In the past ten years, fitness franchises have exploded in popularity. And, despite closures and shutdowns related to the COVID-19 Pandemic in 2020, industry experts expect another surge of growth throughout 2021 and beyond. Despite the popularity of fitness franchises in general, though, not all fitness concepts are a stunning success. Franchise economics can help you determine the best fitness concept for you.
Rick Mayo, CEO of Alloy Personal Training Franchise, discusses the franchise economics behind the most successful fitness franchises out there, and how to generate a positive franchise ROI for your business. We will also see why are some fitness franchises are much more profitable than others and key measures that make a franchise concept strong.
Franchise Economics 101: 4 Key Metrics to Determine the Best Fitness Concepts
When we talk about franchising and running a franchised business, we spend a lot of time on the big-picture aspects of the process – why you should do it, the upward mobility of the market, etc. We don’t, however, discuss the nuts and bolts of franchise ROI very frequently. With that in mind, here are four key metrics by which the best franchise concepts measure their success:
1. Retention Level
The best franchise concepts care deeply about retention – both of customers and employees.
- Employees: Employee turnover is a major (and expensive) factor that can hinder a franchise’s growth. Recent studies indicate that full-time employees receive an average of a 10% pay increase when they change jobs, and the cost of replacing employees continues to rise because of that. As such, retaining employees is crucial for a profitable business. Check out more in How to Improve Employee Retention in the Personal Training Business.
- Customers: A whopping 82% of companies agree that retention is cheaper than acquisition. Additionally, 65% of the average company’s business comes from existing customers. Increasing customer retention by even 5% can boost profits from 25% to 95%. See more details in How to Increase Personal Training Client Retention
The bottom line is this: retaining both customers and employees increases franchise ROI by reducing overhead and hiring expenses and driving profits – which is just good business for everyone involved.
2. Good Profit Margins
Profit margin is a critical consideration for any business – not just franchises. One of the profitability ratios used to gauge a company’s ability to make money is profit margin which calculates the percentage of sales that have turned into profits.
Investopedia defines profit margin as: The percentage figure indicates how many cents of profit the business has generated for each dollar of sale. For instance, if a business reports that it achieved a 35% profit margin during the last quarter, it means that it had a net income of $0.35 for each dollar of sales generated.
While there are many types of profit margins, most franchises use the net profit margin measurement, which provides a clear picture of the company’s bottom line after paying expenses like taxes and trainer salaries.
Profit margins need to be large enough to allow for both operation and growth over the long-term. Also, check out this article 5 Tips for a Profitable Fitness Franchise Business.
3. High Customer Lifetime Value
Customer lifetime value (CLTV, for short) is a critical metric for any franchise to measure, and it factors directly into retention, which we discussed in the first point of this article. If you want your franchise to retain valuable customers, understanding CLTV is essential.
Put simply, CLTV breaks down the total revenue a company can expect a single customer to generate. It takes into account that customer’s revenue value and compares the projected number to the company’s average customer lifespan (the amount of time the customer spends being a customer of said company).
When calculated correctly, CLTV can identify the specific customer accounts or segments that are most valuable to the fitness franchise. It can also help franchisees understand how much revenue they can expect a given customer to generate over the course of a business relationship. The longer someone is a customer, the higher their CLTV becomes.
No matter how much the franchise industry changes, one thing stays the same: high CLTV creates a positive franchise ROI. Fortunately, focused, well-run fitness brands tend to generate high CLTV as a matter of course.
4. Positive Investment-to-Revenue Ratios
All franchises require an initial investment to get started.
This investment covers the cost of buying the franchise, as well as providing access to things like marketing materials and onboarding support provided by the franchise parent company. Much of the initial investment is market-related: it may relate to the rent princess in the area you plan to establish your franchise or go to product cost, royalties, and utilities.
If you want to ensure a positive franchise ROI, however, you need to know that the franchise investment-to-revenue ratio will be positive in the long run.
To calculate this, we recommend averaging your expected cash flow for the next 3-5 years and dividing it by the upfront investment to purchase the franchise. Standard franchise economics recommends that franchisers expect to earn 1/4th of their investment back annually.
While calculating the investment to revenue ratio may seem intimidating upfront, it’s one of the key indicators that separate successful fitness franchise concepts from those that barely stay afloat.
Successful Fitness Franchise Concepts Started Here
At Alloy, we have a long track record of creating and backing highly successful fitness franchises. Why? Simple – we created the formula.
When we initially moved from licensing to franchising in 2019, we identified a few key franchise ROI metrics that would help our franchisees be successful. Since then, we’ve maintained focus on those Key Performance Indicators (KPI’s) and provided a level of support to our franchise owners that’s simply unheard-of in this industry. See more about our KPI’s in Key Performance Indicators For Personal Training Business.
Franchise prospects who quality and receive our Franchise Disclosure Document will notice that we actually provide an earnings claim with details disclosed in item 19 of the FDD which outlines some of these financial variables to help franchise prospects evaluate their potential franchise ROI when operating an Alloy Personal Training Franchise. Not all franchisors make these disclosures but we do.
While the last ten years have undoubtedly been the decade of the fitness franchise, it goes without saying that not every franchise opportunity is a good or profitable one. Today our personal training franchise model focuses intently on the unit economics mentioned above, which helps both our brand and our franchise owners continue to enjoy high levels of success.
Keywords: Franchise economics, franchise ROI
Article by Rick Mayo