According to the IHRSA, 81% of health and fitness businesses fail within their first year—but, despite this, the fitness industry continues to grow. In fact, projected revenue for the U.S. fitness industry is expected to reach $434.74 billion by the end of 2028—representing annual growth of 33.10% from 2021-2028.
Have you been wondering how to increase gym revenue and take profits to the next level? Owning a gym can be a very lucrative business venture, but only if you understand how to turn gym revenues into profits.
The good news is—you don’t need a financial expert to understand the foundation of gym valuations. We know it can all be a bit overwhelming, so in this blog, we’ll cover the basics of assessing gym profit margins and what you can do to lower costs and increase revenue—thereby also improving profitability.
How to evaluate profitability
Did you know your business can show a profit without actually being profitable?
When you do your quarterly financial reports, you may show a profit at the end of a quarter—which effectively means your gym made more money than you spent. However, that doesn’t necessarily mean you’re bringing in enough income to remain in operations for the long haul.
This is why it’s important to understand the difference between profit and profit margins.
How to calculate gross profit
Gross profit—also referred to as gross income—is the amount of revenue left after subtracting the cost of goods and services (COGS). To calculate your gym’s gross profit, you’ll need to calculate the total amount of earnings, in addition to the cost of selling your products and services.
Then, take your total sales revenue for a designated period of time—which is typically either by month, quarter or year—and subtract total expenses. What’s left is your gross profit.
Total revenue – total expenses = gross profit
How to calculate net profit
The major difference between gross profit and net profit is that the latter also accounts for the cost of operations—for example, rent, utilities, wages and salaries, insurance, etc.—and subtracts those from total revenue.
For this reason, net profit is a more precise assessment of a gym’s profitability, but gross profit is still a suitable calculation to give you a general idea of your gym’s performance.
How to calculate gross profit margin
A gross profit margin is a metric for analyzing sales. And although gross profit will show whether or not your gym is running in the black, it won’t tell you if you’re getting enough return on your expenses to stay viable. For this, you must calculate and consider your gym’s gross profit margin.
To calculate the gross profit margin, take your gross profit and divide it by total revenue to get a percentage.
Gross profit ÷ total revenue = gross profit margin
Example:
Let’s suppose your gym made $50,000 in total revenue last month and your total expenses were $30,000, leaving you with a profit of $20,000. Divide the $20,000 profit by $50,000 in income to get a profit margin of 40%.
$50,000 – $30,000 = $20,000 gross profit
To calculate your gym’s gross profit margin, divide net profit by revenue:
$20,000 ÷ $50,000 = 0.4
Finally, multiply your gross profit by 100 to determine your gross profit margin percentage:
0.4 x 100% = 40% net profit margin
Your gym’s profit margin is one of the biggest key performance indicators (KPI) because it shows how much return you get from the money you’re spending. The larger the percentage, the more profitable the business is.
Most gyms will have a sales mix, meaning they sell multiple products and services. Therefore, it can be helpful to calculate the margin mix for all products and services individually, as this calculation can help you determine which are the most profitable.
How to increase your gym profit margin
Profitability is the difference between your gym’s revenue and expenses. If your revenue is higher than your expenses, your gym is considered profitable. Conversely, if your expenses are greater than your revenue, your gym is not profitable.
Most gyms typically have diversified income streams, meaning they bring in revenue from a variety of sources. This includes memberships, class fees, personal training fees, as well as apparel, food and drinks, or supplements.
Your expenses account for all the costs you pay to keep your gym in operation. This includes rent, utilities, staff, equipment, marketing, and more.
Generally speaking, one of the fastest and easiest ways to increase profitability is by lowering costs—which could include anything from your utility bill to the costs associated with hiring and firing staff.
With the competitive market also anticipated to continue growing rapidly, it’s imperative for gym owners to be proactive about improving profitability. Fortunately, there are a number of steps you can take today to give your gym’s bottom line a boost.
Here are three examples:
Streamline operations
Gym management software—also referred to as membership management software, a facility management system, or a gym software solution—is a platform of tools that will centralize and streamline your gym’s operations. In other words, gym management software serves as a central hub for gym owners to better manage and oversee their facility, finances, staff, memberships, and more.
Value-based pricing
One of the most obvious ways to increase your gym’s revenue is to increase the cost of your memberships. In addition to bumping up revenue, it can also boost the perceived value of the membership.
What you’ll need to keep in mind, however, is that this only works if you deliver on that added value; otherwise, this strategy could have the opposite effect and lead to a loss of members.
Add revenue streams
Some of your clients will want personal training, while others will want group classes—and within those classes, you’ll need a range of levels.
Why not provide both, but limit the numbers in your group classes? Your best clients will pay more because they are receiving more personal attention than they otherwise would in a larger group class.
You might also want to consider adding new types of classes or increasing the number of your most popular classes. To figure out which are the most profitable, you can calculate the gross profit margin for each.
Conclusion
For a gym owner to be successful in today’s increasingly competitive fitness market, it’s imperative to get on board with the shift to digitization and to invest in a gym management system that can accommodate changing business needs, in addition to the needs of employees and consumers.
Why not get started today?
Give us a call and try EZFacility for free!