Measuring Retention

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It is commonly accepted that membership retention is the largest problem facing most businesses in our industry. However, this problem is not new, so why are clubs still struggling to make an impact on their retention performance? The secret lies in a change of strategy. Operators who continue to focus their energy and investment on sales and marketing as the primary method to grow their businesses are missing an opportunity. It is proven that successful retention of members not only increases profitability, but will reduce the necessity to perpetually sell to a shrinking market.

So if it is that easy, why aren’t all clubs, and the industry as a whole, taking hold of the problem and delivering better retention results? The underlying reason is that most clubs use the wrong measures and can therefore never clearly assess whether their retention efforts have any kind of impact. In this article we look at how to measure retention in a way that allows operators to make clear, actionable decisions which will improve retention and increase income.

The attrition percentage – why it has no value in measuring retention

A method which has been used for years by the vast majority of clubs is to measure attrition by expressing the number of membership cancellations in any given month as a percentage of the starting membership that month, as illustrated in Figure 1 below:

Fig. 1

A similar measure is used to calculate ‘annual attrition’ as illustrated in Figure 2 below. In this case the annual percentage is calculated by totalling the number of membership cancellations throughout the year and dividing the figure by the average monthly starting membership.

Fig. 2

Drawing conclusions about retention performance using these methods has two fundamental flaws:
• 1. The attrition percentage is heavily influenced by the number of membership sales. In Fig. 1, between June and July the attrition % fell (from 5.0% to 4.9%), yet the number of cancellations increased (from 126 to 129)! It is clear in this example that the reduction in attrition was caused by a large amount of new joiners in June and not by any improvement in the retention of existing members.
• 2. The attrition percentage does not take into account HOW LONG A MEMBER HAS BEEN RETAINED. Using our example from the table in Figure 1, if we analyse the cancellations further on any given date, it is possible to see huge variances in the membership duration of each member that cancels. This is illustrated below in Figure 3, which looks at the cancellations from 1st April 2009.

Fig. 3

As you can see the membership life varies considerably. If every member left after 1.18 months the club would be in a very different financial situation compared to a scenario where every member stayed 56.57 months! It is therefore essential that clubs get beyond the cancellation figure to understand more about their members and how to encourage them to stay longer. What is the reason the member was retained for 50 months? What kind of demographic profile did that member have, how old were they and what kind of service did they receive?

Measuring Retention Correctly

In order to understand how to improve retention operators need to measure:
1. THE RETENTION RATE defined as:
The proportion of members who stay for a predefined period of time e.g. 3, 6, 12 months etc.
2. LIFETIME VALUE defined as:
The average length of time members stay and therefore how much they pay in membership fees.

RETENTION RATE

The horizontal axis on the graph in Figure 4 below shows the time lapsed since joining, taking ’0′ as the start of a membership. The vertical axis shows the proportion of members who retain their membership. Figure 4 shows that the 12 month retention rate is 50.4%. That is 50.4% of members retain their membership for at least 12 months. The corresponding figures for 24, 36 and 48 month retention rates are 27.7%, 17.1% and 10.7%. The area under the curve represents the total income from membership dues and therefore the shape of the curve is very important. Any flattening of the curve represents greater income.

Fig. 4

LIFETIME VALUE

The lifetime value of a member is the average duration of membership represented by the ‘median’ duration – that is the duration of membership that separates the total membership in half. Half the members stay longer than this time and half stay less (for mathematical reasons it is wrong to use the mean value as the average). This can also be read from the retention curve (Figure 5). A horizontal line is taken from the 50% point on the vertical axis and read across to the corresponding point on the retention curve. Taking a vertical line down to the horizontal axis will give the median length of stay and therefore the average lifetime value. In this example the Lifetime Value is 7.8 months. That is, 50% of members pay 7.8 months of membership dues or more, and 50% of members pay less than 7.8 months.

Fig. 5

Operators can plot all sorts of variables using these measures e.g. age, gender, membership type, service received etc. and by doing so, can start to understand why some members stay longer than others. This helps them take actionable decisions that will improve retention.

Using ‘Age’ as an example, we can plot the graph below:

Fig. 6

Assuming £40 per month.

By looking at the Lifetime Value measure in Figure 6 we can clearly see that recruiting 45+ year old members yields on average £344 more income per member than recruiting 18-24 year olds. What decisions can we make from this analysis that can be used to increase retention?

• Invest in marketing to older age groups through campaigns, imagery etc.
• Offer a discount to older members e.g. you can spend £300+ more attracting an older member and still be better off than selling to a 18-24 year old.
• Adjust membership sales targets and commissions accordingly, i.e. offer a higher commission to a sales person if they sell to an older and reduce commissions for younger members

These are examples, but they all stem from having the correct membership retention measures in place.

CONCLUSION

Hopefully we have helped to illustrate that the first and most important task in developing a membership retention strategy is to fully understand the size of the problem, and whether the problem is more prevalent in some members than in others. This will lead to possible solutions in sales and marketing, and more importantly, help to develop your customer experience using systems, policies and procedures that will achieve the desired retention outcomes.

Some of the practical steps you can take to do this are reviewed in later TRP articles.

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