Choosing a Growth Promotion at Riverside Fitness
Riverside Fitness has three studios, 1,900 members, and a $59 monthly membership. Variable cost per member-month is $18, and average tenure is 14 months. Acquisition cost averages $120 per new member, and about 400 members join each year. Churn has risen, and the owner, Dev, wants a growth push. Option A is 20% off for the first 12 months; the marketing consultant predicts this will raise annual joins to 500 but attract more price-sensitive members with expected tenure of 11 months. Option B is a referral program-a $50 account credit to the referrer and 50% off the friend's first month-expected to produce 150 joins with tenure of 16 months. Studio classes are already 85% full at peak times, and a $90,000 equipment refresh is due next year. Dev asks which promotion to run and whether either solves the underlying retention problem.
1. Compute customer lifetime value per member and total value under the baseline, Option A, and Option B. Which option creates the most value, and what assumption matters most?
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Baseline: monthly margin = $59 − $18 = $41. CLV = ($41 × 14) − $120 = $574 − $120 = $454 per member; 400 joins = $181,600.
Option A: price = $47.20, margin = $29.20. CLV = ($29.20 × 11) − $120 = $321.20 − $120 = $201.20; 500 joins = $100,600. Member-months = 5,500, actually below the baseline's 5,600.
Option B: first-month margin = $29.50 − $18 = $11.50; remaining 15 months = $41 × 15 = $615. Gross = $626.50. Acquisition cost = $50 credit + $29.50 discount = $79.50. CLV = $547.00; 150 joins = $82,050. If these referrals are largely incremental to the 400 baseline joins, total value is about $263,650.
Option A destroys roughly $81,000 of value versus the status quo despite more joins. Option B adds value at low fixed cost and does not discount the standard price for a full year. The referral program is better, provided the studios can absorb the members.
2. Dev says '500 joins beats 150, so Option A wins on volume.' Explain the flaw in that reasoning and recommend a decision, including capacity and positioning considerations.
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Volume is the wrong scoreboard because the business pays to acquire members and then earns a thin monthly margin. Option A buys 500 joins by giving up $11.80 per member per month for a year; the discounted members stay 11 months instead of 14, so total member-months fall slightly (5,500 versus 5,600). Dev would spend more on acquisition and earn less per member, while teaching the market that list price is negotiable-making future price increases harder.
Decision: run Option B, but target referrals to off-peak hours because peak classes are already 85% full. Adding 150 members at peak would degrade service and raise churn among existing members. Cap referral rewards, require the referred member to stay 60 days, and pair the offer with a retention check-in at day 30 and day 90. If Dev still wants a price promotion, use a limited trial (for example, two weeks free) rather than a 12-month discount, so the list price remains the anchor.
3. Identify three metrics Dev should track over the next six months to judge the chosen program, and state what would trigger a change.
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Track: (1) retention by acquisition source at 90 days and 6 months-the referral cohort should beat 14 months, while the discount cohort should be watched for early cancellation; (2) blended acquisition cost and payback months, calculated as acquisition cost ÷ monthly margin, with a target under three months; (3) class utilization by time slot and net revenue per class hour, to see whether new members fill idle capacity or crowd peak classes. A fourth useful measure is referral rate per member and referral conversion, to judge whether the program is self-sustaining.
Trigger rules: if 90-day retention for referred members falls below the house average, pause the reward and interview cancellations. If peak utilization exceeds 90%, shift incentives to off-peak or add classes before recruiting more. If payback exceeds four months, rework the reward. Review monthly for two quarters, not weekly, because retention signals need time to mature.