You might think that there’s no such thing as bad profit - after all profit is the lifeblood of any business. Coined by Fred Reichheld, loyalty expert and the creator of the now famous Net Promoter Score, bad profits are profits gained at the expense of customer relationships.
In our industry, the dominant pricing model is membership subscription. This is a great model for managing a business, cashflow and general business security. The problem with this is that so many members end up paying for a membership they are not using.
If you calculate how much you are making from the members who are not attending vs those who are, you’ll see the income can be much higher - after all the biggest 'proverbial elephant in the room' in the fitness industry is that we rely on people not attending to make money. To put it simply, all your business profits come from customers who are not using your product/service and therefore at the expense of any value or gain for these customers. Relying on bad profits for any period of time is a dangerous business model.
Reicheld's research states that customers who are subject to bad profits models "... buy less, demoralise frontline employees with complaints and demands. They gripe to friends, relatives, colleagues, acquaintances. Estimates vary, but for a long time, the accepted maxim was that every unhappy customer told 10 friends. No wonder bad profits strangle a company’s growth. If many of your customers are bad-mouthing you, how are you going to get more? If your customers feel mistreated, how will you persuade them to buy more from you? Right now, churn rates in some industries have deteriorated to the point where a company may lose half of its new customers in less than three years.”
The last bit is worth repeating “some industries have deteriorated to the point where a company may lose half of its new customers in less than three years”
As we know, it is very common in our industry for an operator to lose half its customers in just one year! Has our industry 'deteriorated' to such a level that this is now the norm? This is a serious problem we need to address as an industry...and quickly.
I often hear the argument “our facilities are here, and they're open - we have to employ the staff and pay the bills regardless of whether the member comes or not.” This is true, but is it stopping us from addressing the question on how we change? It is this attitude that has meant the industry has barely grown over the last 10 years despite huge media, social and political investment in getting more people active. The recent growth in the industry (in part driven by the boutique fitness trend) is interesting as these businesses typically do not use a subscription model, but instead only get paid when they have delivered the service to the customer ie added value. In other words they are 'good profit' business models.
So is it not true that by failing to address the 'bad profit' model so many operators rely on has allowed new models in the industry to come in and ‘disrupt’ traditional fitness businesses, some to the point of collapse?
We need to change the model of the industry so we only get rewarded when we have provided a service that the customer has received value from. Obviously to change your whole business model overnight is extremely high risk. At Move we have worked hard to design a phased approach to moving to a new model so that sustainable growth can be achieved within the industry.