Budget Brand Boom Moves Health Club Market in New Direction

Know when you should consider converting your health club to a high-volume/low-price business model.

  • December 30, 2019

It’s one of the most important decisions a club operator will ever make: Setting an appropriate price for dues and other services.

What you charge determines the financial health of your business and also sends a clear message to your market.

“The moment you make a pricing mistake, you eat into your profits or your reputation,” says Katie Delahaye Paine, a public relations and social media authority based in Durham, N.H.

Like countless owners of other businesses, club operators have learned this lesson the hard way. The most difficult challenge arises when they realize that, due to market forces, the pricing strategy that they used initially is no longer tenable or viable.

What do you do then? Cut payroll? Eliminate marginal services such as childcare? Or do you make a more fundamental change in your pricing structure and, possibly, revisit and revise your business model?

Strategy and finance childcare stock column

In some situations, a club might consider eliminating marginal services, such as childcare.

This is a dilemma that’s increasingly being faced by mid-price clubs that are being squeezed between luxury brands and budget clubs. The latter are referred to, by their detractors, as high-volume/low-price (HV/LP) facilities; or, by their promoters, who’ve repurposed the acronym, as high-value/low-price.

“A lot of middle-market clubs are struggling, and asking themselves, ‘How do I price this thing without making a complete change in my business model?’” says Bill McBride, a former IHRSA chairperson and the president and CEO of Active Wellness, a club management firm, and BMC3, a consultancy, both in San Francisco. “There’s still a strategic play to be made in the middle, but you have to make sure that your value chain and expense engineering can justify and accommodate it.”

If not, then you may want to consider transitioning to an HV/LP model, however you, personally, decide to define the acronym.

It’s a big move, but could, conceivably, be a business-saving step.

Among the many factors you’ll need to evaluate are local market conditions; membership and pricing options; the addition or elimination of certain amenities; how to deal with increased member volume; staffing; the impact on current members; market positioning; and, perhaps, rebranding.

Making the Numbers Work

Before making any move at all, though, you’ll need to understand your market thoroughly, cautions Rick Caro, the president of Management Vision, Inc., an industry consultancy based in New York City. Caro also is one of the founders and a past director and president of IHRSA.

“Health clubs, which are service businesses, are totally dependent on, and sensitive to, local market conditions,” he says. “If I’m going to generate fewer dollars per person, I’m going to have to increase the number of payers. So the first key consideration is based on market conditions having to do with supply vs. demand.

“Is there enough excess demand I can win to succeed?”

The challenge is echoed elsewhere in this issue by a club owner who notes that, “Competition is increasing, low-cost gyms are proliferating!” and asks, “How can I differentiate my club?"

What do the relevant numbers look like?

According to IHRSA’s Profiles of Success, the average dues for different club categories are as follows:

  • Multipurpose: $74/month, and an $82 initiation fee
  • Fitness-only: $45/month, and a $69 initiation fee
  • Multi-club group: $64/month, and a $74 initiation fee
  • Independent: $57/month, and a $74 initiation fee

The average for all clubs is $61 per month, with a $74 initiation fee. Compare that to $10 or $25 per month, which is common for HV/LP brands, such as Planet Fitness and Blink Fitness, and it’s clear that, when it comes to cost, the low-dues model is tough to beat.

If you reduce your rates to compete with HV/LP, you’ll have to make up the revenue loss by growing membership volume or developing new revenue streams, Caro reminds. “If you’re in a market with strong demographics, but a ton of competition, and if you move from $50 a month to $10 a month, you may need to increase the number of people you serve by as many as 4,000 or 5,000,” he estimates.

That’s where the “high-volume” in HV/LP comes into play.

If you decide you require that sort of volume, you have to plan how you’re going to handle it.

The first consideration: ample parking. If people can’t park close to your facility, they simply won’t use it, no matter how low your rates are, warns Caro.

“Having a limited number of spots may have been OK when I was a mid-price club,” he explains, “but I need a multiple of that for a high-volume, low-price club.”

Tier Memberships, Bundle Services

When Wayne Ellis decided to go HV/LP, he had to grapple with the associated challenges, and has managed to do so successfully.

Ellis is the owner of Bob’s Gym & Fitness Center, a group of four, 30,000-square-foot multipurpose facilities in the Evansville, IN, area. Founded in 2000, the regional chain was charging $56 for a single membership, but the numbers weren’t adding up.

In September 2017, he lowered the dues to $19.99 per month for a basic membership and, then, added a Prime Membership, for $29.99. The latter bundles several amenity offerings, including group X classes, massage chairs, pool privileges at two clubs, and free access to all locations.

