Influx Metric: Member Lifetime Value (MLV)

There’s no shortage of remarkable ideas, what’s missing is the will to execute them. – Seth Godin

Here is the next article in our series of ‘Influx Metrics’. The series covers the metrics that are important to understand if you are interested in improving your gym. This article introduces two new metrics: Gross Margin (GM) and Member LifeTime Value (MLV), and builds on metrics covered in previous articles, which you can find here:

  1. Influx Metric: Retention
  2. Influx Metric: Average Revenue per Member
  3. Influx Metric: Customer Lifetime

Influx Metric #4: Member Lifetime Value (MLV)

What is Member Lifetime Value (MLV)?

MLV predicts the value new members will have over their lifetime at the gym.

How do you calculate MLV?

It uses a combination of two previously covered metrics: Average Revenue per Member (ARPM) and Customer Lifetime (CL), and is crudely defined as:

(Crude) Member Lifetime Value = Average Revenue per Member * Customer Lifetime
(Crude) MLV = ARPM * CL

This gives us a starting point, however will be an over-estimation of the actual MLV, as it does not allow for the Gross Margin.

Gross Margin is a percentage of revenue that the gym makes after the cost of producing their services are subtracted. It is calculated as follows:

Gross Margin (GM) is: (Sales – Cost of Goods) / Sales

We use the gross margin to get a more accurate MLV:

Member Lifetime Value = (Average Revenue per Member * Gross Margin) * Customer Lifetime
MLV = (ARPM * GM) * CL

 

Example:

If your gym had the following metrics over the last 12 months:

Yearly Revenue: $250,000

Yearly Cost of Goods: $100,000 (expenses minus sales and distribution costs)

Average Revenue per Member (ARPM): $3,000 per year

Retention: 60% per year

Before we can calculate the MLV, we must first calculate GM and CL.

GM

= (Sales – Cost of Goods) / Sales

= ($250,000 – $100,000) / $250,000

= 60%

CL

= 1 / (1.00 – Retention)

= 1 / 0.4

= 2.5 years

So our gross margin is 60% and our customer lifetime is two and a half years.

Now we can calculate the MLV:

MLV

= (ARPM * GM) * CL

= ($3,000 * 60%) * 2.5

= $4,500

 

Why is MLV important?

MLV helps you understand the value each member brings to the gym (on average), and gives you a starting point for considering how much you could spend on acquiring new customers.

You likely acquire customers now through a number of different methods. For example, word of mouth and referrals from current members, walk-ins, promotions, or advertising. MLV lets you make informed decisions on how much resource could be put into improving these methods.

Now we know the value each new member brings, in our next post we will outline how to calculate the cost of each new member.