Ridgeway Gym: price cut or retention campaign?
Ridgeway Gym has 1,150 members paying £42 a month. Variable cost per member is £11 and fixed costs are £29,000 a month; capacity is 1,300 members. Monthly churn is 3.5%, roughly 40 members. Exit surveys show 58% of leavers cite price and 46% cite limited opening hours or lack of childcare. Two proposals are being considered. Proposal A cuts the fee by 15% to £35.70 and is forecast to raise membership to 1,280. Proposal B keeps the fee, spends £14,000 on a six-month digital campaign and £2,500 a month on a retention system; it is forecast to add 180 members and cut churn to 2.8%, but membership would reach 1,330, above capacity. The landlord has offered space for a crèche at an extra £2,000 a month, which would raise capacity to 1,380 and support the family segment. The gym's brand is positioned as a low-cost, no-frills operator.
1. Calculate Ridgeway's current monthly profit and break-even membership, then calculate the profit and break-even membership under Proposal A.
Read the worked answer
Current contribution per member = £42 − £11 = £31. Current monthly profit = (1,150 × £31) − £29,000 = £35,650 − £29,000 = £6,650.
Current break-even = £29,000 ÷ £31 = 935.5, so 936 members.
Proposal A: new fee = £42 × 0.85 = £35.70. New contribution = £35.70 − £11 = £24.70. Break-even = £29,000 ÷ £24.70 = 1,174.1, so 1,175 members.
At the forecast 1,280 members: contribution = 1,280 × £24.70 = £31,616; profit = £31,616 − £29,000 = £2,616.
A 15% price cut cuts contribution per member by 20.3% and raises break-even by 239 members. Even though membership rises by 130, monthly profit falls by £4,034, or about 61%. The price cut is therefore financially weak unless it produces much higher volume, which capacity constrains.
2. Evaluate which proposal better addresses the causes of churn and fits Ridgeway's brand. Recommend a course of action, including whether to rent the crèche space.
Read the worked answer
A addresses only the price signal. Price is cited by 58% of leavers, but 46% cite hours or childcare, so A leaves a large cause untouched. It also conflicts with capacity: 1,280 is close to 1,300, leaving little room for growth.
B addresses the service causes. At 1,330 members, contribution is 1,330 × £31 = £41,230. Recurring costs are £29,000 + £2,500 = £31,500, giving £9,730 before the campaign. Spreading £14,000 over six months adds £2,333 a month, so profit is £7,397 in the campaign period. However, 1,330 exceeds capacity, so without the crèche only 1,300 can be served: contribution £40,300, profit £6,467 after campaign cost. With the crèche, costs rise to £33,500 and capacity to 1,380; at 1,330, profit is £7,730 before campaign and £5,397 during it, then £7,730 after. B is therefore modestly better than the current £6,650 once the campaign ends, and much better than A.
Recommendation: reject the 15% cut; run B with a six-month review. Rent the crèche only if at least 80 family members join, because it otherwise dilutes the low-cost brand and adds £24,000 a year. Use a waiting list to manage the 1,300–1,380 capacity gap.