If pricing at your gym is based on cursory glances at the competition and gut instinct, you could be leaving a significant amount of revenue on the table.
When a 1% improvement in pricing can equate to an 11% boost in profits, it’s important to get it exactly right. For anything that needs that kind of precision, accurate data inputs are crucial, and the cost-plus or set-and-forget pricing models that are so common in the fitness industry leave a lot to be desired.
Read on to find out how you can increase revenues and profitability at your fitness business with evidence-based price changes, tiered memberships, demand-based dynamic pricing, targeted promotions, and detailed customer research that gets to the heart of what your members are really willing to pay.
Key Metrics for Data-Driven Pricing Analysis
Gym pricing analytics rely on a range of metrics that will be invaluable to you as a gym owner when trying to maximize revenue and profitability. Data-driven pricing needs data to drive it, and these are the key figures that will give you the clearest picture of where your attention needs to be focused.
Retention Rate
Your gym’s retention rate is the percentage of members who renew their memberships in a given month or year. A similar metric is the churn rate, which is the proportion of members canceling their memberships in a given time period.
If your prices increase too much or local competitors lower their prices while offering a similar level of service, you will likely see higher customer churn and therefore a lower retention rate. Diagnosing such a jump in member churn is critical to understanding what you can do differently to keep members signed up for longer.
Retention is a key driver of ARPM, LTV, and overall profitability, especially given the fact that retaining existing customers can be up to five times cheaper than acquiring new ones.
Surveying customers who are canceling their memberships can give you valuable data to inform your pricing strategy. Analyzing why people are leaving could, for example, reveal that price is not a major concern at all and that there are other more pressing factors to address.
Conversion Rate
The proportion of people exposed to a promotion who go on to make a purchase as a result, expressed as a percentage.
A particularly low conversion rate could convey that prices have been set too high, while a particularly high one could indicate that there is significant value in your offer that has not been factored into the pricing enough.
Net Promoter Score (NPS)
When customers are asked a question that is a close variation of “How likely is it that you would recommend our company to a friend?”, the answer, based on a scale of 1-10, determines the net promoter score.
Customers who give scores from 0-6 are classed as ‘detractors’, and those who give scores of 9-10 are classed as ‘promoters’. The percentage of promoters minus the percentage of detractors equals your NPS.
A resulting score above 50 is considered fantastic, while an NPS below 20 could signal that more needs to be done to improve customer satisfaction, which could include reviewing your pricing.
Average Revenue Per Member (ARPM)
The total revenue from memberships and other member spending per month or year divided by the number of members.
Driving up ARPM through data-driven pricing changes, upsells, cross-sells and downsells is crucial for shortening your payback period, increasing LTV, and improving your LTV:CAC ratio.
Member Lifetime Value (LTV)
You can calculate how much a member is worth to your business on average by taking the average revenue per member (ARPM) and multiplying it by the average duration of a membership.
Another way to arrive at LTV is to divide your monthly ARPM by your monthly churn rate. For example, if your average revenue per member per month is $50, and your churn rate is 10%, then 50 ÷ 0.10 = an LTV of $500.
Customer Acquisition Cost (CAC)
Your average customer acquisition cost is the total marketing expenses and sales costs divided by the number of new signups in a given month or year. This should include all advertising spending, commissions, and lead nurture costs.
The customer payback period - how long it takes for a member’s revenues to exceed the cost of acquiring them - is also an important metric to monitor in order to ensure your business can stay cash flow positive as it grows. Too long a payback period could mean you run out of cash to operate your gym before your investment in customer acquisition pays off.
LTV:CAC Ratio
LTV and CAC are the pair of metrics that are most important to monitor when aiming to increase profitability and ensure the long-term success of your business. To remain profitable enough to grow a minimum LTV:CAC ratio of 3:1 is recommended, but the fastest-growing and most successful gyms can see a ratio of 30:1 or more.
Calculating the LTV:CAC ratio for each member segment can help you make more informed decisions about pricing strategies, as well as indicate where you should focus your expansion efforts to ensure maximum growth and profitability.
Price Elasticity of Gym Memberships
How sensitive your members are to price increases depends a lot on the price elasticity of demand, which is a measure of how much demand increases or decreases in response to a change in prices for a certain product or service. This concept can also be applied to prospective members to gauge how likely they would be to sign up for your gym at a range of different price points.
