One of the first things I do with a new client is look at two numbers. These two numbers help me understand why your marketing has/has not been working, and why your bottom line hasn’t been increasing even though you feel you’re selling more memberships.
These two numbers are: Cost of New Member Acquisition (COA) and Lifetime Member Value (LMV)
COA tells us the average amount it costs you to acquire one new member. LMV is how much a typical member is worth to you over the life of their membership with you.
Both sound like important numbers to know right?
Surprisingly, most fitness business owners have no idea what their COA and LMV are. And if you don’t, I encourage you to start paying attention to these two metrics because they will help you understand what happens with your marketing dollars and why your profit line isn’t moving upward.
When you find out these two numbers, all you need to do is subtract COA from your LPV to determine the average amount of gross profit your gym is generating per member.
For example, let’s assume you spend $1,000 per month on your marketing efforts. From those marketing strategies (not walkins or referrals, etc), on average you sign up 5 new members. This means your COA is $200 ($1,000 divided by 5 members). If you determine that on average your LMV is $600 over the course of the entire time they spend with you (this can include membership dues, personal training, profit center sales, etc), then your gross profit per member would be $400 ($600 LMV minus $200 COA)
In this example, you are signing up members worth $600 for only $200 each. Which is a good thing and if this is the case you should keep this up.
But the problem is that most gym owners don’t have this strong of a profit per member. And the REAL problem is that most gym owners have no idea how much they are making per member. Or perhaps you know your LMV, but you don’t really understand the cost, or vice versa.
Both numbers are equally important to understand how profitable you are and how effective your marketing strategies are. Liken it to buying a rental property. You would never buy the property if you couldn’t calculate the amount you’ll pay the bank per month on the property and the amount your renters will pay you. Just knowing one of these numbers isn’t enough, you have to know both.
By knowing these numbers, you can make better decisions on how to spend your marketing dollars and you can stop focusing solely on response rate. Too many gym owners think that simply because 10 people respond and 3 people purchase, that their $1,000 marketing strategy was worth it. But what if those members only stay on average 7 months (which is the industry average by the way, regardless of the term they sign up for) and they’re only worth $250 each LMV?
Not a good deal! You must know both COA and LMV to understand the real effect of your marketing.
Armed with both metrics you can easily make decisions about whether you should continue, or forgo, a particular marketing campaign. You’ll be able to look past response rate – a poor assessment of a chiropractic marketing campaign’s profit value to your office – and see whether you’re losing money, breaking-even, or generating a profit, irregardless of response rate.
Anytime you spend money on marketing, track the COA for each campaign. And start focusing on how long members are staying with you and how much they are spending.
One of the first things I do with a new client is look at two numbers. These two numbers help me understand why your marketing has/has not been working, and why your bottom line hasn’t been increasing even though you feel you’re selling more memberships.
These two numbers are: Cost of New Member Acquisition (COA) and Lifetime Member Value (LMV)
COA tells us the average amount it costs you to acquire one new member. LMV is how much a typical member is worth to you over the life of their membership with you.
Both sound like important numbers to know right?
Surprisingly, most fitness business owners have no idea what their COA and LMV are. And if you don’
t, I encourage you to start paying attention to these two metrics because they will help you understand what happens with your fitness marketing dollars and why your profit line isn’t moving upward.
When you find out these two numbers, all you need to do is subtract COA from your LMV to determine the average amount of gross profit your gym is generating per member.
For example, let’s assume you spend $1,000 per month on your marketing efforts. From those health club marketing strategies (not walkins or referrals, etc), on average you sign up 5 new members. This means your COA is $200 ($1,000 divided by 5 members). If you determine that on average your LMV is $600 over the course of the entire time they spend with you (this can include membership dues, personal training, profit center sales, etc), then your gross profit per member would be $400 ($600 LMV minus $200 COA)
In this example, you are signing up members worth $600 for only $200 each. Which is a good thing and if this is the case you should continue your successful fitness marketing strategies.
But the problem is that most gym owners don’t have this strong of a profit per member. And the REAL problem is that most gym owners have no idea how much they are making per member. Or perhaps you know your LMV, but you don’t really understand the cost, or vice versa.
Both numbers are equally important to understand how profitable you are and how effective your fitness marketing strategies are. Liken it to buying a rental property. You would never buy the property if you couldn’t calculate the amount you’ll pay the bank per month on the property and the amount your renters will pay you. Just knowing one of these numbers isn’t enough, you have to know both.
By knowing these numbers, you can make better decisions on how to spend your fitness marketing dollars and you can stop focusing solely on response rate. Too many gym owners think that simply because 10 people respond and 3 people purchase, that their $1,000 marketing strategy was worth it. But what if those members only stay on average 7 months (which is the industry average by the way, regardless of the term they sign up for) and they’re only worth $250 each LMV?
Not a good deal! You must know both COA and LMV to understand the real effect of your fitness marketing.
Anytime you spend money on marketing, track the COA for each campaign. And start focusing on how long members are staying with you and how much they are spending.
Rock out with your Mock out…
Curtis
P.S. Be sure to watch this week’s episode of Fitness Business Television. Leave your comment below the show notes!
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Another great post!
When I finally figured out that a lead (from traditional print marketing) cost nearly 100 bucks and that closed sales cost me nearly 200 we had to dramatically change our tactics. We refined our efforts and now leads run about 50 new client acquisition is 100 while LMV is over 500. I think those numbers work out month in and month out.
One challenge I have with my marketing budget is that members pay over time (monthly EFT) yet our marketing is spent during the month we send out the marketing. So even a strong response doesn’t mean immediate recovery of those marketing dollars. Is there a formula for that? As an example if I spend 2000 and acquire 20 members should we set a cash collected goal above and beyond the LMV equation?
Absolutely. I love to get a quick return. Granted over time, it will all catch up…but I like to get cash back quick so I can roll it into the next marketing strategy…repeating that process over and over. Sometimes you can’t cover quickly and you have to dig for more $, but that’s the beauty of EFT. Predictable revenues provide confidence to continue spending marketing dollars.
You might try incentivizing a few of the early responders with a special Paid in Advance option. That’s what we do with the membership campaigns at http://www.GymMarketing.com. Each campaign depends on a percentage of down money to continue the marketing efforts. If too much cash comes in, we increase prices or remove the PIA option. If not enough down money comes in, we incentivize more to get a few people to opt for it.
Curtis
Curtis,
Nice article. I think you’re right on the money with these KPI metrics. Thanks for the insight. Do you have any thoughts as to the industry averages are for COA and LMC? Also, let me know if you have any other articles related to measuring the value of marketing dollars?
Great article, worth it to read info. I ran across your site on yahoo. I am going to recommend it to family and buddies.
If I spend $2400 on 10000 peceices of mail and get 29 members at $39.99 at 12 months with $50 down – then $50 x29 = $1450 collected up front .Then I collect $1159.71 over the next 12 months =$13.P/T is expected to sign up at least 20% of the people at $30-45 per session. Product sales is added in as well ! Get the idea . Most say I do not get anything for they do not keep track or have a true offer ect…
Where do you get postcards for .24