Peak Fitness: Cut the Price or Raise the Value?

Now

• Contribution per member = €45 − €12 = €33
• Total contribution = 640 × €33 = €21,120
• Fixed costs = €21,000
• Monthly profit = €120 - the club is trading almost exactly at break-even.

Proposal A

• Contribution = €35 − €12 = €23
• Fixed costs = €21,000 + (€9,000 ÷ 6 months) = €22,500
• Break-even = 22,500 ÷ 23 = 978 members
• Projected membership = 640 × 1.35 = 864
• Contribution = 864 × €23 = €19,872 → loss of €2,628 a month
• Even at full capacity of 900: 900 × €23 = €20,700 → still a loss of €1,800.

Proposal B

• Contribution = €45 − (€12 + €2) = €31
• Fixed costs = €21,000 + (€8,000 ÷ 24 months = €333) = €21,333 (treating the €4,000 referral scheme as a one-off marketing cost)
• Break-even = 21,333 ÷ 31 = 688 members
• At 720 members: 720 × €31 = €22,320 → profit of about €987 a month

What the numbers reveal

The €10 price cut destroys €10 of contribution on every member to win members who each bring in €10 less. Because fixed costs are high and unchanged, A needs 978 members - more than the building can hold - simply to stand still. Proposal A is not a marketing risk; it is arithmetically impossible. Proposal B is thin but positive, and the €8,000 equipment pays back at roughly €987 a month once membership reaches 720, about eight months after that level is reached.

Assumptions in Proposal A

1. It assumes high price elasticity of demand. The claim is that a €10 cut pulls in 224 extra members. But the competing chain charges €29 - Peak at €35 is still 20% more expensive and still has no 12-month contract, so the cut may not make Peak the cheapest option and may not trigger the switching it assumes. If price were the deciding factor, those members would already have gone to the €29 operator.
2. It assumes the campaign works in six months. Advertising effect is uncertain and stops the moment spending stops; the extra 224 members are bought, not earned.
3. It assumes the 35% is achievable within capacity - 864 is 96% of 900, leaving no room for peak-hour classes and no slack.
4. It ignores competitor reaction. The low-cost chain can cut to €25 or add a promotion; Peak, with €21,000 of fixed costs, has no room to respond.

Non-financial reasons for B

• Positioning and segmentation. Peak cannot win the price segment against a low-cost operator with scale. B repositions it in a segment the chain does not serve - coached, small-group, physio-supported training - where €45 is defensible and where customers are less likely to compare on price alone. Cutting to €35 muddies that position without reaching €29.
• Retention and lifetime value. Churn is the real leak: 4% a month means about 38% of the base is replaced each year. B attacks churn directly (target 2.5%), and a retained member is worth 12 × €31 a year in contribution and is far cheaper than an advertised new member. A simply buys new members at a lower price while the leak continues.
• Risk and cash. B commits €12,000 of the €15,000 cash and can be staged; A commits €9,000 to advertising that has no resale value if it fails.

Recommendation: Proposal B, but only because Proposal A fails on its own arithmetic. B is not comfortable - it produces roughly €987 a month at 720 members, which is a thin cushion for a business with €21,000 of monthly fixed costs - so it must be managed as a test rather than a certainty.

Condition 1: stage the spend and set a review point. Buy the €8,000 of equipment only after the referral scheme has demonstrated that churn is falling (say, two consecutive months below 3.2%). Spending €12,000 of €15,000 before any evidence of retention is the same mistake as A, just gentler.

Condition 2: protect the peak-hour product. 720 members on 900 capacity leaves little room in the 6–8 pm classes. Coaching must be scheduled and priced so that it does not cannibalise the highest-demand hours, otherwise the club sells a premium service into a crowded room and service quality falls.

Financial measure to monitor: monthly contribution (members × €31) against €21,333 of fixed costs - in practice, the break-even gap in members, which should be reported as "members needed to break even" versus "members held" every month.

Non-financial measure: monthly cancellation rate, with exit reasons recorded. If cancellations fall toward 2.5% but complaints about class crowding rise, the growth is being bought at the cost of the product, which will show up in cancellations six months later.

A reasonable alternative judgement is to recommend B and a modest price move - but not to €35; the numbers show anything below about €38 cannot break even within capacity even at 900 members, so the price floor should be calculated before any discounting.