And the Winner of the Most Profitable Gym is….
By: Michael Scott Scudder
Founder/CEO of Fitness Business Council
If your answer to the above is: 1) the one that sells the most memberships; 2) the one that retains the most memberships; or 3) the one that sells and retains the most memberships…in all three cases – SORRY CHARLIE!!!!
Increasing statistical evidence from Fitness Business Council independent-club quarterly and annual surveys points to the fact that the most profitable health clubs are consistently:
- THOSE THAT PRODUCE THE HIGHEST PERCENTAGE OF ANCILLARY REVENUES TO TOTAL REVENUES (otherwise known as AR2TR).
A glance at FBC’s last six (6) quarterly reports and the 2013 end-of-year report shows that clubs which regularly produce more than 24% ancillary revenues also regularly produce double-digit net profit margins (total revenues-total expenses/total revenues).
While there remains one exception to the above rule…that being the low-price “fitness-only” clubs like Planet Fitness TM or clones…which generally offer no services other than a workout in a well-equipped but minimally-staffed facility – even those facilities are beginning to see gradual diminishing of profit margins, often due to the fact that they produce extremely low annual ancillary income.
The converse is also statistically true (as any 20-year-plus industry veteran can tell you): those clubs which predictably produce lower-than-20% AR2TR are the most likely to fail. At the end of our country’s last severe economic pullback (the recession of 1991-1994), 9% of existing health clubs had closed their doors. Of that number, greater than ¾ of the clubs that closed produced less than 18% ancillary revenues (inflation-adjusted for 2014: 22%).
Why is ancillary revenue so important to a club’s success? The answer here is rather simple: with the exception of the afore-mentioned low-price, relatively-low-payroll operators, the vast majority of clubs make absolutely no profit in the first year on membership sales! Add to that fact the alarming news that annualized Member Retention is once again trending downwards (at last look, only 62% versus a less-than-2-years-ago-high of 68%)…and even a casual observer recognizes the need for what has been aptly named “the monetization of members.”
Recent polls support the premise that the higher-the-price club, the greater the percentage of ancillary revenues produced by that club. Interestingly, third-quarter 2014 data shows that clubs priced under $50 monthly (for single membership) not only have the highest annual member attrition (well over 40%) but also produce less AR2TR in direct relationship to lower prices! (The weakest ancillary revenue percentage – 15% – is reported by the $20-$29 membership price range.)
Time to re-think your business’ long-term strategy? Should you concentrate not solely on membership sales…but also on selling those members additional services once they’re inside your doors?
(Michael Scott Scudder is Founder/CEO of Fitness Business Council, the independent club business network. Michael can be contacted at 575-751-1212 or firstname.lastname@example.org. For your PDF copy of the 3rd Quarter FBC Business Results Report, click Michael’s secure Dropbox link.