Better to raise or lower the prices?

Strong competition in the fitness industry often leads to the question: "Is it better to raise or lower prices?" In this post I try to give some answers that I hope will be helpful, especially to box owners and gym owners.

A necessary premise

In Italy the fitness market has many gyms organised as ASDs that have chosen this legal form basically for tax reasons. However, although profit is not the fundamental purpose, even these entities must pay suppliers, rent, energy, and instructors, and this is why, even if they are not considered as real companies, they still require a well-organised, entrepreneurial type of management. 

For this reason, in this post. I will speak of 'organisations' to include any type of association or company. Having said that, let's answer the initial question: "Is it better to raise or lower prices?"

Why lower prices

Many gym owners believe that keeping prices lower than the competition is a good way to attract more customers or members, as the case may be. In fact, it might seem the most logical choice, considering that people generally seek the best value for money.

And here the 'buts' begin, especially since the concept of quality, as I have explained many times, is subjective, and if one of the two variables of the quality-price ratio is subjective, it goes without saying that the result is also subjective. To put it another way, what is expensive for someone is cheap for someone else. 

Lowering prices relative to competition is one of Porter's five strategies, also called cost leadership. The goal of this strategy is to become the low-cost player in its industry. In this way, the company can offer competitive prices and still have a higher profit margin than its competitors.

Although Porter's cost leadership strategy is often associated with the production of physical goods, it can also be applied to services.

In a service-based organisation, such as a gymnasium, costs may include staff training, acquisition of technology and tools, operating costs, human resource management, and other overheads. In order to adopt the cost leadership strategy, the service organisation must seek to reduce costs in all these aspects, without compromising the quality of services offered to customers.

For example, technological solutions could be adopted to optimise operations and reduce costs, such as process automation, electronic document management or the use of work management software. Furthermore, the organisation could try to reduce customer acquisition costs by using digital marketing techniques or by incentivising customer loyalty.

Importantly, Porter's cost leadership strategy focuses not only on reducing costs, but also on optimising processes and resources to deliver greater efficiency and value to customers. In this sense, the service organisation must seek to maintain a balance between costs and the quality of services offered in order to maintain customer loyalty and achieve long-term success.

Adopting a cost leadership strategy may lead to a price war with competitors because, when an organisation tries to reduce costs in order to offer lower prices than its competitors, other competitors may be pushed to reduce their prices in order not to lose customers. Moreover, if the organisation is unable to keep prices low due to cost increases, it may lose customers who have become accustomed to low prices and are less inclined to pay more.

Let us say that the price leadership strategy works very well when the business is scalable to the point of benefiting from so-called economies of scale and can rely not only on a lean and inexpensive organisation but on a very large customer base. Which is the case with low-cost gym chains that offer a basic service for a very low cost.

Why raise prices

The price leadership strategy may be difficult to apply to services where personalisation and customer experience are paramount. In such cases, it may be necessary to adopt a differentiation strategy, focusing on providing high quality, tailor-made services to customers, rather than on reducing costs.

The differentiation strategy applied to services is based on creating a unique and distinctive customer experience. To apply this strategy to services, the organisation must focus on creating a customer experience that is unique and memorable through the provision of high-quality, customised services. 

This can be achieved through customising services to specific customer needs, creating a welcoming and comfortable environment, offering additional and valuable services, and training employees to provide an exceptional service experience.

Furthermore, service differentiation can also be achieved through the use of advanced and innovative technologies, such as the use of mobile applications, augmented reality or virtuality, to enhance the customer experience and provide a high-quality, personalised service.

A common challenge for companies using the service differentiation strategy is to maintain constant innovation and improvement of their services in order to maintain their competitive advantage. In addition, creating a unique and distinctive experience may require significant investments in technology, employee training and service environment design.

Differentiation makes it possible to maintain higher prices because customers are willing to pay a premium price for unique and distinctive products or services that meet specific needs and create added value over the competition. In practice, this strategy allows the organisation to create a strong relationship with customers and to develop a recognisable brand identity, which increases customer loyalty and makes the company's products or services unique and difficult to substitute with those of competitors.

Not least, the fact that differentiation can create a sustainable competitive advantage, which prevents competitors from easily copying the company's offerings and lowering prices to compete. This is because the company's services are unique and difficult to imitate. 

As a result, differentiation allows the company to maintain higher prices than its competitors because customers are willing to pay more for the organisation's distinctive services, enabling it to increase profit margins and invest more in innovation and development of its product or service offering.

Is it better to raise or lower prices?

The answer is 'it depends'. Either strategy may or may not work depending on the organisation's structure, culture and business plan. The hunt for the high-price customer is not always fruitful because the expectations of this type of user are often underestimated, while the race to lower prices only risks bringing troublesome people to chase every time there is a subscription instalment to collect.

The right answer is therefore a direct consequence of the strategic choices made upstream, when designing the organisation and its services, and to put it bluntly, there are other strategies besides the two mentioned, although these are probably the most debated at the moment. The choice to be made therefore depends on an analysis of various factors such as the market, the territory, the economic situation, customer needs and so on.

As a Box Owner, who has done all the analysis, I am more inclined to use the differentiation strategy but I am also very critical of the fact that first you have to create a customer experience of a certain type, not so much one that justifies the price, but one that leads the customer to choose to want to pay a certain price for that experience. As a mentor, I'm a bit more lead-footed because raising prices 'at random' is no good; doing it after having done all the necessary analysis and built and implemented a customer experience of a certain type is. And that's what I generally suggest to the Boxes that work with me, which is why the path we take together is quite long and tortuous, but in the end it pays off, applying the ideal strategy for that specific situation from time to time. Generalising is never good in these cases.

And do you prefer to keep your prices low and maybe fight to the last penny with your competitors, or keep them higher and differentiate yourself from the rest of the competitors?

Are you looking to take your business to the next level?