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Research & Resources

Two Questions to Ask Before You Offer Dynamic Pricing

Decided that you want to offer dynamic pricing to your customers? Cool. (If not- check out five reasons why we think it's a good idea for fitness studios).

If you've come this far, you've probably realized that there are a number of different options out there, whether you are implementing your own dynamic pricing model or working with a third party.

We've pulled together two questions that are good to have in the back of your mind (or lead conversations with) as you are navigating the marketplace for dynamic pricing.

1. Where will customers see the pricing?

It's a good idea to decide where you would like to make the dynamic pricing available to your customers. Will it be visible on your site, or only through an app or third party- and how does that affect who will have access to it? Before we share our thoughts on that, we want to call to your attention an article ClassPass posted on their blog about dynamic pricing. Under the header "Can studios offer dynamic pricing on their own," Zach Apter offered the following advice:
I would advise a studio against trying to offer dynamic pricing on their direct traffic for two reasons. The first is that you need to have a lot of data, not just about your own studio but the overall market, and be able to build accurate demand curves to to support your efforts. It’s not about lowering prices, but intelligently understanding the opportunities you uniquely have around pricing and inventory. If everyone started dropping prices then there would be a race to the bottom which we don’t want to create; rather, we want to increase the revenue studios are bringing in as much as possible. The second reason is that if you lower prices on your direct traffic then you are at great risk of giving away your pricing power. It is much better to seek to price discriminate in an indirect channel that offers you the opportunity to reach a different audience, rather than just lowering prices on your existing customers.

This paragraph rubbed us the wrong way for a few different reasons. We think there's a lot to be said about relative value. Each studio has its own unique brand, style, instructors, music, and so much more. Customers aren't looking for "the cheapest spin class in New York"- rather, they are looking for ways to get more value at the studios they already love, relative to that studio's pricing.

And to be frank, his point on using indirect channels seems a bit short-sighted to us. If there is one thing we know for sure about today’s customer, it’s that she is savvy. Third party discounts do not exist in a bubble, invisible to existing customers. Studios have learned this lesson the hard way, when their own direct customers stopped buying packages because they got more value through ClassPass. Why not offer value to your most valuable customers directly, rather than letting someone else do it on their site?

We also want to add a friendly reminder: we believe that you are competent, and already “intelligently understand the opportunities you uniquely have around pricing and inventory.” That being said, if you’d like support in actually implementing these changes, there are options out there to help you offer dynamic pricing directly to your consumers.

2. Will the pricing drive sustainable growth?

How do you know if you have reached "sustainable growth"? In an industry like fitness, it's pretty straightforward- we just need to make sure that in any given time period, we are bringing in more people than we are losing. Achieve that, and you'll grow; otherwise, you'll shrink. 

Most dynamic pricing algorithms are designed to optimize the revenue per class. Classes have a set number of spots, but demand varies widely across different times, instructors, and locations. Dynamic pricing helps you make more money from the busiest classes, while also making the pricing more attractive on classes with less traffic. 

However, focusing on the class level is only one part of the equation. When you are considering pricing strategies, it is essential to look beyond the individual classes and get a better understanding of how the pricing will actually affect customer behavior. At the end of the day, customers drive revenue. If the pricing structure doesn't lead customers to come back to your studio repeatedly, then you will be forced to double down on lead generation to compensate for the high level of churn. Lead generation isn't considered a stand-alone engine for growth, because it is so time and cost intensive. Word of mouth is free, but tends to occur in event-oriented spikes rather than over longer periods of time.

The first real opportunity facing fitness studio owners isn't lead generation; it's reducing churn. This article from the Harvard Business Review frames the situation really clearly. Jill Avery (interviewed in the article) lays out the following problem and solution:

 

The most common mistake companies make when looking at their churn rate: “Taking churn rate as a given rather than as an opportunity.”

The opportunity: “The most innovative firms are using churn rate analysis as an opportunity to get ahead of losing customers rather than just accept it.” 

Once churn is reduced to a number that feels comfortable for your business, then it's time to focus on lead generation. That way, you know that you are bringing in customers who are more likely to stick around long-term and contribute more revenue to your studio.

We hope this article helps guide you through the process of implementing dynamic pricing at your studio. If you're curious how Dibs approaches the challenge, check out our pricing philosophy.