Lifetime value (LTV): The "one metric that matters" of your fitness business
Updated: Feb 7, 2022
In the aftermath of the pandemic, we are seeing traditional "brick & mortar" fitness businesses having a hard time acquiring large amounts of new customers. Hence, strategic priorities more than ever need to shift to focus less on volume and making sure each new customer drives greater long term profit. In other words, Lifetime Value (LTV) needs to become (if it had not done so already) the "one metric that matters" for your fitness business.
There are usually two ways to focus your business model. Either you focus on "volume," meaning trying to more customers but obtaining less benefits from them, or on "margin," which, on the contrary, is about having less customers but getting more return from them.
One of the things we quickly noticed when we started working with brands in the fitness industry was the focus on "acquisition" of new customers. All related metrics and reporting processes were clearly defined, but when the conversation turned to metrics such as customer retention, CAC, NPS or Lifetime Value, things were not so clear and in some cases, some of these metrics were not even being tracked. Again, this was personal experience from the projects we were involved in and by no means we intend to generalize.
Calculating the lifetime value (LTV) of your business can be done by using the following formula, as shared in this brilliant guide on calculating CAC & LTV shared by CXL:
LTV = (Average Revenue per Customer in a month x Gross Margin) / Churn Rate
Breaking it down to the different elements of the equation, either you manage to get your customer to increase their average order, which is sometimes also referred to as ARPU (Average Revenue Per User) through personal training programs, nutrition plans, merchandising or apparel, etc., look for ways to obtain greater profit from them or you put the systems in place to keep customers attending your gym for longer periods of time, and therefore, minimizing "churn rate."
LTV ultimately helps assess the quality of your customers and as a result, define the health of the business.
After the first few weeks of gyms being able to reopen in the country, it seems obvious that LTV will need to become the guiding metric for fitness businesses. Customers are still being hesitant to get back to the gym and after reading interviews with some industry experts, projections are that around only about 30% to 40% of customers have actually returned to their club.
Consequently, businesses who are having a hard time keeping their customers turn to "acquisition" in an effort to balance the loss of customers.
The risk here is incurring in higher customer acquisition costs (CAC) in order to meet sales objectives. Referencing back to the CXL article, CAC can be calculated as follows:
Total Spend on Acquiring Customers / Number of Customers actually acquired
Ultimately, all efforts should be ROI positive and for that to happen, keep in mind that:
LTV > CAC
If your fitness business is to survive this critical period, you will need to ensure that the lifetime value of your customers is greater than the cost of acquiring them. We understand the cost of acquisition is a tricky metric since some people calculate it differently than others but to us, CAC should consider everything involved in servicing the customer, including the cost of advertising, salaries of your staff, maintenance cost, etc.
With regards to CAC, CXL makes some recommendations you might want to take into account to arrive at a more precise metric:
It usually is cheaper to bring back previous customers than acquiring totally new ones. Therefore, you might want to calculate a separate CAC for each segment.
On that note, it may be a good idea to split the funnel and understand the sources where your most profitable customers are coming from and even calculate the CAC for each marketing channel you rely on.
Deep dive into your marketing funnel and optimize each phase where you notice significant "drops."
4 ideas to maximize lifetime value for your fitness business
To finish this article, we wanted to share some ideas on how to try to maximize LTV:
- Business analytics: It is now more critical than ever to understand who your current customer is. Not only will this help you adapt your business offering to their needs better, it will help you lower your CAC by using look alike audiences.
- Invite people to try your product for free: The best way to get people to trust your business is for them to experience it first hand. Aim your inbound marketing campaigns at trying to get potential customers to download a free access to your club and then ensure that you offer a superior customer experience once they visit you.
- Long term promotions: If you are going to sacrifice your short term average order by lowering your prices through promotions, at least try to ensure that those customers remain subscribed to your services for a longer period of time.
Along these lines, we actually shared a very useful article from Phiture on The Ballketing Letter #17, which describes the challenges of different types of app-based business models and also shares tactics to maximize LTV.
While the article describes it from the angle of app businesses, we believe there are many similarities with fitness subscription related businesses and it can also be useful for any sport organization looking to keep engagement with fans on a high note.
- Brand partnerships to achieve differentiation: Fitness businesses usually have a hard time standing out from competitors since the service offering is quite similar across businesses. Our personal opinion here is that "convenience" is the key to differentiate and hence, the reason why business analytics is critical. Find out what your customer really needs (even outside the "health & fitness" realm) and then look to close brand partnership agreements to provide those solutions if these needs are outside your core business. For example, we know of a brand that offers laundry, fitness and beauty services under one "umbrella," with the hypothesis that these services are convenient for their customers.
For instance, if your customer is worried about eating well but has little time to prepare healthy meals, you could partner with a healthy food delivery business and give your customers discounts to order at that place. It is a win-win scenario for all...
If you want to know more about developing brand partnerships and ecosystems, in The Ballketing Letter #8 we actually shared a magnificent article by McKinsey which provides great detail on how to do so. Feel free to check it out and let us know your thoughts on it.
This would be all for the moment from us, but please feel free to share your thoughts on some of these ideas or get in touch if we can help you put an action plan in place that will increase the LTV of your sport or fitness business and take it to the next level.
Meanwhile, keep safe.