What is by-product pricing?

Need pricing models for a membership-based business

• Hi Researchers, I'd like an analysis of alternative pricing models for membership-based businesses, sort of like fitness clubs. This is an actual business with a location, not a virtual business. For example, a fitness club could charge a flat fee per month (or per year), which would be charged on a recurring basis, it could charge by usage instead (per hour or per visit), or a combination of the two. Alternatively, the membership could be based on the person's exclusive status (such as a university club, where only alumni of the university could use the club but would still need to pay a membership fee and/or a usage fee), instead of the payment of money. In particular, I am looking for the following: (1) Actual pricing models used by similar businesses that are membership based. Specific examples would also be useful. (2) Innovative pricing models for a membership-based businesss. (3) How these actual and innovative pricing models would affect membership, usage of the business and overall revenue. For example, a high monthly membership fee might stop many people from joining in the first place, but for those who join, they might get a lot of usage out of it and retain their membership. Plus, it might be seen as more valuable because it's more exclusive. Thanks

• Answer:

  Hi tucker_freeman, Thank you for your interesting question. I have worked out many models of pricing for you, analyzed most of them, given you examples of innovative business models, and some further tips to help your business. The most important advice I could give you to increase retention rates are to bill in installments. --------------------------------------- (1) There are a few different models available for pricing. First of all, you could position yourself as a low-price membership. Secondly, you could position yourself as a club that costs a lot to join and is seen as a commodity to be bought by wealthy people. The latter strategy would help you to not be so prone to dips in membership as unemployment or inflation rises and falls, for instance. "Historically, high priced clubs appear to be more recession-resistant operations. These clubs tend to be multipurpose facilities with a more affluent client base and much higher average non-dues revenue streams and revenue-per-member ratios. These factors made them less dependent upon new membership sales when the industry saw national membership numbers flatten in terms of growth (United States membership remained at about 21 million from 1989 through 1992)." http://findarticles.com/p/articles/mi_m0675/is_3_20/ai_86230655 Whichever road you choose, you should definitely price it in installments... I'll give you reasons for this in my examples. Examples ---- *University of California at Berkeley-- tiered membership Summary: lower prices for some groups (students and alumni), perks for members such as day passes (which can be given to friends, and presumably, the friends might also be interested in membership), there are no initation fees for these faculty/staff/student memberships but there are for the general public. The club also has a special program for those with disabilities, offers short term memberships, day passes for fitness and swimming, and summer passes for kid swimmers. The full membership details can be found at this website: http://calbears.berkeley.edu/insidepage.aspx?uid=b21e61d9-bb15-4db8-89f0-109a67ba90be Here is a quick summary: Cal Emeriti/Retiree * $296 per year. * Includes 5 complimentary day passes per year. Cal Faculty and Staff * $420 per year/$185 per semester. * Annual membership includes 5 complimentary day passes per year and monthly payroll deduction option. Community * $680 per year/$58 per month ($65 initiation fee). * Annual membership includes 5 complimentary day passes per year. * Minimum Age: 17. Short Term * $100 for one month * $250 for three months * Minimum age: 17. Day Pass * $10 * This pass allows use of all our facilities and group exercise classes for one day. * Valid photo ID required. Must be 17 or older. Swim-Only Day Pass * $5 per adult/$3 per child. * Valid at Strawberry Canyon and Golden Bear pools (GBRC pool is lap swim only; min. age: 12). Kid Swim Card * $55 (Valid April through October only). * Membership allows access to Strawberry Canyon West Pool for kids 2-16 years old. * Kids must be accompanied by an adult. * Members aged 13-16 may access the facilities without parent supervision. ---------------- *Brick Bodies of Cockeysville, Maryland simple membership with group exercise This club has a straightforward membership process in which there is an initiation fee and membership card fee, and along with membership one gets three free sessions with a trainer and unlimited access to group exercise. Adding in small bonuses such as the trainer sessions can really serve as a perk to membership. They also provide discounted senior, student and family memberships. They offer a free 14-day trial membership. *Analysis: Brick Bodies' membership levels are straightforward. By including unlimited access to group fitness, the facility could encourage its members to get to know and befriend one another. This could help retention rates by providing something-- friends-- that another facility cannot. "Participants in group fitness and other group activities have a higher retention rate than ?machine members? or those whose only interaction with their club is with the particular exercise machines on which they exercise. Friends ? new and old - are a great membership draw and a good retention tool." (3) ------------- Hot Springs Athletic Club high initiation fees and membership fees The Hot Springs Athletic Club in Glenwood Springs, Colorado, promotes an image of exclusivity. Its high membership prices elaborate on that image, as membership to this club becomes a commodity that members can feel proud to be part of. The club also has day guest passes available. http://www.hotspringspool.com/club.html http://www.hotspringspool.com/images/pdf/MemberApp.pdf#search=%22hot%20springs%20athletic%20club%22 listed below-- type of membership: monthly dues: initiation fee: Individual $81.00 $350.00 Couple $110.00 $540.00 Dependent (per) $31.00 $125.00 Senior Individual $53.00 $250.00 Senior Couple $76.00 $350.00 *Analysis. As you theorized, high prices can equal high loyalty. "Price has perceived value. According to IHRSA?s report, clubs with higher joining fees ($250+) as well as clubs with a higher monthly fee are perceived by the member to have a higher value. A higher price is often the symbol of higher quality. Within the industry, there is and has always been a correlation between price and attrition: the higher the price, the lower the attrition; the lower the price, the higher the attrition." Attrition rate is the rate of someone leaving the club after only one or two years. In addiition, the more that individuals and families are willing to pay to be at a club, the more they are willing to spend once they're there, on fitness supplies or in a pro shop. ------------------------ California Family Fitness-- chain in Sacramento, California with 13 locations only monthly plans, no contracts http://www.californiafamilyfitness.com/memberships.htm *Analysis-- By emphasizing its family-friendliness along with having no contracts and only monthly memberships, CFF appeals to families who may not want to commit to a whole year of membership for their fickle children. In addition, those who renew on a month-to-month basis are more likely to renew than those who have had an annual membership. (3) However, the longer the annual membership runs, the more likely it is that that person will stay-- they did, after all, agree to a long membership in the first place! ------------------------------ The Balance in Harrisburg, Pennsylvania. Monthly membership requires application fee, six months prepaid and annual prepaid have no application fee. http://www.thebalance.biz/membership.html Monthly EFT $52/month + $25 sign-up fee 6-Month $300 pre-paid Annual $576 pre-paid 3-Month/Student $156 prepaid Guest Pass $10 personal program not included *Analysis: By encouraging six-month memberships due to an application fee on month-to-month memberships, The Balance might have higher retention rates than other clubs. Six months is still pretty short-term compared to one or two years, and if those who use the membership can be encouraged to use it enough to renew, the system is effective. However, by insisting that memberships be prepaid rather than paid on a monthly basis, The Balance could be harming retention rates. There is a phenomenon called "sunk costs," in which consumers prefer to minimize loss rather than maximize gain in purchases. If someone has purchased tickets to one baseball game, they will be sure to attend it. However, if they have season tickets, they might justify the cost of the season tickets by saying it works out to saving $20 a game, but they won't attend all the games. Their overall cost has gone up, but because they've already purchased the tickets and justified it, they don't care as much. If you purchase tickets to a movie you don't like, you'll probably stay to the end anyway since you did just pay $20 to see the movie, whether you enjoy yourself or not. By requiring upfront payments, The Balance will probably have customers who come in on a regular basis for the first few months and then slack off as they forget they paid a few hundred dollars for the privilege. If it was coming out of their bank account monthly, they might be coming in more and more, get used to the routine, and pay for another six months when the time comes. ------------------------------ Burlington County College Fitness Center and Pool in Pemberton, New Jersey daily usage for certain amenities http://www.bcc.edu/pages/165.asp The Bronze Level membership includes a $10 annual fee, plus daily usage fees for the pool and basketball court. Higher, annual memberships include use of the fitness center and spa. There are no application or initiation fees. Bronze Level Includes the pool (with daily fee) and gymnasium. $10 Annual Fee plus the following daily usage fees: Child, under 5 years No Charge Child, 5-17 years $2 Adult, 18-59 years $3 Senior Adult, 60+ years $2 Silver Level Includes the pool (daily fee included), gymnasium and Wellness Center. Annual Per Semester Adult, 18-59 Years $216 $80 Senior Adult, 60+ years $162 $60 Family One Parent & Child(ren) $378 $140 Two Parents & Child(ren) $513 $190 Gold Level Includes the pool (daily fee included), gymnasium, Barons Wellness Center and Spa. Annual Per Semester Adult, 18-59 Years $256 $95 Senior Adult, 60+ Years $202 $75 Family One Parent & Child(ren) $418 $155 Two Parents & Child(ren) $553 $205 -------------------------- Courthouse Athletic Club in Salem, Oregon initiation fees for new members unless they sign up for two years http://www.fitfx.com/membership_fees.asp *Analysis: Since there is a $150 initiation fee for those who don't sign a contract at all, and $75 for those who sign an annual contract, many