October 30, 2018 Faith Christine Lai
Low-cost gyms are dominating the fitness industry. In 2015, the number of members at “budget club(s)” grew 69%, while the growth rate of “mid-market clubs” stagnated. As of June 2017, there were more than 500 low-cost gyms in the United Kingdom alone, accounting for an estimated 35% of all gym memberships, and offering membership rates from as low as £8.99 per month.
Besides cheap membership rates, low-costs gyms often share more than one common characteristic. Fernandez et. al. (2017) discovered that many low-cost gyms shared multiple characteristics, like running on very little manpower and offering a “gym-only proposition”.
However, the characteristics that make low-cost gyms so successful also create unique challenges with respect to membership retention. This article uncovers the challenges low-cost gyms face in retaining customers, and suggests that the right technology can meet these challenges head-on.
The business model of low-cost gym facilities can be summed up with one phrase: the essentials. Besides doing away with rarely-used facilities like cafés and saunas to maximise workout space, many low-cost gyms also allow gym members to access the facility without requiring a staff member to let them in. For example, the U.K.’s largest low-cost gym chain, PureGym, has an access system in which each member has a unique PIN code, and international gym giant Anytime Fitness provides members with electronic key fobs for around-the-clock access.
Since low-cost gym facilities depend on a low-manpower business model, they observe substantially lower recurring operational costs than traditional gyms, which depend heavily on staff members being present on-site. These cost savings can then be passed on to the consumer through attractively low membership fees.
However, the same systems and operations that make it possible for low-cost gyms to offer cheap memberships also present severe challenges in terms of membership retention. We know that gym memberships are often cancelled when members experience low engagement, lack in motivation, or lack sufficient funds to continue with the membership. Members of low-cost gyms are unlikely to drop-out due to not being able to afford the membership fee, but they are particularly prone to experience both low engagement and low motivation.
Consider the average new member at a low-cost gym. This member is likely to sign up, make payment, and receive their gym access information through the Internet. When they visit the gym for the first time, they may not encounter a single staff member, since, as previously mentioned, most low-cost gyms have enabled staff-free access. Finally, since many low-cost gyms also tend to have non-binding membership contracts, that same member could cancel their membership as easily and as quickly as they signed up – all without meeting a single member of staff face-to-face. This lack of meaningful engagement between customer and company inhibits the sort of community-building that we know improves member retention rates, and transforms the gym into a mere physical location, entirely substitutable for the next best option. In addition, a lack of member engagement also means that the gym is deprived of an avenue to find out their customer bases’ sentiments and needs. This makes it almost impossible to identify which members are at risk of terminating their membership.
Members of low-cost gyms are also prone to experience low motivation to exercise, which in turn makes them more likely to terminate their membership. Because it costs so little to join a low-cost gym, the sunk cost (incurred costs that cannot be recovered) for the average member is very low in comparison to a mid-range or luxury gym. A member of a mid-range or luxury gym may, in the absence of all other motivation, continue working out as a result of sunk-cost effect; they’ve spent a lot on their gym membership and want to get their money’s worth. However, the sunk-cost effect is negligible in cases of low-cost gyms. The aforementioned lack of engagement that members of low-cost gyms experience also hampers motivation because it results in a lack of accountability for the average gym member. After all, if a member at a low-cost gym stops turning up, it is unlikely that anyone would notice.
It is obvious, therefore, that many traditional strategies or gateways to improve membership retention inherently conflict with the low-budget gym’s business model. For example, on-boarding new members can drastically improve both short-term and long-term membership retention rates, but on-boarding every new member entails a sizable team of staff that many low-cost gyms lack. Similarly, strategic communication with at-risk members, and creating a personalised member experience seem unrealistic low-cost gyms.
That is, until you fully consider the power of technology.
Many low-cost gyms already incorporate technology in their operations. After all, the automated member access systems at most low-cost gyms run on fairly sophisticated data and technology. In fact, these automated access systems may already hold substantial amounts of crucial member data, such as the number of times a particular member has attended the gym in the past month. This sort of information is powerful, particularly when harnessed by the right technology.
For example, Machine Learning and Artificial Intelligence (AI) can utilise existing data to identify which members are at higher risk of terminating their membership, which locations (if a gym owns several) are more likely to see member attrition than others, and even provide custom class or product recommendations to members based on their gym activity. In fact, online fitness marketplace PayAsUGym has recently taken a step in this direction, signing a partnership deal with customer data expert InfoSum to gain greater insight into their customer base and to improve their customer retention rate.
With the right technology, a low-cost gym can generate a member experience as personalised as that at a luxury gym by acting as an intermediary between client and company – a role typically filled by staff. Technology might even be able to be more effective in understanding customer’s needs than staff members, since it is free from human error and available around-the-clock. Bye, bye, low retention!
