MRR, Churn, ARM’s, LEG’s and more! If you don’t know what these mean to your business, you’re not a business owner.
Understanding your key gym business metrics is imperative in being a business owner. Take the time before you start your business to know what kind of numbers you need to pay attention to and what they mean.
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.
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).
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!
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:
For instance, if you had the following memberships:
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).
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.
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
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.
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:
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.