The Membership Guys

Have You Hit The Revenue Ceiling For Your Membership Business?

Play Podcast Episode Subscribe on iTunes

Here's a question which may terrify you:

Do you know what the revenue ceiling is for your membership business? 

It's entirely possible – even likely – that this is something you've never contemplated…

Perhaps you had no idea until now that a revenue ceiling existed, in which case, you’re not alone…

Or maybe you're aware of the revenue ceiling, but you're not sure how to calculate it for your membership.

Whatever the case, it's important to be aware of it, because whether we like it or not, the revenue ceiling exists for every membership…

Yes, even the most successful ones! 

So, how can you figure out what your ceiling is and whether or not you’ve already hit it?

We're going to help you answer that and explain what you can do to raise that ceiling higher.

So let's dive in…

What actually is a revenue ceiling?

It's the point in your membership where the value of members you lose is equal to the value of members you bring in…

In other words, it's the absolute peak of your membership's potential…

The ceiling of how much revenue you can generate and the amount of members your business is capable of attracting.

Sounds scary doesn't it? 

But it doesn't have to be…

Take the blue pill, and you'll go back to a world where you didn't realise your membership had a revenue ceiling!

The good news is, when it comes to memberships there's a lot of scope to make adjustments that will increase your revenue ceiling…

So if things aren't looking good once you've calculated yours, don't despair!

How to calculate your revenue ceiling

The first step is to multiply your average number of new monthly members by your monthly subscription price.

If you charge annually or offer both a monthly and an annual plan, divide the annual charge by 12.

Doing either of these things will give you your average new monthly revenue.

The next step is to take the average new monthly revenue and divide it by your monthly churn rate.

This will give you your revenue ceiling.

You can use the same formula to calculate your member ceiling too…

All you need to do is remove revenue from the equation and simply divide the number of newmembers you attract every month by your churn rate.

Let’s break it down some more…

So if you attract around 20 new members per month, and you charge $40 per month as the subscription fee.

Multiplying the two gives you $800. 

If your churn rate is 5%, divide $800 by 5% (or 0.05).

You’re then left with $16,000 per month, which is your revenue ceiling.

Now this could be good news or bad news, depending on your situation…

If you’re currently earning $500 per month from your membership, then this means if you keep up your current levels of sales and churn, you can potentially triple your revenue before hitting your ceiling.

On the other hand, if you’re already generating $15,000 per month and you're wondering why your growth seems to have stalled…

Now you know why…

It's because you’re just below the ceiling for your membership.

When you’re close to the ceiling, it can be challenging to continue to scale, and growth can seem very slow.

Why does my membership have a revenue ceiling?

Say your churn rate is 10% and you consistently bring in 100 new members each month until your membership reaches 500 members…

The 10% churn rate shows you’re losing around 50 members per month.

10% of 500 is 50… 

You may add 100 new members per month, which seems great, but you’re losing 50 existing members at the same time.

Yet your membership is still growing… 

However, once your business grows and reaches 1,000 members, if you're still bringing in just 100 new members per month, that 10% churn will mean you're also losing 100 members in the same time period.

So you're losing as many members as you're bringing in…

But this constant cycle of bringing in new members and losing existing ones won’t change your sales rate.

It will, however, see the impact of your churn rate increase with your member base.

Where 10% churn used to mean losing 50 members, it now means losing 100 members.

So you end up hitting the ceiling with no room to grow or scale any further.

And the only way to break through that ceiling is to lower your churn rate or increase your sales.

What if your monthly revenue is higher than your revenue ceiling calculation?

Of course, this is not an exact science by any means…

You'll rarely have the same number of sales each month or the same churn rate…

Especially those memberships who operate the closed door model…

If this is you then you should calculate by the year rather than monthly…

Whatever your circumstance, it's likely you'll notice bit of fluctuation in your revenue ceiling.

But if you work out your ceiling and it turns out to be lower than what you’re currently earning each month…

Don’t get too excited! 

In all likelihood, this means you’ve already hit the ceiling, and you may be in the middle of a decline.

Most likely, your sales or churn rates have dropped recently…

And if you don’t reverse the drop in sales or the increase in churn soon, your monthly revenue will probably continue to decrease until it gets to that lower ceiling…

And in cases like this, the ceiling becomes a floor.

Why hitting your revenue ceiling isn’t a bad thing…

This all sounds depressing, we know!

But you'll benefit from understanding your revenue ceiling because it means you can be better equipped to manage it.

If you’re still in the early days of your membership site, working out your revenue ceiling will give you an idea of your earning potential…

And that can be pretty exciting!

On the other hand, if you’re edging closer to your revenue ceiling or you've just realised you've already hit it, you might be feeling a little uneasy right now.

If this is the case, remember that hitting the ceiling isn’t always a bad thing.

For starters, at least you know what you're working with!

And now you can start making more informed decisions for the future, because you don’t have to spend those long frustrating hours trying to work out why your monthly revenue has stalled.

You can now focus on maintaining your membership and making sure it doesn’t drop below that ceiling.

Knowing you’ve hit the ceiling also gives you your time back.

So instead of trying to focus on increasing your revenue with no luck, you can maintain your membership and put the time spent working on increasing revenue in your membership towards something else….

Like focusing on adding new revenue streams to your membership…

Or reducing your hours spent working on your business so you earn more for working less…

Or maybe even consider taking time away altogether.

It doesn't always need to be about increasing the bottom line…

Earning more for working less is a big win!

How to raise your revenue ceiling

Some revenue ceilings might be higher than others, but the reality is that all membership and subscription businesses have to manage this…

Netflix has this ceiling…

Dollar Shave Club has this ceiling…

Membership Academy has this ceiling…

While you can't get rid of the ceiling, there are some things you can do to try and raise it.

When you attract more members than you lose, your monthly revenue increases….

And if you lose more members, your monthly revenue does the opposite…

Obvious we know, but that means when both are balanced, they cancel each other out.

So if you want to raise your revenue ceiling, you need to tip those scales in your favor.

Alan numbers

You figuring out the numbers to tip the scales in your favor…

Increasing membership sales will do that…

It will also help if you reduce your churn rate by losing fewer members.

Other ways to add to your monthly revenue include:

  • Adding new tiers to your membership
  • Raising the price for new members
  • Introducing up-sells
  • Hosting live events, and 
  • Coaching…

Doing any of these things will tip the scales the right way.

So this means even if you don't increase the revenue ceiling in your membership itself, you can increase the revenue generated from each customer through other streams… 

And that will raise the revenue for your business as a whole. 

Ultimately this is all stuff you should be doing anyway…

You should be striving to find ways in which to increase sales and reduce churn…

It's just that now you're aware of your revenue ceiling in your membership, that puts everything you do to grow your business into a different context.

Because it's very easy to get to a place where you're consistently bringing in new members, seeing your revenue increase and your churn rate hold steady…

That's great for now, but you can't rest on your laurels…

It won't last forever, especially if you're not moving the needle with sales and churn.

Just knowing there's a ceiling can keep you motivated until you reach it.

Then, when the day comes that you do reach it, you can either try to raise it or stay steady with your membership in the knowledge it's performing to the best of its ability.

So that's the revenue ceiling, hopefully now you feel better equipped to manage yours.

Top