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Last month, Hussle wrote an article in collaboration with Dr Paul Bedford, exploring the ‘unit economics’ of a fitness business.  In the piece, Paul and our Director of Fitness Partnerships – Jamie Owens – stressed the importance of understanding your Customer Acquisition Cost (CAC) when sourcing new members, and your Lifetime Value (LTV).

These data points are key in establishing how much money you have available to invest in marketing, to ensure your fitness business continues to grow.

Since the original article, we have received an incredible response from gym operators – some wishing to better understand these metrics and some challenging the assertions we made.

One of the most common queries we received related to ‘free’ customers, those who signed up as members but seemingly not as a direct result of any marketing the gym carried out.  How should these customers be accounted for when calculating CAC?

It’s a good question. 

The first thing to say is that we don’t believe any customer is truly ‘free’. What we can say, however, is that there are direct response customers and indirect customers.

A direct response customer is someone that responds to your paid advertising and, as a result, becomes a member. For illustrative reasons let’s pretend that customer cost you £50 to acquire through your marketing, they purchased a £50 per month gym membership and they go on to stay for 10 months, generating gross sales of £500 and net sales of £450 (deducting the £50 you spent on marketing to acquire them).

Your CAC is obviously £50 and your CAC:LTV ratio is 1:10, right? Well yes, but also no. 

If that customer goes on to tell one other customer and they sign up as well, then they are an indirect customer. It’s easy to consider this person a free customer – they literally walked into the gym and asked to sign up, after all.

In fact, they’re not free – they were acquired as a result of your first member. Member #one told someone about your club, they signed up and became member #two. 

This is the effect of ‘virality’ and can be measured by a ‘viral coefficient’. If member #one tells one more customer, then your viral coefficient is one. If you then add that one to the original customer, you have two customers for the original CAC of £50. 

Stick with me for the maths! This means your CAC was actually £25. If member #two also stays for 10 months, you’ll have gross sales of £1,000 and net sales of £950.  Your CAC:LTV ratio is no longer 1:10, it’s actually 1:20.  Pretty good investment!

Unfortunately, most businesses do not have a viral coefficient of one, which makes the maths more complicated. 

Let’s say for example that only one in every four members successfully refers another member to your business. That would be a viral coefficient of 0.25. If you add that 0.25 to the one original member, you have 1.25 members for the £50 CAC incurred. This gives you a real CAC of £40 (£50 original CAC divided by 1.25 members).

If you’re lucky enough to have a high viral coefficient, whereby one member tells at least one or more other people, then you will hit exponential growth. 

In summary, the idea that a customer is free is a common misconception. It may seem harmless but think about the unit economics and you will quickly appreciate why it is vitally important to track the source of all new members, including those who come to you via word-of-mouth.

In the original scenario where you assume customer #two is free, you’ll continue to incorrectly believe your CAC is £50 and will likely spend less than you could on marketing, as the economics might not look good enough to go faster. 

But if you have a good understanding of your viral coefficient, you’ll see that your CAC is actually lower and you could (should!) be spending more money on marketing, to enable faster growth.

Figure this out too late and your competitors could easily be out-spending you on marketing and so taking market share from you. Do the maths right now and you can use your data to make better, more effective marketing decisions and grow faster.

By Jamie Owens, Director of Fitness Partnerships at Hussle 

To find out more about how Hussle could provide you with a low-cost, new member joining channel, click here