Last week my gym membership expired. Like many New Yorkers before me, I am now a “free agent” in the gym world. Although this has thrown my morning routine for a bit of a loop, it’s been somewhat fun exploring the possibility of switching gyms. My gym buddy Arthur and I have spent the last few days trying out and evaluating different gyms to see which ones we like and where we can get the best deal.
In evaluating all of these fancy gyms, one thing has stuck out to me more than anything else: it’s not the towel service, or the machines, or the free weights, or the classes. The thing that has stuck out to me most is that they all have the same pricing model – and it makes no sense.
The typical gym pricing model is to have people pay a fixed initiation fee (let’s say $120), and then pay a fixed monthly fee for unlimited use of the gym (let’s say this is $100). This means, fundamentally speaking, the people that come to the gym the most are the gym’s “worst” customers and the people that continue to pay and never visit the gym are the “best” customers. Let me break it down into an example to explain what I mean.
In our fictional gym, where the enrollment fee is $120 and the monthly fee is $100, let’s say there are three customers named: “Light User”, “Medium User” and “Heavy User”. Light User wants to get in shape and thought she would come to the gym every day, but work has gotten in the way and she really only uses the gym once per month. Medium User has been a bit better about her gym visiting, she comes once per week – still not as much as she had originally intended on coming. Heavy User really loves the gym and visits four times per week. After one full year, the “cost per visit” of our three users would look something like this:
Light User: ($120 enrollment + $1200 monthly fees) / 12 visits = $110 per visit ($1320 total fees)
Medium User: ($120 enrollment + $1200 monthly fees) / 52 visits = $25.38 per visit ($1320 total fees)
Heavy User: ($120 enrollment + $1200 monthly fees) / 208 visits = $6.35 per visit ($1320 total fees)
Looking at these three users we can see that Heavy User is getting a deal that is about 17 times better than Light User. Now let’s look at things from the gym’s perspective. Let’s say the gym has 1,000 members with a fixed monthly cost (rent + upkeep + staff) of $80,000. That means that each member is responsible for covering $80 in fixed cost per month (their fair share of the total fixed cost). The gym also has a marginal cost of $3 per visit for towels, water, soap and electricity used by one person on the average visit. From the Gym’s perspective here is how much it costs to support each of our three sample users above after one year (we can call this “cost of goods sold”).
Light User: ($80 fixed cost per month x 12 months is $960) + (12 visits x $3 per visit is $36) = $996 total cost of goods sold. $1320 total fees paid by Light User – $996 cost of goods sold = $324 profit for the Gym
Medium User: ($80 fixed cost per month x 12 months is $960) + (52 visits x $3 per visit is $156) = $1,116 total cost of goods sold. $1320 total fees paid by Light User – $1,116 cost of goods sold = $204 profit for the Gym
Heavy User: ($80 fixed cost per month x 12 months is $960) + (208 visits x $3 per visit is $624) = $1,584 total cost of goods sold. $1320 total fees paid by Light User – $1,584 cost of goods sold = $-264 profit (loss) for the Gym
Here you can see that our gym makes a good bit of money on Light User (the person who never uses their service), but actually loses a lot of money on Heavy User, the person who uses their service the most.
Assuming our three users are representative of the overall 1,000 members at the gym at a distribution of 20%/70%/10% (20% of gym users act exactly like Light User above, 70% like Medium User, 10% like Heavy User). Our gym would make (200 x $324) + (700 x $204) + (100 x $-264) = $64,800 + 142,800 + -26,400 = $181,200 profit per year (assuming all 1,000 members joined the gym at the beginning of the year).
What if we were to structure the cost of the gym differently? What if we charged each person per visit rather than a fixed monthly fee? In order to continue to make $181,200 profit per year, our gym would have to charge an average “per visit” fees of about $19.15 (((80,000/month upkeep x 12 months = $960,000) + $181,200 profit) / 59,600 total visits across all users = $19.15 per visit). This number seems high, and may scare people away – but to incentivize people to come to the gym more, we could build in discounts that apply to your per visit price if you satisfy a variety of conditions. Those conditions could include: if you come to the gym more than once per week for a month, if you use a personal trainer, if you refer a friend, if you come to the gym 3 days in a row, if you come twice in one day, if you bring a friend who’s not yet a member, etc… These price discounts can effectively lead to the same end pricing structure as above (where Heavy Users pay less and Light Users pay more) – but with this model we are rewarding our best users for engaging in activities that correlate with good behavior (they’ve been coming to the gym) and add value to the gym community (they use other gym services and get new members to join). With this new model the goals of the gym are aligned with the goals of the individual – which is currently the exact opposite of how it works.
I wonder if anyone has already tried something like this – seems pretty easy, right?