The Gym's Pricing and Capacity Problem
Pulse Fitness is a single gym with 1,100 members paying $45 per month. Its capacity is comfortable at about 900 visits per week, but peak-hour visits already reach 780 and members complain about crowding. Fixed costs are $28,000 per month and variable costs average $8 per member per month. The owner wants to grow revenue. Two proposals are on the table. Proposal A: cut the price to $39 per month, which research suggests would attract about 300 new members. Proposal B: introduce a premium tier at $65 per month with off-peak perks and capped class sizes, which research suggests 25% of existing members would take up, with no new members attracted. A third option is to cap membership at 1,200 and invest $15,000 in extra equipment and a small studio to raise comfortable capacity.
1. Calculate the financial effect of each proposal and recommend one, showing your reasoning.
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Current position: Revenue 1,100 × $45 = $49,500. Variable costs 1,100 × $8 = $8,800. Contribution = $40,700. Profit = $40,700 − $28,000 = $12,700 per month.
Proposal A - price cut to $39:
- New members: 1,400. Revenue = 1,400 × $39 = $54,600.
- Variable costs = 1,400 × $8 = $11,200. Contribution = $43,400. Profit = $15,400.
- Gain: $2,700 per month. But visits rise roughly 27%, worsening crowding at peak and risking complaints and cancellations. The gain is small relative to the added operational strain, and price cuts are hard to reverse.
Proposal B - premium tier at $65:
- 25% of 1,100 = 275 members upgrade, paying $20 more. Extra revenue = 275 × $20 = $5,500. Variable cost is unchanged per member, so contribution rises by $5,500.
- Profit = $12,700 + $5,500 = $18,200 per month.
- No added crowding; in fact off-peak perks may shift demand away from peaks.
Option C - capacity investment:
- $15,000 capital plus $28,000 fixed costs. Capping at 1,200 limits growth to 100 members, worth 100 × $40 contribution = $4,000 per month, giving profit of $16,700 before amortising the $15,000 (about $1,250 per month over a year), so roughly $15,450.
Recommendation: Proposal B. It produces the largest profit gain ($18,200), requires no capital, does not worsen crowding and raises revenue per member rather than volume. It can be combined later with the capacity investment once premium demand is proven.
2. Discuss the risks of Proposal B and how Pulse should manage them.
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Risks:
- Segmentation backlash - members who do not upgrade may feel they are getting a lesser service, especially if peak equipment or classes are restricted to premium members. This could cause cancellations. Manage by keeping all current benefits available to standard members and making premium additions genuinely extra, such as off-peak classes and guest passes.
- Uptake uncertainty - the 25% estimate is research, not commitment. If only 10% upgrade, the gain falls to $2,200 per month. Pulse should pilot the tier for three months and measure actual uptake before locking in costs.
- Cannibalisation - some members may have been willing to pay more anyway; a poorly designed tier can push existing revenue into a new label without real gain. The tier must offer visible added value, not just a price label.
- Operational complexity - capped class sizes and off-peak perks require booking systems and staff training, adding administrative cost not captured in the simple calculation.
- Reputational risk - a two-tier gym can be perceived as elitist in a small community, affecting word-of-mouth referrals.
Management approach: Communicate the rationale clearly, protect standard members' access, pilot and measure, monitor cancellation rates monthly, and review pricing after six months. If uptake is strong, use the added contribution to fund the capacity investment, combining higher revenue per member with room to grow.