Latest / Pricing Power Podcast with Fexingo: How Businesses Set Prices, Raise Margins, and Win Customers / How Gyms Price Memberships and Profit from No-Shows
Transcript
- Lucas: So, Luna, quick question. When did you last actually use your gym membership? Luna: Um, last week? I did a spin class. Why, are you judging me? Lucas: Not judging. I'm just setting up today's puzzle. The gym industry runs on a beautiful, slightly devious business model, and the core of it is that your monthly fee doesn't pay for you to work out. It pays for you to not work out. Luna: Okay, that sounds almost philosophical. But I think I know what you mean. They're betting on me not showing up. Lucas: Exactly. And that's not a bug, it's the whole design. The fitness club model is built on a metric called utilization rate. And the industry average is something like thirty to forty percent on a busy day. So the vast majority of members are paying for a service they're not using on any given day. Luna: That sounds like the airline model. Overbook and hope not everyone boards. Lucas: It's related, but actually the opposite in a way. Airlines want to sell every seat, even if the passenger doesn't fly. Gyms sell way more memberships than they have capacity for, but they don't want everyone to show up at once. If they did, the place would be unusable and people would cancel. Luna: So it's a delicate balance. Too many no-shows and you're leaving money on the table. Too few and you've got a fire hazard. Lucas: Right. And that's why the pricing has to be so specific. Let's start with the big box model, the Planet Fitness approach. Ten dollars a month, no contract, free pizza on Mondays. How does that work? Luna: Well, ten dollars a month is one twenty a year. That's not nothing. But they need a huge membership base to cover rent and equipment. Lucas: And they get it. Planet Fitness has over eighteen million members. But the trick is they've designed the gym to be a little intimidating for serious lifters and a lot welcoming for casual users. That's on purpose. They want the crowd that's going to show up in January and then fade by March. Luna: So they're basically monetizing the New Year's resolution. I mean, I'm not knocking it. It's genius. Lucas: It's a classic sunk-cost play. You pay upfront, or you sign up for annual and pay monthly. Once you've paid, the rational thing is to use it. But the human thing is to skip a day, then a week, then a month. And the gym keeps your money and your unused capacity. Luna: Okay, but there's a shift happening. Boutique studios, the SoulCycle and Barry's of the world, they don't do monthly memberships. They sell class packs. Lucas: Right. And that's a completely different psychology. You're buying a fixed number of sessions, and they expire. That's the key. If you don't use them, you lose them. That creates urgency and scarcity. Luna: And they also charge a late cancel fee, like thirty dollars if you don't show up or cancel within twelve hours. That's not just a penalty, that's a revenue stream. Lucas: It is. And you know what that fee is really about? It's about protecting the instructor's pay and the studio's capacity. But it also nudges you to show up. They're trying to increase utilization, not decrease it. Luna: So the big box gyms want you to not come, and the boutique studios want you to come. It's like the same industry but opposite business models. Lucas: That's the frame. And then there's the middle ground. Regional chains, the YMCA, your local rec center. They're more about community and retention. They don't want churn, so they price lower but focus on service and classes to keep you engaged. Luna: And then you've got the budget online players, like ClassPass, which aggregates studios and classes. They've disrupted the whole pricing grid. Lucas: ClassPass is interesting because they're a middleman. They buy credits in bulk from studios at a discount, then sell them to consumers. Studios get to fill unused spots, but they give up control over pricing. And ClassPass has to manage a complex dynamic supply and demand algorithm to keep everyone happy. Luna: Yeah, I've seen classes vary in credits depending on time of day and popularity. A prime-time spin class can cost three times what a lunchtime yoga class costs. Lucas: Exactly. And that's surge pricing, but applied to fitness. It's not just about filling seats, it's about shaping behavior. Higher credit costs for peak times push demand to off-peak, which balances utilization across the day. Luna: So the future of gym pricing is basically a mix of subscription, class packs, and dynamic pricing. But what about the rise of at-home fitness, the Pelotons and the apps? That's got to be putting pressure on the brick and mortar model. Lucas: Huge pressure. Peloton had that boom during the pandemic, and then they crashed hard. But the at-home model taught people they could get a good workout without leaving the house. That's forced gyms to rethink their value proposition. Some are adding hybrid memberships where you get access to both the physical gym and an app. Luna: And that's a pricing problem. How do you bundle a physical space with digital content? Do you charge a premium for the app? Do you give it away to members? Lucas: And that's a pricing problem. How do you bundle a physical space with digital content? Do you charge a premium for the app? Do you give it away to members? Luna: Sorry, I think I just echoed you there. Anyway, that's the question. Lucas: No worries. And honestly, this is where the pricing gets really creative. Some gyms are experimenting with pay per visit, no membership at all. Others are offering tiered memberships, where you pay more for access to premium equipment or classes. And some are using AI to personalize pricing based on your usage history. Luna: Personalized pricing? That feels a little creepy, but I bet it works. If you only come twice a month, they can offer you a cheaper plan to keep you from canceling, because they know you're already cheap to serve. Lucas: Exactly. And that's the core insight. The cost of serving a member is almost zero once they're signed up. So any price you can get from them, even a dollar, is pure margin. The challenge is finding the price that maximizes lifetime value without pushing them to cancel. Luna: And that's why the industry is so focused on retention. A member who stays for three years is worth way more than one who cancels after three months, even if they pay less per month. Lucas: Right. And that's why you see annual contracts with penalties for early cancelation. It's not just a revenue guarantee, it's a commitment device. The sunk cost keeps you coming back, or at least keeps you from canceling. Luna: So it's all about commitment and psychology. And if you think about it, this is a model that works for a lot of subscription businesses. Software, streaming, even news. The product is the habit, not the service. Lucas: Absolutely. And that's a good place to pause because this is exactly the kind of conversation that we're able to have because of listener support. If these pricing deep dives have changed how you see the world, or helped you in your own business, you can support the show at buy me a coffee dot com slash fexingo. Luna: Yeah, it's a tiny ask, but it keeps us ad-free. And honestly, we love doing this, so anything is appreciated. Lucas: So back to the gym. We've talked about big box, boutique, and hybrid. But there's one more piece I want to touch on, and that's the ancillary revenue. Personal training, smoothie bars, merchandise. That's where the real margins are. Luna: Oh, for sure. A protein shake costs maybe a dollar to make, and they charge six or seven. And personal training is pure profit because the trainer is paid per session, and the gym takes a cut. Lucas: And that's why you see gyms pushing training packages and supplements. They're not just trying to help you. They're trying to increase the average revenue per member. Luna: So what's the takeaway for a small business owner listening? How should they think about pricing a service where the customer might not show up? Lucas: The lesson is to understand your utilization rate and price accordingly. If you have a service that's capacity-constrained, like a gym or a consultancy, you need to price to encourage off-peak use and penalize no-shows. If you have a service that's basically infinite, like software or content, you can price low and focus on volume. Luna: And don't forget the psychology. Sunk costs, commitment, and perceived value all play a role. A low price can attract customers, but it can also devalue your service. Lucas: Right. So whether you're selling gym memberships or anything else, think about what your customer is actually paying for. Are they paying for the outcome, or are they paying for the hope of the outcome? Because in the gym business, a lot of them are paying for the hope. Luna: And that hope is worth a lot. At least ten dollars a month. Lucas: At least. Thanks for listening, everyone. We'll see you next time.