Your gym could be said to have elastic demand if an increase in prices would cause a relatively large fall in demand and therefore lower total revenues. On the other hand, inelastic demand is if an increase in prices would have a relatively small effect on demand and therefore increase total revenues.
When applied to gyms and other fitness club memberships, lower-budget options where an affordable price is one of the main selling points will have more elastic demand, whereas the demand for higher-end facilities with more personalized experiences will be more inelastic.
It’s important to keep this in mind and to carefully track the effect that price changes have on your key performance indicators to make sure you arrive at price points where revenue is maximized. The key factors that influence demand elasticity should also be paid close attention:
- Availability of Substitutes - A truly great gym experience in terms of perceived value for money will have few substitutes. Your gym should offer an overall experience that would be hard to replace with an alternative.
- Cost of Switching - When applied to fitness club memberships, the cost of switching also includes the social costs. If someone enjoys visiting a certain gym with their friends or is familiar with the people in a certain group class, they will be a lot less likely to cancel their membership in response to a price rise.
- Brand Loyalty - Crafting a strong brand presence that members can identify with and promoting positive relationships between customers and staff can be a big sticking factor.
- Habitual Demand - As creatures of habit, sometimes we pay more for things even if we know we could get them cheaper elsewhere. Frequent attendance and a lack of any obvious reason to change could mean gymgoers would be happy to stick with their current routine even if prices were to rise above the substitutes.
Willingness to Pay (WTP)
Willingness to pay measures the maximum amount of money a customer would be willing to pay for a product or service. A situation where that maximum is found to be higher than what consumers currently pay is referred to as consumer surplus.
Alongside market research and simple price experiments, survey research is one of the best ways for gyms to assess what kind of prices their current and prospective members would be comfortable paying for the services that they offer. While doing so, it’s important to be able to tease out the customer segments which are prepared to pay the most, as well as what aspects of the gym experience matter most to them.
Once an increased WTP has been identified for a particular segment of members, gym owners should aim to capture this consumer surplus through the incremental raising of prices for that segment. The same promising groups of customers should also be targeted with a greater proportion of new marketing spend, as well as shifts in positioning if necessary.
The closely related ‘marginal willingness to pay’ (MWTP) could also be useful to explore. This examines the extra money that members would be prepared to pay for specific additional features within their overall gym experience, e.g. for access to a sauna, steam room, or cold plunge on top of their baseline membership fees.
Competitor Price Monitoring
Consistently keeping on top of how competitors are pricing their memberships and other services should give you a unique insight into the changes you could make that might lead to higher revenues.
How they present their prices, how they advertise upgrades or downgrades, the systems they use to facilitate bookings, and their wider communications strategy will also be valuable sources of information.
Making sure your memberships are competitively priced means staying on top of emerging trends, including those that come from outside the industry such as inflation. Competitor price changes can often be important indicators of these kinds of trends emerging or declining.
Dynamic Pricing Strategies
Dynamic pricing models alter the prices of memberships or other services such as personal training based on factors such as demand or time. For gyms with a pay-as-you-go model, this could mean offering cheaper sessions at off-peak times and charging higher prices at peak times. Membership-based models could similarly offer tiered membership levels, with cheaper monthly options only granting access to the facilities at predetermined times when usage tends to be lower.
Optimizing a dynamic pricing system like this involves looking at capacity utilization at different times of the day, week, and year, as well as singling out the most popular classes and trainers. This kind of analysis will allow you to capture additional revenue based on the times and activities where members are most prepared to pay more.
Effective customer segmentation could also lead to pricing strategies that address demographic shortfalls as they are identified. This could include offering discounted rates to groups such as students or those aged 55 and over for example.
In Conclusion
By calculating and keeping track of a range of key metrics, you can measure the impact that pricing strategies have on the revenues and profitability of your fitness business. Hopefully we have demonstrated why the right pricing strategies are so crucial to increasing your bottom line as a gym owner, as well as how gathering the right data through testing and surveys will guide you towards the most optimum prices.
If carried out successfully, data-driven pricing analytics will leave your business in the best possible position to scale and grow sustainably well into the future.
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