The oldest financial tool in the gym is still the best for your business
The 12-month contractual agreement, used to create a strong receivable base for your business, has been around since the early 1970s and if there has been one common denominator that has added to the financial success of most of the major gyms in the world it has been using this tool.
Many people have tried to eliminate this classic from the modern training gym for a variety of mostly poor reasons, but there is nothing you can do that is more important in your business than using a 12-month agreement as your client membership payment collection tool, especially if you ever want to sell your gym for more than a few dollars and some change.
Here are several reasons the 12-month agreement is a must to build a financially successful training gym over time:
#1… The receivable base is the only thing you own in your gym that is of value to a potential buyer, or to the bank if you want to expand into a second unit, or to borrow money to grow your business.
A receivable base means you have clients that have signed some type of agreement with the gym that projects revenue into the future. Remember there is no receivable base if there is no obligation to pay on the client’s part. If you use a 12-month agreement, then you have created an obligation between the gym and the client allowing the gym owner to anticipate money that will arrive in the future, as a month-to-month payment, and that he can count on that money arriving since the client signed a contract stating he will pay.
Most of your clients are honest people. If they give their word they will pay, by signing a membership/client agreement, then they normally do. I promise to pay for 12 months and I will because I said I would. On the other hand, if you do not ask for an agreement, but only a month-to-month obligation, then I will honor that as well and leave anytime I want since that is what you requested as an owner and that is what I agreed to as a client.
What is a receivable base? For example, let’s say the gym only has 10 clients and they owe the owner these payments left on their memberships to the gym:
- One client owes 7 payments of $300 = $2100 (he started at 12 months, but only has 7 months left to pay for his first year)
- 12 payments of $400 – $4800 (new client just getting started)
- 3 payments of $350 = $1050
- 6 payments of $300 = $1800
- 1 payment of $400
- 9 payments of $149 = $1341 (this might be a person in team training)
- 3 payments of $400 = $1200
- 11 payments of $149 = $1639
- 5 payments of $350 = $1750
- 6 payments of $300 = $1800
- 12 payments of $300 = $3600
- 2 payments of $149 = $298
If this gym owner never sold another client another membership, he could collect up to $21,778 over the next 12 months. In other words, if every client paid as promised, and most will, but we will discuss loss rates later, then this owner might have a chance to collect up to $21,778 over the next 12-month period. This assumes one very important thing: we assume the clients are on a contract and give their word they will pay.
What happens if there are no contracts or 12-month agreements? Then the owner does not own a receivable base. This means that the owner has monthly cash flow from his clients from their payments, but since the clients have no obligation, defined as no contract, then all of them could leave immediately if they wanted.
When an owner tries to sell his gym, he only has two assets worth buying: the lease so the buyer can extend the business into the future at that location, and the receivable base, which is a pile of contractual obligations between the owner and the clients that could be transferred to the new owner.
If there is no contract, every client could walk away the day the business sold. If there is a contract, or in this case a 12-month agreement, then the buyer can count on client payments arriving as he gets his team and business plan into place. This receivable base also gives the new owner a chance to build his own relationship with the clients before they choose to leave.
An important side note is major staff change in your gym. If there is no receivable base, again meaning the clients can get mad and leave immediately, you are always held hostage if you need to replace a key staff person. Hey, get rid of Freddie and we quit the clients say. But you have to get rid of Freddie because he was once good but now is bad for the business. If the owner has a strong receivable base, based upon a strong contract, he can make that change and not lose half his members over nothing.
Banks don’t get too excited to loan against cash flow since it could disappear so easily, but banks love receivable bases since you have proof you will have a certain amount of cash arriving in the future that can be validated through the contracts.
If you want to create a business of value that can be sold in the future, then the only tool you have to base your business on a tool that adds this value, and that is making sure every client, or as many as possible, are on 12-month agreements.
#2… Why 12-month?
Every client tool has an associated loss rate. This means that you never collect all the money from all the clients, but she who collects the most money from the most clients will win. Twelve-month memberships have the lowest loss rates of all possible membership agreement tools, or stated another way, you will collect the most money from the most clients over time using a 12-month membership.
Here are the loss rates for the typical tools used in the fitness business. Remember, losses are figured monthly, but compounded annually. If you have a 4% monthly loss rate, which doesn’t sound too bad, you really have a 48% annual loss rate, or in other words, you just lost have of your entire membership (4 x 12 = 48):
- Open-ended month-to-month memberships = 4-7% each month
- 12-month agreement losses are < 1% a month, or about 10% annually
- 24-month agreements lose about 5-8% each month
As you can see, the most effective tool over time is the 12-month agreement. Many attempts have been made through the years to replace a contract with month-to-month memberships, but all the supporting data has been too short in length to uncover how really bad this month-to-month system is.
