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How Health Club Operators Should Calculate Retention Rates

Regardless of how you calculate your retention rate keeping members satisfied is one way to ensure your retention rate remains high Photo by Thinkstock

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Considering that loyal customers are worth almost 10 times as much as their first purchase, according to the White House Office of Consumer Affairs, it's safe to say that operators of membership-based fitness facilities need to focus on retaining members if they want to be successful. Reaching sales quotas and getting new faces in the door are important parts of the business, but if you are not retaining those members, then you're working harder for the smallest profits.

According to IHRSA's 2013 Profiles of Success report, the average membership retention for clubs is 66 percent. As a club owner, you not only need to know how to calculate retention correctly, but you also must know the statistics behind the process.

Retention is the percentage of the members that stayed members in the past year. A common error is that retention percentage is consequent of totaling cancellations in a year and simply dividing by the year-end membership total. However, this leaves out several variables. To accurately calculate your retention percentage, always use 12 concurrent months of date, although sticking to the calendar year is not necessary; April to March, October to September, etc. is fine.

Member Retention Rate vs. Attrition

Often confused with attrition rate, member retention rate is the percentage of customers who have remained members for a particular period of time. Annually, monthly or weekly measurements can be calculated depending on the membership options of the gym. The attrition rate is the opposite, defined as the percentage of members who have canceled over a specific length of time.

The fitness industry has a history of focusing primarily on sales. Many club owners keep track of their acquisition rate, simply because getting new member sales is easy to measure. Yet, acquiring a new customer is more than five times more expensive than keeping an old one. With sales continually disproving that they will ultimately equal growth, it is becoming more important than ever to keep existing clients satisfied.

According to Stephen Tharrett, president of Club Industry Consulting, both retention rates and acquisition rates should be used when determining a club's success.

"I think that both metrics are vital KPIs (key performance indicators) for the industry, and I am sure the best club operators in our industry track both metrics religiously," Tharrett said.

Methods of Calculating Retention Rates

An accurate, and straightforward way to calculate retention is done using these few steps:
1. Start with a 12-month chart and record the beginning monthly membership for each month. This is easily done with the following equation:
Previous month's beginning membership + number of sales in previous month + number of reinstated (unfrozen) memberships.

2. Subtract the number of canceled memberships and the number of frozen memberships.

3. Total the canceled membership for the last 12 consecutive months.

4. Total the beginning monthly membership for the last 12 months and divide by 12 to give you the average beginning monthly membership.

5. Total the number of canceled membership for the last 12 consecutive months. Take that number and divide by the number of average beginning monthly memberships you got in the previous step. The answer you get will equal your annual attrition.

For annual retention, take the number you get from step one above and subtract attrition.

As you can see, the process is fairly easy, but club owners must be meticulous in their calculations.

Another popular formula for calculating retention rates is just as accurate:

Member retention rate = ((ME-MN)/MS)) X 100
ME = number of members at end of period
MN = number of new members acquired during period
MS = number of members at start of period

Although this equation may look scary, it is easy to understand and just as easy to use. For example, if you start calculating with 100 members in your club's first month, and compensate for 15 members who canceled their contracts and 20 new members, then you end the month with 105 members. When you plug in those numbers to the above equation, it looks like this:

((105-20)/100)) X 100 = 85 percent

The result is 85 percent of your members are continuing to use your services.

Both of the above formulas are as straightforward as you can get and work equally well for large clubs and small boutique facilities.

Another way some club operators calculate retention is by combining customer retention rate with dollar retention rate. This calculation method focuses solely on money as a way of understanding the percentage of revenue renewal over an allotted period of time.

"Unfortunately, some club operators make crucial errors, such as combining too many metrics and miscalculating their retention rate, making it appear higher than it may actually be, or ignoring customer retention rate completely in an effort to implement strategies to retain customers. These professionals are missing out on easy growth opportunities that can increase their revenue even faster," Tharrett said.

The Science Behind Tracking Retention Rates

Tracking retention rate is the foundation of growing a business, something that Dr. Paul Bedford, known as the "retention guru" of the fitness industry, backs up with his years of experience. With a master's degree in exercise and health behaviors and more than 20 years in the club industry as a personal trainer, a fitness manager and club manager, Bedford literally has retention calculated down to a science.

In addition to specifically tracking retention using the second formula mentioned above, Bedford also came up with The Scarcity Analysis to help explain the science behind tracking retention rate. The Scarcity Analysis is an economic principle in which a limited supply, coupled with a high demand results in a mismatch between the desired supply and demand equilibrium. Based on his analysis, Bedford found that members who come into a club more than three times a week in their first week of membership are more likely to terminate their membership after just a few months.

Whether they burn out, give up on their goals or don't fully understand how to use the equipment, Bedford said that, based on this principle, clubs should place their focus on increasing the level of customer service each member receives through behavioral change techniques. Such techniques aim to improve retention, reduce attrition and increase the income that club operators receive each year.

Regardless of which of the above formulas you choose to use, the most important thing for club owners to understand is that taking a serious approach to member retention will help to avoid leaving a lot of growth on the table. Accurately measuring customer retention and implementing strategies, such as improved customer service through behavioral change techniques to retain members, can mean good things for the future of your club and the fitness industry as a whole.

 

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