How Elements of a Membership Contract Can Improve Customer Retention
Data science consulting identifies elements of a subscription agreement to reduce churn.
Fitness club owners and operators can stem the flow of members from their clubs by better understanding what pushes members to the exits. Based on my data science consulting company’s analysis of millions of data elements from U.S. clubs’ membership and billing databases, we found four categories that drive member attrition rates: broad economic conditions, contract design, seasonal impact and the user experience. Last month, I wrote about how broad economic conditions affect member retention. This month, I am examining the impact of contract design on member attrition.
All membership contracts are not created equal. How club owners draft their contracts has a direct and measurable impact on member retention. Contracts need to be built around three features: monthly payment structures, automatic payments and renewals, and relatively low monthly fees. Doing so can significantly improve member retention rates.
Monthly vs. annual fees. Retention rates are higher by up to 20 percent among members who pay monthly dues rather than pay in full at the beginning of the year. Why? Let me use my own club membership as an example. I pay in full at the beginning of each year. My club encourages this arrangement by offering a discounted rate to members who pay in full. However, when making this decision to maintain my membership each year, I must justify this relatively big expense and reassess if I get that much value from my gym.
This cost-benefit analysis is different for members on a monthly payment plan. When they stop to think about the value of their membership, most will think about the cost of just one month’s dues and assess if they get that much value from the gym. Clubs are more likely to meet and exceed member expectations when measured against a monthly installment rather than a full year’s cost.
Automatic payment and renewal. Most monthly payments are either automatically billed to members’ credit cards or automatically deducted from their bank accounts. In addition, many contracts with monthly billing allow the club to automatically renew the contract at the end of each year. Members are not taking active steps to renew. Both billing and renewal happen automatically, and your members become used to it. Canceling the contract, on the other hand, requires action. Members who allow automatic contract renewal remain active for an average of six months longer than members who do not authorize automatic renewal, according to our research.
Lower monthly fees. Clubs that offer memberships at a lower monthly price can fly under the radar. Some members continue their membership because the price point is low enough that they readily see the value in maintaining their membership. Clubs that offer contracts with higher up-front enrollment fees but lower monthly membership dues can have retention rates 10 percent to 20 percent higher than contracts with higher monthly dues.
Examining the Trade-offs
All of the features mentioned on the previous page certainly have trade-offs that go beyond retention. Monthly membership plans may have higher retention rates, but payment in full contracts can improve cash flow. Plans with higher upfront fees and low monthly payments may have higher retention, but the fees could deter prospective members from joining in the first place.
To examine these trade-offs, you can take the following steps:
- Audit your billing database. If your contracts allow you to automatically renew your clients’ memberships, ensure that your billing system reflects that. If your membership agreements do not include automatic renewal, consider offering it to your members where it would increase the convenience of their membership.
- Compare your retention for members with paid-in-full vs. monthly payment plans. If retention is higher for monthly payment plans, determine how a shift to monthly payments would affect your operations and cash flow.
- Compare membership plans. If your clubs have promoted different membership plans, compare your retention for plans with high enrollment, low monthly fees vs. low enrollment, higher monthly fees.
- Contract design is just one element that can increase member retention. It cannot and should not be a substitute for creating a high-quality health and fitness experience for your members. Without a positive user experience, a club cannot demonstrate value to its members, and over time, members will leave regardless of how their contracts are structured.
See success stories from clients who have implemented these recommendations.