You read somewhere, “Yes, we stopped 12-month agreement and started month-to-month and our sales shot through the roof.” As we note later, there are probably other issues in play, but most important here is the fact that no one tracked these memberships for the next several years. The losses will be there, and they will be big, but in the short run this seems like a good plan, although over time it erodes the entire membership of the gym and can you down, while lowering the potential to ever sell your gym for any real money.
Most training gyms offer a 12-month membership at a fixed price, but if the client travels, has a second home or just doesn’t want to sign a contract, we usually charge him 20% more. This system rewards the clients who support the gym all year long, while charging a premium for the clients who want to come and go.
The losses are higher in the month-to-month group as stated, but you still have a solid base of 12-month contractual members along with a much lesser number of month-to-months, usually representing about 10% of your membership/client base.
#3…. Are open-ended, month-to-month memberships really that much easier to sell?
No, they are not, but if you find they are, then you messed up something earlier in your system.
One of the attempts to kill 12-month memberships always includes the, “it is easier to sell” promise, but is this true? Think about this chain of client progression for a few minutes:
- The client does not belong to a gym and is sitting at home. He currently isn’t searching for a gym, might have had a bad experience at a gym, or he is finally to the point that he might consider getting back into shape but does not know where to start.
- He is watching the game, scanning on social media, and a testimonial ad pops up from the local training gym featuring a guy in his age group who is successful in that gym.
- The current population in this country divides into two segments that join gyms: the first represents about 2/3 of the population of this country and are deal seekers who support the low-priced gyms, while the other third are money people, more educated, more sophisticated and who worry less about the cost and more about what they get for the money they paid. They sort themselves out when it comes to joining a gym. This guy is in the one-third and is interested in getting the best for his money.
- The ad features a link back to a website where there is a large number of testimonials all similar to our guy here. He is also given a chance to sign up for a 30-day trial. This means he will be given a chance to meet the other members, experience the gym’s service and see the quality of the product before he is asked to join.
- He books his trial, finds his gym stuff he hasn’t used in two years and shows up. Remember, he hasn’t tried a gym in several years and had to find the emotional courage to give it a shot one more time. Even getting to the door for the first time is a huge step for this guy.
- He comes into the gym, spends an hour with a good assessor, is set in motion somewhere in the gym where he fits, but he has not yet been asked to join. Remember, if you ask the potential client during the first visit to start today the discussion always comes down to money and contracts since the client has no, none, not any experience with your gym or product. This is the biggest mistake you make here. You ask too soon, too hard, and then blame the tool (12-month membership agreement) instead of questioning how you sell and how you ask for money.
- Two weeks later, the guy is asked to join. He has been in the gym five times, met everyone, has a free shake or two, attended a social event at the gym, has been introduced to every client in every workout he attended and is happy.
- Do you really think this guy is going to balk at a 12-month agreement after going through all this effort to get this far? We blame the tool, but it was the system, or lack of in most cases, that fails.
#4… How you collect the money is important too
How hard do you work to get clients? Imagine doing all that work to build your clientele, yet you only collect 70% or less of the money you should have received.
Many gyms get enough clients, they just can’t collect from any of them. If you want to build a financially successful training gym, get control of the money first. You have to create a system that allows you to collect the most money from the most clients over time. There are three key parts to make this happen:
- Is your price structure right for the market? Is your programming defined by your pricing strategy?
- Do you have a collectable 12-month agreement in place?
- Do you have your memberships serviced by a strong, third-party financial service company?
If you have these three components in place, you can screw up a lot of stuff and still stay in business. In fact, for most of you reading this, get this right and you would have a hard time killing your business.
The company we have used for years and recommend through our workshops is ASF Payment Solutions out of Denver. They started in 1971 and today specialize in training-centric gyms. Above all else, protect your money and make sure a professional company gives you the best chance to collect the most money you can from the most people.
The training gym business is a harder business than it looks. You not only have to be a good, or even great coach, you also have to be a good business person as well. The first thing you need to master on the business side is how money works. If I build a business on getting clients to pay me monthly, then how can I collect the most money from them over time?
The key is build a solid financial foundation based upon pricing, using a 12-month membership agreement and then using a solid financial company to help you collect the most you can.
The 12-month membership is an old tool but is has survived for a reason through the years; it is still one of the most important decisions you can make to help your business be financially successful over time.