This two-tier strategy has worked.

“We really needed at least 40% of our members to go Prime. Less than that was going to be a disaster. And 60% was our dream,” he says. “Our current average—71%!”

Ellis estimates that Bob’s total revenues will be about $7.8 million for 2019, up from $6.17 million in 2016 (a 26.4% increase), while the combined membership for all four locations has jumped from approximately 16,000 to 20,500 (+28.1%). His profit margin also has increased.

Once you get prospects in the door, says Ellis, it’s easy to convince them to pay $10 more for a variety of extras. And, beyond the initial investment, many of the Prime amenities don’t incur any additional costs. Massage chairs, for instance, are a powerful incentive, but don’t require any staff involvement. They’re regarded as a bargain for the price, whether or not members use them.

Strategy and finance cardio equipment at Bobs Gym column

Weigh the Price-perception Effect

Much of the decision-making surrounding the HV/LP option is based on “consumer price perception,” which, in turn, is predicated on Adaption-Level Theory. In this case: lower dues influence how customers make other choices, including, for instance, how long they’ll maintain their membership.

The impact, Ellis happily discovered, was quite positive.

“We’re only two years into our lower rates, and our retention has been fantastic,” he says. “People who pay $20 or $30 a month are a lot less likely to cancel than someone paying $50 or more.”

With respect to other switch-specific issues, Ellis concurs with Caro that having plenty of parking is vital. “What we found is that parking is a big deal,” he says. “You’ve got to have enough capacity to handle a lot more members.” He also points out that the higher volume puts more pressure on equipment maintenance. Gone, he says, is the luxury of being able to wait for a few days or a week to repair a unit.

“We’ve brought all of our repairs and maintenance in-house to get that turnaround time down.” Even with the extra traffic, Ellis has been able to cut labor costs.

Strategy and finance parking lot column

Ample parking can be a game-changer.

“We actually were able to cut payroll,” he says. “We actually have fewer employees because, while we used to have two salespeople at each location, now, with our assistant managers handling sales, we don’t have any.”

Bob’s, which had 230 employees before the conversion, today has 217.

Consider Rebranding Your Club

Another concern that an established, mid-price club confronts when going HV/LP is the effect the process will have on current members.

“Think about how that transition is going to be for them,” advises Brent Darden, the CEO of Brent Darden Consulting bin Dallas, and a former chairperson of IHRSA’s board of directors. “Even after you take them down to the lower price, members who joined thinking that yours was a high-end or mid-priced club may have misgivings. That played a role in their buying decision. Now they may wonder if it’s still a fit for them.”

This, of course, poses an even bigger challenge if, in the transition, you eliminated some amenities.

“Operators who convert from mid-price to HV/LP often need to repackage their offerings, and may eliminate some underutilized services,” says Caro. “They may not schedule as much group exercise, or, like many HV/LP facilities, may not offer childcare or personal training.”

Eliminating towel service, which can run up laundry costs, is a frequent expense-trimming step, observes McBride.

Such changes may prompt some members to leave, which raises another serious question.

Given your new pricing structure, should you rebrand and, in effect, relaunch your club?

“It’s hard to bring an existing club downstream without giving very careful thought to rebranding it,” says McBride. “Doing so means that you’ll need to attract a different segment of the market.”

Beware the Business Race to the Bottom

Darden suggests that you should approach a conversion to HV/LP as though you were conducting a first-time launch.

“I’d do due diligence as if you were opening a new club,” he says. “Do a new feasibility study, demographic analysis, and competitive analysis of the competitors in your market.”

Ellis didn’t rebrand Bob’s Gym, but he made sure to get the word out. “We developed a very simple ad, and we ran it everywhere—from billboards, to webpages, to social media. It had a big blue background that said, ‘$19.99,’ and a big flash that said, ‘$29.99,’ and, ‘Now only two great rates.’”

Ellis believes that, in this case, retaining the Bob’s brand was the right decision.

But, McBride warns, whatever you decide to do about pricing, don’t cut your way into losses.

“Frequently, in American business, there’s often a race to the bottom,” he says. “Companies are pressured to add more services to keep up with customer demand, so they either introduce new expenses or reduce the price to keep up with the competition.”

“... in American business, there’s often a race to the bottom.”

Bill McBride, President & CEO

Active Wellness

If the process repeats itself, a vicious cycle can ensue until, inevitably, a club goes out of business because it’s whittled away its profit margin.

“Avoid the race to the bottom at all costs,” concludes McBride.

Related Articles & Publications

  • IHRSA 2019 Profiles of Success

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