Battle of the Bulge In Low Cost Club Business Models

In the latest consolidation of the fitness industry, 24 Hour Fitness acquired most of the remaining Bally Total Fitness (BTF) clubs. It’s been a long and winding road for BTF; acquisitions, public filings, de-listing’s, multiple bankruptcies and countless CEO’s.

The BTF story was tailor made for a B-School text book case on how NOT to run a business. The nail in the coffin comes at a time when the fitness industry is undergoing major transformational change.

You see, BTF was the original high volume low-cost club. In fact, they took it to an extreme selling bonded memberships, lifetime PIF’s and of course the crème de la crème $9 monthly contracts … for life! They were the inventors of what I’ll call commodity fitness where you charge people an amount that is negligible and the member will either:

  1. A) Forget they are paying it; or,
  2. B) Convincing themselves they’ll restart their fitness regimen the next month.

The problem is that neither of these assumptions is good model of how to run a successful gym.

Today, lots of mid-tier priced clubs are being forced to make some tough choices and the pressure to lower prices is an easy place to start…and end. Like Bally, you’ll find yourself flanked by a high-end club or perhaps a luxury brand that is depleting services revenue and a low price alternative that is killing new membership sales. The alternatives seem bleak and so the transition to a no contract, month-to-month low price model begins.

The initial results will most likely be positive with a surge in new membership sales combined with the return of many former members who left for the cheapo gym down the road. You may even see usage increase and growth in your non-dues service revenues. Over time though, many of these clubs begin to see reality and the errors in their assumptions.

Unless located in dense urban areas, low-price clubs are incredibly susceptible to attrition. While a location in New York City may thrive, a club in Des Moines will die a slow death. Without contracts, there are simply not enough bodies to support the churn that these businesses are faced with.

Furthermore, the cost model of a mid-tier club is substantially higher than that of a low priced one, and in making the transition, operators fail to make adjustments for trainer commissions, Group X programming or membership consultant fees. Net/net less revenue with the same costs does not a business make.

There are however ways of making the transition more successful:

  1. Stay true to your roots: Don’t stop selling contracts. Even in the low cost world, companies like Retro Fitness are still asking for commitments. This allows for better cash flow and gives you the ability to plan your spending in advance and as those trail blazers at BTF taught us…people will keep paying for a little while but not forever.
  1. Don’t take a double hit in loosing or lowering existing member dues. Create incentives for higher paying members to stay at their standard rates. Include a free monthly PT session or some membership perks like advance scheduling for popular classes, towel service or free daily lockers.
  2. Leverage technology to extend your reach: I often joke that people are buying homes, cars and even finding their significant others and spouses online but buying a gym membership is still one of the more unpleasant consumer experiences. SELF SERVICE IS THE NEW FULL SERVICE. Consumers are demanding this as evidenced by the success of startups like Classpass and Fitmob. For you skeptics out there start your online joins by approaching your former members. If done correctly, once you see the success of these programs you will be a convert. Integrate these programs into social media and online advertising, and the results will speak for themselves.
  1. Use technology to realize operating efficiencies: Rather than get fleeced by the full service providers who hide ridiculous processing fees wherever they can, take a look at tech-enabled services like Motionsoft’s Back office support services (B.O.S.S) to lowers your cost and increase your dues margins.

The low cost model can be a successful one. Ask the founders of Anytime Fitness and Planet Fitness. The transition to it though can be unsettling if not managed properly.

 

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The Circuit Blog provides insights and analysis on technology in the health, wellness, and fitness industries.

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