The fitness landscape has changed a lot in the last five years, making it increasingly complicated to isolate the levers that truly drive growth.
The classic approach is to calculate the current fill rate (let's say 70%) and average price paid per spot ($25) and use that to project expected sales for the coming year. In this model, driving growth comes down to increasing one or both of those metrics. Seems straightforward, right?
The difficulty is that these metrics actually work against each other. In other words, improving one usually comes at the cost of decreasing the other. Lowering prices drives up occupancy, and driving up prices has the opposite effect.
The process of making seats available on ClassPass is a good example. Studios usually wait until the day before or day of the class in question, consider how many seats haven't been filled, and open them up to ClassPass. While this gets rid of excess inventory and adds "incremental revenue," it has the effect of driving down the average price paid for spots in that class.
In order to maximize both metrics, studio owners and operators are tasked with sorting through all the different factors that together determine spend.
How many package options should we offer? What sort of memberships should we offer? What should drop-ins cost? What sort of deal should new customers get? One week free? A BoGo package? How many times a year should I offer a sale? How much should the services be discounted? How many seats should I offer through third-party sites likes ClassPass?
The truth is, assessing your pricing strategy by monitoring average price per spot and fill rate can be informative, but it won't leave you with a clear action plan to drive more revenue.
The Importance of Focusing on One Metric
We've borrowed the concept of The One Metric That Matters from Alistair Croll and Bejamin Yoskovitz, authors of Lean Analytics (which you should definitely check out). We aren't suggesting that you put on blinders and disregard all data besides this metric. However, honing your focus will be incredibly useful when it comes to guiding pricing decisions. In Alistair's words,
That doesn’t mean there’s only one metric you care about from the day you wake up with an idea to the day you sell your company. It does, however, mean that at any given time, there’s one metric you should care about above all else. Communicating this focus to your employees, investors, and even the media will really help you concentrate your efforts.
This metric needs to have a few key qualities: it must be simple, easy to calculate, actionable, and trackable.
Okay, So What's the Metric?
The One Metric That Matters varies between industries and companies, but when it comes to boutique fitness, there is only one fundamental answer. We need to be focusing on Revenue Per Customer.
- It's fundamental: Fitness studios are nowhere without their customers. At the end of the day, spots don't have an inherent value, but the customers who fill them do. Avg Rev per Spot x Fill Rate = Revenue, but so does Number of Customers x Revenue Per Customer. On top of that, happy customers are the most powerful source of lead generation, through word of mouth referrals.
- Small changes have a huge impact: Slight increases in the retention and engagement of your customers have a massive effect on revenue short and long-term, and the changes compound with time.
- There's so much room for improvement: Improving the revenue per customer is truly low-hanging fruit. The fact is, most of your customers don't come back after their first visit, and very few go on to be high-paying members.
- It is actionable because it reveals crucial gaps: Starting with revenue per customer never fails to reveal a number of underlying inefficiencies. To use an analogy from Alistair, the OMTM should be like a stress ball; squeezing the toy makes it bulge in unexpected places. Taking a peak beneath the hood and breaking down your revenue per customer opens up all sorts of interesting gaps in the customer journey at your studio.
That’s what focusing on the OMTM does. It squeezes that metric, so you get the most out of it. But it also reveals the next place you need to focus your efforts, which often happens at an inflection point for your business - Alistair Croll
Source: The Spruce
If you work with a back-end booking platform like MindBody or Zenrez, calculating the revenue per customer is pretty straightforward. We do have a few tips to make sure the number you are pulling is simple, comparable and trackable.
- Either compare customers who entered in the same entrance month (those who entered in January have spent x, those in February have spent y), or limit the calculation to annual revenue per customer.
- Break out what customers spend in each month, to highlight any drastic fall-off.
- Make sure you are accounting for third-party bookings. Most of these will show up as $0 in the revenue per visit column, so just add in an average for the sake of simplicity.
- Break your customers into four tiers and look at the average revenue per customer of each. For most businesses, a small percentage of customers will account for most of the revenue- and that's normal, but it can mask what's going on across the customer base.
- Shoot us an email. We're happy to help pull this information- no strings attached.
Questions or comments? Don't hesitate to add your thoughts below, or shoot me an email at firstname.lastname@example.org.