people would go ahead and sign a contract to avoid feeling "ripped off" by the high initiation fee. In addition, since this system encourages people to sign up for the full two years by effectively penalizing those who don't, it could have higher retention rates as people on the two-year contract dedicate themselves to the club more fully. --------------------------------- Silicon Valley Capital Club in San Jose, California membership by invitation only http://www.sanjoseclub.com/membership/index.htm New members must either receive an invitation from the club to join or be sponsored by an existing member. There is a one-time, nonrefundable initiation fee, plus monthly dues. *Analysis-- By making it an honor to even be invited to join, the Capital Club is really encouraging new members to join once approved and then keep up their membership. Who would turn down an honor? --------------------------------- (2) Innovative Pricing Models. Corporate Membership-- Lifetime Fitness has a corporate membership, in which a company buys memberships in bulk and their employees can utilize the fitness club facilities as a regular paying member would. http://www.lifetimefitness.com/corporate_wellness/intervention/index.cfm?strWebAction=corporate_memberships http://www.lifetimefitness.com/corporate_wellness/ http://www.lifetimefitness.com/corporate_wellness/index.cfm?strWebAction=program http://www.lifetimefitness.com/corporate_wellness/assessment/ The Lifetime Fitness Corporate Wellness program consists of examining the company's employees, either at work or through an online survey, reporting on the overall health of the company's workers, setting goals for them to achieve, working with employees who need extra help, and then detailing the ROI (return on investment) that the company has received by participating in the wellness program. Brick Bodies in Maryland, mentioned above, also has a corporate membership option. http://www.brickbodies.com/Memberships/corporate.html -------------------- Broadwater Springs in Helena, Montana. Monthly options. http://www.thebroadwater.com/html2/memberships.htm Two options: 18-month agreement, paid monthly, with a buyout option. Or, no contract or obligation, paid monthly, but paying about $13 more a month than if you had a contract. There are also heavily discounted memberships for senior citizens. http://www.thebroadwater.com/html2/memberships.htm Platinum Membership - All Three Clubs, no restrictions! 18 month agreement period * All three clubs. These are non-restricted memberships, unlimited club usage. * 18-month agreement period. * Payment method is EFT (dues are paid automatically through your checking, savings or credit card.) * Buy-out fee per month of $13.00 for a single and $15.00 for a couple if membership is cancelled anytime within the first 12 months. * After 18 months automatically rolls over to a month-to-month membership. * 30-day written notice required for cancellation after agreement has been met. Service Fee $100.00 Processing Fee $15.00 Monthly Dues: Single $52.00 Spouse $23.00 Children < 0-4 years $5.00 Children > 5 ?13 years $12.00 Children 14-18 (thru High School) $16.00 Family Max $105.00 College students 18-22 years and living at home $25.00 (College students are not included in family max) Flex Membership - All Three Clubs, no restrictions! Month-to-month membership, no agreement period! * All three clubs. These are non-restricted memberships, unlimited club usage. * Non-Contract. * Payment method is EFT (dues are paid automatically through your checking, savings or credit card.) * Last month?s dues deposit required, deposit is applied to last month of membership. * 60-day written notice required for cancellation. * No buy-out fee. Service Fee $125.00 Processing Fee $15.00 Monthly Dues: Single $65.00 Spouse $25.00 Children 0 - 4 years $5.00 Children > 5-13 years $12.00 Children 14 ? 18 (Thru High School) $16.00 College students 18-22 years and living at home $25.00 Dues deposit equal to first month's dues ------------------ Broadwater has some good ideas with this pricing scheme. They don't require you to have a montly contract, so people who are scared of that will be able to join, but at a higher rate than those with contracts. The differential in pricing is just enough-- $13 a month-- that monthly members will be tempted to sign contracts, but the buyout option is also inexpensive enough-- that same $13 a month-- that people are probably more likely to try out the contracts than they would with no buyout option. Here is another innovative model from Broadwater. ------------------ Broadwater also has a membership that is discounted from regular membership rates called a "Super Saver Membership" that is only applicable on Tuesday, Thursdays, Saturdays and Sundays. SuperSaver Membership - All Three Clubs - Tuesdays, Thursdays, Saturdays and Sundays only - 18-month agreement period. * All three clubs. * Tuesdays, Thursdays, Saturdays and Sundays only * 18-month agreement period. * Payment method is EFT (dues are paid automatically through your checking, savings or credit card.) * Buy-out fee per month of $13.00 for a single and $15.00 for a couple if membership is cancelled anytime within the first 12 months. * After 18 months automatically rolls over to a month-to-month membership. * 30-day written notice required for cancellation after agreement has been met. Service Fee $25.00 Processing Fee $15.00 Monthly Dues: Single $42.00 Spouse $23.00 Children 0-4 years $5.00 Children 5-13 years & through highschool $12.00 Children 14 ? 