Content sponsored by The Retention People.
Understanding your facility's membership performance is crucial to health, growth and longevity of your business. Club owners can use many metrics or key performance indicators (KPIs) to offer insight into operational success and arm themselves with data to make educated decisions when budgeting expenses. Making the right business decisions is directly tied to the quality of data calculated and tracked, but navigating this data can be an overwhelming task. You must ensure you are looking at the right data to paint an accurate picture of the efficacy of your business efforts. Club owners should keep a close eye on attrition, length of stay, retention and the lifetime value of a member to understand the lifecycle of a membership and how to make appropriate strategic plans.
Many facilities calculate attrition as a baseline for success. Attrition is measured by taking the number of cancelled memberships at the close of each month and dividing this by the number of active memberships from the beginning of the month and multiplying by 100.
Attrition = (Cancelled Memberships / Month Starting Members) x 100
This calculation results in the percentage of members who have dropped out. This calculation seems straightforward enough, but beware that it doesn't take into consideration the impact of atypical promotional and sales efforts for that month.
Another commonly used indicator of retention is to calculate the average length of stay (LOS) for a member. Divide the total number of months your members stay by the total number of members to get the average number of months that a member stays.
Length of Stay = Total Months Stayed / Total Number of Members
Unfortunately, this number can be misleading because your long-term members skew the result as artificially higher.
Although looking at both attrition and LOS are valuable metrics to track, they don't provide a good snapshot of true membership retention. Alternatively, you can call upon two better metrics: retention rate and lifetime value. These calculations are less effected by poor or exceptional sales months or your select members who have been with you for a long time.
Retention rate is the number of members you keep with respect to the number of members you had at the start of a predefined interval of time, for example one, three, six, 12, and 36 months. This is a good indicator of how loyal your members are and how effective your customer service is. Tracking and benchmarking retention rates helps you find out where your operational strengths and weaknesses are.
Steps to calculate annual retention rate:
1. Make a 12-month chart and record:
- Starting number of members. Calculate by adding the previous month's final membership to number of new sales in the current month and subtracting the number of members who cancel.
- Total cancelled memberships for the last 12 months
2. Total the beginning number of monthly memberships and divide by 12 to calculate the average beginning monthly membership.
3. Total the number of cancelled memberships divided by the average beginning monthly membership to get your attrition.
According to the International Health, Racquet and Sportsclub Association's 2015 industry statistics, the average rate of member retention for IHRSA clubs was 72.4 percent.
Every new member is worth potentially much more than just their initial membership fee as they are much more likely to purchase additional goods and services. Lifetime value of a member is determined by the median LOS and the average spend per member. Different from an average, the median is a simple measure of central tendency of a series of numbers. In the case of membership, you are looking for the LOS time interval at which 50 percent of your membership is retained, multiplied by monthly membership dues.
Lifetime Value = Median LOS x Monthly Dues
Let's use the following data to illustrate calculating the lifetime value of a member:
You can see from the above chart that attrition can vary widely from month to month. For example, your New Year's resolutioners who joined in January and February as a result of December and January promotions may start to fall off a few months after joining.
When you look at the predetermined month intervals, you can see that a large number of members leave after six and 12 months. However, those longstanding members who stay 36 months have a greater impact on the total number of months stayed and weight the average. Using the average LOS to calculate the member value could result in a deceptively high forecast of future revenue. Assuming that monthly membership fees are $25, the average value of a member using the average LOS = 11.9 months x $25 member fees = $297.50 revenue per member.
To offset the skewed average as a result of your long-term members, use of the median length of stay paints a more accurate snapshot of the current state of membership value as it captures the more typical stay of your membership. The graph illustrates that the median (50 percent) stay for a member is actually six months, enabling you to more realistically forecast revenue. Lifetime Value = 6 months x $25 member fees = $150 per member. Note that this is a drastically smaller number compared to the average LOS at $297.50.
So what does all of this data mean? The American Society of Association Executives (ASAE), a trade association for membership-based associations, published its "Metrics for Success" that stressed the importance of using performance metrics to implement operational changes that align with their strategic goals and use of data to make informed decisions to redirect resources, modify membership models, implement programs, etc.
For example, when looking at attrition from month to month over an extended period of time, you will begin to learn the behaviors of members who leave and strategize tactics to get them re-engaged before they drop their membership. Looking at retention rate over time, you will be able to see in general how your membership benchmarks against the industry average and pinpoint what activities may have influenced any changes. Understanding the lifetime value of a member gives you a parameter for budgeting new member acquisition costs. If your acquisition cost per member is higher than a member's lifetime value, you should re-evaluate your acquisition strategy and find ways to balance the cost.
Making a diligent practice of tracking and evaluating these important metrics gives you valuable insight into the typical lifecycle of your membership and influences your strategies for keeping them happier for longer.