October 28, 2018 Faith Christine Lai
Membership retention should be top priority for any business aiming for long-term success. It costs five times as much to attract a new customer than to keep an existing one, and increasing customer retention rates by 5% increases profits by 25% to 95%.
One of the factors that affects membership retention rates is pricing strategy. In this article, I’ll discuss the current pricing strategies popular in the health and fitness industry, and suggest three strategies to improve membership retention rates.
Pricing speaks volumes in this industry. When a gym or health centre sets its prices, it is also involuntarily committing to a model of business that prioritises either attraction or retention.
Statistically, it is well-established that 44% of companies focus on customer acquisition as compared to 16% that focus on retention. Taking the United Kingdom as a case study, virtually every commercial gym giant offers free trials of at least 1 day in length. For example, Virgin Active, Anytime Fitness, Fitness First, and Nuffield Health all offer free trial schemes of varying lengths. Other household names like easyGym and PureGym also promote offers which reduce joining fees for new customers. In addition, many gyms promote lower membership rates for new members. These establishments are all following a pricing model that intends to bring in new customers with eye-catching offers.
However, this pricing strategy also sorely misses the mark. The optimal strategy for a firm in the health and fitness industry is to focus its resources on retaining existing members rather than attracting new ones. But current behavior communicates to both existing and prospective members that the business cares more about its new members than its existing ones. After all, the old members aren’t the ones getting discounts and membership benefits.
Jill Avery, a senior lecturer at Harvard Business School, adds that this sort of pricing strategy also is likely to attract the ‘wrong kind’ of customer – “deal seekers who then leave quickly when they find a better deal with another company”.
‘Okay’, you might say. ‘The status quo hasn’t quite got it right. But what would an optimal strategy for membership retention look like?’ In the next section, I suggest a few general principles to guide a retention-focused pricing strategy.
Have you ever received a stamp card from a coffee shop? If you have, it probably sounded something like this: ‘buy 9 coffees, and get the 10th free’. If you’re lucky, you may even have experienced the sweet satisfaction of turning in a completed stamp card at your favourite coffee joint, and subsequently claiming a free drink.
That feeling of excitement is why so many coffee shops have this sort of loyalty scheme. When you feel rewarded for your action (in this case, consistently getting your coffee from one particular shop), you are more likely to associate enjoyable experiences with that same shop. You are motivated, through such an action-and-reward mechanism, to stay engaged with the shop you are patronizing.
And it’s not just coffee shops that play the ‘loyalty card’. International clothing brand H&M has H&M Club, a loyalty program that gives regular shoppers reward points for their purchases. These points can then go on to redeem “offers, services, events and much more”. Sainsbury’s, the second largest chain of supermarkets in the United Kingdom, also runs a similar program with their Nectar Points scheme. In fact, everyone seems to agree that rewarding loyalty matters. Except, strangely enough, the health and fitness industry, in which loyalty programs are not the norm.
If you’re a health and fitness operation, making loyal customers feel valued will not only improve their experience of your brand, but will also solidify their commitment to your business. Some techniques to make long-time customers feel valued include allowing for members to pay incrementally lower monthly rates depending on how many years they’ve stayed with you, or for long-term members to get perks that new members don’t, like a free towel service and refreshments.
This will not only improve membership retention rates but could even have the happy consequence of attracting new members through word-of-mouth recommendations from your ever-growing loyal and satisfied consumer base.
In a recent article, Harvard Business School professor John Gourville discussed the psychology of pricing. He discussed the case study of an “average health club” who is faced with the challenge of ensuring that they both attract and retain their member base (sound familiar?). Gourville suggests that the owner of a health and fitness business should actually make members pay monthly, rather than yearly, in order to improve membership retention rates.
This seems odd at first. Surely, making new members commit to a year of payments upfront is better, since it eliminates the ability for them to ‘drop-out’ every month. However, the psychological element behind payment means that a monthly payment cycle incentivises people to exercise more regularly than a yearly payment cycle. This, in turn, means that members of your health and fitness facility members are more likely to reap the physical benefits that they signed up with you in order to achieve, and will motivate them to continue on with their membership beyond the first year.
Thus, knowing when to charge is just as important in pricing strategy as knowing how much to charge.
Finally, one final important element that is necessary in pricing for retention is a sensitivity to your target demographic. Every business has unique needs and a unique demographic. You know your business better than anyone and are better placed than anyone else to figure out what sort of pricing strategy will work best for your members. Do your members value flexibility or costs-savings? Do they use all your services, or would they prefer paying for one at a time? Find out, and then work towards your demographic.
After all, at the heart of all of my suggestions is one simple principle: if your consumers feel valued, they’ll stick with you for the long-run.
October 25, 2018 Faith Christine Lai
So, you’ve got the fitness company of your dreams. You’ve pushed through hours of conceptualising your brand and business model, creating the best facilities, hiring the best employees. You’ve even been successful at getting customers in the door. All the hard work is over now, right?