18 (Thru High School) $16.00 Family Max $105.00 College students 18 - 22 years and living at home $25.00 *Analysis-- This plan costs about $100 less in initiation fees and about $20 less per month, but you are also getting to use the gym only half the time as other members. This is a good membership to include as an entry-level-- if someone uses the gym enough, they'll want to upgrade to the full membership. In addition, this encourages users to use the center when it is not otherwise heavily used. It allows customers to be spread out and also for machines to be more available at busy times. If customers come in and can never get the machine they want, they will not renew their membership and will be dissatisfied. --------------- Lincoln Park Athletic Club, Chicago, IL http://www.lpaconline.com/joinToday.php Visit Packages. Lincoln Park has an innovative "visit package" scheme in which users can buy packages of 10 or 20 visits. ----------------- Innovative discounts. Lincoln also gives innovative discounts for not just students, but teachers and artists. These groups are sure to appreciate the discounts and might be more willing to become a member. Some gyms even have "nanny memberships" if the child already has a membership. Unique discounts like those could get the attention of families with babysitters. ------------------ Non-prime time memberships. Lincoln has special memberships that are only good for certain times: * Monday - Thursday restricted club use between 4 - 8p * Friday, Saturday and Sunday unlimited use. ------------------- Dual memberships. Lincoln has a dual membership agreement with the Evanston Athletic Club. Partnering with another club, which may be closer to a certain location or have more facilities, could be strategic for clubs wanting to expand the options available to customers. *Analysis. Dual memberships could help-- with twice the facilities, members are more likely to use either one or the other and more likely to resign when their time comes. Adding amenities such as spa packages or sports packages can also help with this-- as long as they are regularly using the membership for some aspect that they enjoy, they will be more likely to sign on the bottom line again. --------------------------------------- (3) How these actual and innovative pricing models would affect membership, usage of the business and overall revenue. There are many issues in which a membership or subscription model could either help or harm a business. First of all, people are more likely to use a product when they realize that they have just paid a certain amount of money for it out of pocket. "In the case of a health club, this means that members are more likely to go to the gym right after having made payments than later on in their memberships." (1) One effect that could be used as a good marketing strategy is the so-called "pennies a day" effect. Chicago's NPR station asks listeners to join their "dollar a day" club. That sounds entirely reasonable to many listeners, and they probably get more subscribers to the club than if they advertised it as the "$365 a year" club. The cost of a fitness membership could be broken down into what it costs per day, to great effect. The biggest concern facing many health and fitness clubs today are the "churn factor," or retention rates at the end of a contract or commitment. High initiation fees, as you speculated, can sometimes help prevent the churn factor, as people realize that if they want in the future to come back to the club, they'll have to pay another high fee. But, those same high initiation fees can prevent people from starting at the club in the first place. Churning can be stopped by building customer loyalty-- if they feel like a valued member of your club, they will be less likely to jump ship to another. According to some research (2), customer loyalty can be built through something as simple as a weekly email list with fitness tips-- this increased retention by 11 percent. "?The biggest challenge in the health club industry is going to be the ?churn-factor.? Anything that the industry can do to reverse that would be important.? John Maxwell, the Managing Director of Fixed Income Research of Merrill Lynch" (2) First of all, encouraging families and older people to join could contribute to a lower attrition rate. Families and seniors are more geographically and financially stable than younger people. Also, by encouraging family memberships you are encouraging re-signers-- a mother or father who might not go on their own will re-sign if their kids enjoy it or their spouse enjoys the facility. After a certain "honeymoon" period, new members have a tendency to end their membership when they realize they're not using it. By targeting new members after three months or six months with programs or benefits specifically geared to them, you would give them a reason to stay around. Sources: 1. http://hbswk.hbs.edu/item/3107.html "Use the Psychology of Pricing To Keep Customers Returning" by John Gourville 2. http://www.retentionmanagement.com/wordpress/?p=18 Retention Management "Focus on Stopping the 'Churn Factor'" by Richard Ekstrom 3. http://www.retentionmanagement.com/wordpress/ Search terms: pricing models membership fitness clubs fitness club membership types hot springs athletic club health club membership types health club fitness club health club membership levels health club alternative pricing Again, thank you for your question. If you need any additional clarification, please let me know and I'll be glad to help. Cheers, --keystroke-ga