I tell people all the time, if you ever want great success in something, you have to get dialed into the performance of it.
Your business is no different. The question is what do you need to pay attention to?
In this short article we will go over the key metrics you’ll need to pay attention to, what they mean and how to make decisions based on them.
MRR (Monthly Recurring Revenue)
The measure of your recurring, predictable revenue stream in a month over month basis.
MRR = The sum of all recurring memberships you have at any given point in time.
MRR is one of the most important metrics to a fitness business that sells recurring memberships. MRR represents cash flow or how much income is streaming into your business. Once you acquire a new customer you have recurring revenue, which means you don’t have to worry about one-off sales every month.
The growth of your MRR stream in a given period.
MRR Growth = New MRR + Expansion MRR – Churned MRR
Calculating the growth of your MRR is important in determining if your business is expanding or contracting. Adding new memberships can be offset by factors like churned memberships (see churn rate below).
- New MRR – The sum value of memberships from new customers.
- If you added 12 new customers at $100/mo, your New MRR value would be $1,200
- Expansion MRR – The sum value of upgrades and downgrades existing customers take on their memberships.
- Expansion MRR can be positive or negative after taking into effect all membership changes.
- A customer upgrading from a limited membership worth $100/month to an unlimited membership worth $150/mo would create an Expansion MRR of + $50.
- A customer downgrading from an unlimited membership worth $150/month to a limited membership worth $100/mo would create an Expansion MRR of – $50.
- If you had 2 customers upgrade from limited to unlimited and 1 customer downgrading from unlimited to limited, using the above numbers, you would have:
- 2 x + $50
- 1 x – $50
- Total Expansion MRR of + $50
- Churned MRR – The sum value of all customers who have cancelled their memberships.
- If you had 4 clients cancel their $100/mo memberships, your Churned MRR value would be – $400.
Using the examples above, your MRR growth would be:
$1200 (New MRR) + $50 Expansion MRR – $400 Churned MRR = $850 MRR Growth
This means you increased your MRR by $850 last month. Great job!
The number of customers that cancel their membership in a given time period.
Churn = Sum of value of memberships lost in a give period
Measuring churn is critical to evaluate your gym’s health, yet it’s one of the most overlooked metrics. If you are adding $1,000/mo in memberships per month, while losing $1,100 in memberships – you’re actually declining.
Many small business owners focus New MRR while neglecting Churn. Often times the fastest way to increase your business is to focus on minimizing churn as opposed to generating more sales.
Churn is measured as a dollar amount – simply the sum of the membership value that was lost. For instance, if you lost 4 memberships worth $100/mo, your churn would be $400.
The percentage of customers that cancel their membership in a given time period.
Churn Rate = Number of memberships lost in a given period / Total memberships at start of period
Churn rate is measured as a percentage of customers that cancelled their memberships to memberships at the start of a time period. If you had 100 memberships and 4 cancelled during the month, your churn rate would be 4/100 or 4%.
Churn rate helps you understand at what percentage you are losing your customers. This number impacts your business more significantly than most gym owners understand. If your churn rate is 8%, you will be losing almost 100% of your clients each year!
LEG (Length of Engagement)
The average length of time a membership remains active.
LEG = Sum of All Days Engaged / Number of Memberships or Customers included in count
LEG is an important business metric which measures retention. A longer LEG generally corresponds with a smaller Churn Rate. The longer you keep clients engaged in memberships, the less you’ll have to continually go out seeking new customers.
LEG is best calculating using both currently active AND churned users. The churned memberships will actually tell you the absolute LEG for that particular memberships, while the active membership will continually increase in LEG. This can skew your results when you are starting off, as your LEG for all accounts on day 1 will be at most, 1.
LEG can be calculated in a couple ways:
- Membership Plan Basis – You can calculate the LEG of each membership plan you sell. This will help you understand the average length of time each membership plan will keep a new customer for once they join.
- Customer Basis – To take into account members switching from one membership plan to another, you can calculate LEG on a customer level. This will tell you once you acquire a customer, how long on average they will remain a customer with you.
For instance, if you had the following memberships:
- Unlimited, active for 880 days
- Unlimited, active for 120 days
- Unlimited, active for 460 days
LEG = (880+120+460) / 3 = 486.66 Days.
This tells you that for your Unlimited membership plan, your average length of engagement is 486.66 days (or 1 year and 4 months roughly).
ARPU (Average Revenue Per User)
A measure of the revenue generated per customer per month, taking into account all forms of revenue, including non-recurring sales.
ARPU = MRR / Total # of Customers
If your studio’s primary revenue model is recurring memberships, this metric will be less important for you initially. You should focus on MRR, as your ARPU will likely mirror your MRR initially.
Once you have solidified your primary revenue stream and start to focus on things like private training, retail sales, and other revenue generating activities, ARPU will become a good indicator how you are diversifying your revenue away from strictly memberships.
If your studio is centered around Private Training, ARPU will be the more important number for you to focus on, as ARPU will indicate how frequently you are getting clients to book appointments.
LTV (Customer Lifetime Value)
Also known as CLV or CLTV. The average revenue your business generates per customer.
LTV = ARPU / Churn Rate
The purpose of the customer lifetime value metric is to assess the financial value each customer. This metric will let you know, based on your average churn rate, how much a client will likely be worth over the lifetime of their membership.
For example, if you have an ARPU of $96/mo and a Churn Rate of 4%:
LTV = $96 / 0.04 = $2,400
ARR (Annual Recurring Revenue)
The annualized recurring revenue your business is generating
ARR = MRR * 12
Most gym owners are thinking of revenue in terms of month over month – mainly because most of our recurring expenses are due monthly. ARR paints a longer term picture of your business that can help you make business decisions in a longer window of time.
In general until your revenue grows to a point where you’re comfortable with your monthly revenue and expenses, you won’t focus much on ARR. Once you’ve started to be more comfortable with cash flow, and you’re booking significant profits, you will begin to zero in on ARR.
CAC (Customer Acquisition Cost)
The average amount of resources that a business must allocate (financial or otherwise) in order to acquire an additional customer.
CAC = Total Costs Related To Generating A Lead / Conversion Rate of Lead to Paying Member
Often times, and generally for early stage gyms, this is simplified down to simply marketing costs. For more established operations, you would need to include sales and marketing salaries, software platforms used to source and track customers, and other forms of expenses related to generating new customers.
CAC is important when you hit the point of marketing to acquire customers, as it will tell you how much you are spending, per new customer, to generate that customer.
Without this number, you cannot quantify if advertising money is well spent or ill advised.
For instance, consider the following potential scenario:
- $200 Ad Spend per lead
- 50% of your leads convert to paying members
- LTV of a paying member is $1028.95
In this example, your CAC is:
$200 / 0.50 = $400
It might seem crazy to spend $400 to acquire a new client. But backed with your LTV of $1028.95, you know, on average, you will generate $828.95 per new client based with this ad spend.
Are you ready for the next step?
If you need a gym management system that will help you uncover the key details and considerations that will make your gym the talk of the town, register your free account here!
PushPress is a gym management software that is here to help you grow your fitness facility. With PushPress, you'll be able to manage classes and privates, take payments, track attendance, manage leads, and maintain member relationships all from the palm of your hand!