Wrong. The key to real, sustained success in the fitness industry is not member attraction, but member retention. This article will explore why this is the case, why it’s not necessarily easy to achieve a healthy membership retention rate, and why you should make improving membership retention a top priority, starting right now.
You probably don’t need to look at your bank book to know that a strong membership base is really important for any health and fitness business. However, if you do, you’re likely to see that membership fees account for around 80% of overall revenue, as Helen Watts discovered was the case for a significant proportion of businesses studied in her paper “A Psychological Approach to Predicting Membership Retention in the Fitness Industry” (2012). This means that member fees are a vital component of revenue (and consequently, profit) generation for fitness businesses. And yet, according to the Fitness Industry Association’s figures in 2002, the average retention rate for a fitness club is 60.6%. This means that each year, a club loses approximately 40% of its members! It is unsurprising, therefore, that the IHRSA has referred to membership retention as the “Achilles Heel” of the fitness industry.
“But who cares?” You might question. “Even if people leave, new members will just come in and replace them.” However, the statistics indicate that this may not necessarily be true. The 2018 State of the UK Fitness Industry Report shows that the rate of growth of the fitness industry is slowing – during the 12 months to March 2018, the number of fitness facilities increased by 4.6 percent, as compared to increases of more than 5 percent in the previously recorded period (March 2016 to March 2017). IBISWorld, an international market research company, has made a similar warning, recently predicting that Australia’s gym market may reach saturation in the next five years. This means that there is no guarantee that there will always be new members to make up for the revenue (and love) lost if your current members leave.
Additionally, apart from ensuring the longevity of your business, there are also inherent benefits to higher membership retention rates. Firstly, focusing business strategy on retaining existing members rather than attracting new members is likely to result in some real costs savings, since, as the Harvard Business Review notes, the acquisition of new customers entails unique costs. For example, the costs associated with advertising, new member discounts, and the practice of giving ‘free trials’. These costs are not incurred with the retention of existing customers. Thus, a shift in business focus towards retention will bring about costs savings, and accordingly, higher profits.
Secondly, improving your membership retention rate can also improve your rate of growth. With a more consistent consumer base, meaningful relationships between these regular members (and even between staff and members) are more likely to develop. This sense of belonging can drastically improve the member experience. As Phillip Mills once said, “people join to get results and motivation, but they stay because they make friends”. When people enjoy and have confidence in your business, they are more likely to recommend your business to others, bringing new customers to your door! Retained customers, therefore, could also be a valuable form of word-of-mouth advertising for your business.
In the first part of this article, I showed that membership retention is really, really important for any successful health and fitness business, and that it is often a problem for businesses within the fitness industry. Why might this be the case? I suggest three reasons.
Firstly, fitness culture is changing. The concept of holistic fitness is becoming more popular, people are demanding greater variety in their fitness regimes, and companies such as ClassPass and GuavaPass are stepping up to meet that demand. This means that the idea of long-term commitment to just one type of fitness facility or workout is becoming increasingly unattractive to consumers. In the Internet age, there are also an increasing number of resources available for free online that allow people to work out from the comfort of their homes, without spending any money!
Secondly, staying fit isn’t easy. At almost every point of one’s fitness journey, there is the temptation to quit. At the beginning, fitness is difficult because one hasn’t yet developed the habit of regularly turning up to the gym and working out. Even when that has been overcome, the motivation to keep exercising diminishes as one becomes more experienced, and session-to-session progress slows down. In addition, people often undergo life changes that make it difficult to keep up with their fitness routine – people go away to college, start demanding new jobs, or have babies. There are many exogenous factors that can make someone leave a fitness gym or facility, membership retention strategies aside.
Thirdly, and most importantly, health and fitness businesses simply aren’t doing enough to ensure that their members stay in the long-run. If businesses don’t actively prioritise membership retention, they won’t account for it in their business and resource allocation strategy. Many businesses even actively divert energy and resources into attracting new members rather than retaining existing ones. As has already been discussed, this is a big mistake, and is likely to be a significant source of the retention problem in the industry.
If you’re reading this article, you’re probably interested in improving your health & fitness business’ retention rate. Although every situation is unique, one thing to be mindful of is the existence of ‘first-mover advantage’. First-mover advantage is the advantage gained by the initial significant occupant of a market segment. Although this phenomenon usually refers to the gaining of technological leadership or resources, it is also applicable when a business emphasises membership retention amidst an industry that does not. As illustrated earlier on in the article, low membership retention is a striking problem throughout the health and fitness industry as a whole, and businesses haven’t caught on yet. But you have.
So, start thinking about your membership retention today. Look closely at your demographics, the people behind your profit line. Think about how to make them feel happier, more included, and more engaged. Think about developing relationships with them for the long-run, not just for the now, and start considering the resources you may need to do so. Start today, get that first-mover advantage, start retaining your members, and watch your business grow!