Fitness Industry Solutions

May 8, 2006
Author: Tom Perkins - Business Solutions Coach and Certified Personal Trainer

To determine how much you can spend to acquire each customer, you need to calculate the Lifetime Profit (LTP) you receive from an average client. To do this, multiply your average profit per sale by the estimated number of times your client will renew their membership.

Formula

Estimated Average Lifetime Profit =

(Average Profit per Sale) x (Estimated Number of client renewals/orders)

To determine how much in total you can spend add back your average client acquisition cost to this figure. (Your average client acquisition costs are your monthly costs divided by the number of new clients). This final number is the maximum amount you can afford to spend to obtain a customer and still break even, in the long run. It should be your goal to spend less to acquire a customer than this figure, so you can turn a profit.

Granted all these calculations are “best guesses” at this point since no one can predict the future. But, the point is that by periodically performing these calculations, you can achieve a fairly solid number to attach to your client’s worth and how much you will need to spend to acquire that customer.

Actual value is cut and dry. You know that if you do nothing more and your client remains happy with the status quo that you can expect to receive “X” in dollars each year.

More interestingly is to address the “what if?” This has to do with the potential value that a client has for your business. Potential value measures what a client’s value could be if you actively worked to earn their business. You need to determine what you can do to capture this potential value that will increase your revenues. In the example above, what would it take to get John to spend more in your club? Would he be interested in one-on-one training sessions? Is he interested in nutritional or supplemental programs?

Often a related question asked is how much should I be spending on marketing? If you are a new facility, plan on spending 20 – 30% of your net revenues. It’s not uncommon to find new businesses spending upwards of 50-70% in an effort to build up their customer base. If your club has been in business for a couple of years, your marketing budget would generally fall to between 1 – 15% of your net revenues.

Also keep in mind that the old adage that it always costs less to keep a customer than it does to find a new one is very true. If your client base is always in transition, you will need to calculate spending more to acquire new clients. One estimate states that it can cost six times more to acquire a new client than it does to keep an existing one.

How much you are willing to spend for a client will depend on what you can afford to spend and how fast you want to grow. Over spending to acquire a client and trying to grow too fast can lead to financial ruin. On the other hand, not investing in growing your client base can have a negative affect on your business and future growth.

Every business wants as many new clients as possible, but very few know exactly what they will receive from each client or how much they can spend to acquire that client. If you have this information, you have a marked advantage over your competition. As long as your cash flow is healthy, spend as much as you must to acquire a client, as long as it is less than the average lifetime profit.

Tom Perkins is a business solutions coach and certified personal trainer who leads fitness professionals to profitability.