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Everyone's talking about: Dynamic pricing
We’re familiar with dynamic pricing from industries such as travel and hospitality, but what future does it have in the health club sector? Kath Hudson asks the experts
Having reach sufficient scale as a business (2,000 locations in the US and 374 globally) we launched our own dynamic pricing booking system – called XPass – last year and we’re seeing great results.
With minimal marketing spend, more than two million minutes of class time has already been booked and almost 20 per cent of these customers are new to Xponential.
It means we don’t have to work with a third party aggregator, can drive incremental demand into studios that need it most and our franchise partners benefit from a steady stream of prospects and transparency with payouts. They also keep all the income, without having to pay fees, as they would with an aggregator. [Xponential takes a small cut of franchise turnover, so also benefits].
XPass has allowed us to bring all of our boutique brands – including Club Pilates, Pure Barre, Stretch Lab, CycleBar, BFT and Rumble – together in one offering, targeting customers who are seeking a quality boutique experience.
This makes boutique fitness more accessible than ever before, while enabling people to try all 10 of our concepts, meaning they’re likely to find the two, three or four they really love.
We’re seeing a 30 per cent conversion rate of ‘XPassers’ becoming studio customers after using XPass. Usually in the aggregate space customers like to move around, but we’re finding that XPass attracts the type of customer looking for their passion. They want quality, boutique, community and to support local business owners.
The pricing algorithm used per seat is called SmartPay and takes into account more than 10 different factors – including the time of the class and the instructor – and creates a price for that seat. Our franchise partners can choose to have a fixed price or go with dynamic pricing: they choose their desired price range and every time a seat is sold it affects the price of the next seat booked.
Customers like dynamic pricing – some like the excitement of catching a deal and others value the convenience and cross-modality. Our franchise partners like it because they have total control. It’s a win-win.
Having reviewed the results over the year, we’re launching an updated version, with a new look and are transitioning from subscription-based to a freemium model. The new XPass is modern and incorporates all the features which people have asked for – such as being able to book a particular bike, rower, to treadmill – and it allows many more options, such as searching for their point of interest and filtering. It achieves our mission of making boutique fitness accessible to everyone.
To drive new people in, we’ve curated high quality and differentiated content, such as healthy recipes on social media, celebrity partnerships and brand deals which has helped us to acquire a whole new customer base.
Going forward, the sector needs to leverage technology and differentiated marketing to make fitness easier to absorb and access.
ClassPass has been using dynamic pricing since 2018 and has seen great success. Our studios love it as well, so we expect more fitness and wellness businesses to incorporate dynamic pricing into their business in the future, as it really allows the maximisation of revenue.
Studios that use our dynamic pricing model, with its SmartTools, SmartSpot and SmartRate typically experience a 15-20 per cent increase in revenue and have also seen up to a 40 per cent increase in first-time visitors thanks to the system pricing classes correctly with SmartTools.
With the overall goal of maximising revenue and filling class spots, dynamic pricing has many advantages for operators. It drives revenue for inventory which would otherwise go unsold, drives traffic to slower-selling classes and smooths demand across class times, lengths and instructors.
Classes in high demand can be sold at a premium, while a class with many open spots might need a temporary price drop to drive up attendance. After all, a spot unsold at the start of a class is a lost revenue opportunity.
For consumers, dynamic pricing allows them to find the right class, at the right time, at the right price for their needs. If they’re looking to save, they have the option of booking at an off-peak time or in a less busy class at a lower cost, while less price sensitive users are prepared to pay surge prices to get a scarce spot in one of the more desirable classes.
Dynamic pricing isn’t about lowering pricing, but understanding the opportunities around price and inventory. The models we’ve developed at ClassPass build on this basic insight and use a combination of availability and ‘willingness to pay’ – for audiences interested in a class at a point in time – to generate a price which maximises revenue for our partners.
We update pricing during the booking window for a class, so the price changes over the period. The group of users looking to book a class on the same day are not the same as those looking to book a week in advance.
Consumers expect to pay more for goods or services in certain circumstances, for example a last minute flight over the Christmas period, or a hotel stay next to the O2 arena during a major event. So it stands to reason that an on-the-day booking for the 6.30pm class at a premium boutique studio would cost you more than if you booked it seven days in advance.
As it stands, many studios haven’t fully recovered to pre-COVID levels and capacity outweighs demand, so operators need to be open to innovation which can support their recovery. Dynamic pricing has the potential to be a better long-term solution than discounting, which devalues the product and can be very difficult to recover from.
Dynamic pricing could open up the boutique market to a broader audience, with a more affordable entry point to classes, which is attractive for consumers. It should also allow operators to fill more spaces in underperforming or off-peak classes and develop a stronger culture of advance bookings for peak-time sessions, by charging a premium for last minute spots.
If managed correctly via software, the integration can be seamless, to the point that members don’t even know it’s been implemented. If it’s badly managed it has the potential to upset a lot of people, so no innovation like this should be entered into lightly.
As with any emerging trend, we recommend learning more about it, getting a demo and maybe running a pilot, as ailing tech that’s not fit for purpose has been the downfall of many a fitness business over the years.
Cutting-edge technology is not something fitness operators are known for, but just as during the early stages of the pandemic, operators must innovate or die.
When working properly, dynamic pricing should drive sales of empty spots without damaging yield of already popular classes. It should incentivise advance bookings from regular users and bring in a premium from last minute bookings.
It’s important to look after loyal members, ensuring there are always enough spaces for them to take, at the prices they’re used to paying. Dynamic pricing should be used to attract new users but never at the expense of upsetting your loyal customers.
Relying solely on dynamic pricing isn’t a 360 solution and memberships must remain an attractive proposition to drive as much direct debit revenue as possible. Sales offers and campaigns that drive conversion from casual use to membership still remain the most important part of the marketing mix for many operators.
Dynamic pricing has been used in industries such as retail and transportation for a while, as it offers more flexibility and control to customers looking for short-term or one-off purchases.
Consumers generally like the value and convenience, however, it can also lead to uncertainty and for an industry such as ours – which is seeking to build customer loyalty and retention – it might not be the best strategy.
Dynamic pricing can allow people to work out based on their needs, budget and time commitment, avoiding long-term contracts or large upfront payments, however, it can also mean uncertainty about the cost of exercise, so people on lower incomes might find themselves unable to afford a workout at certain times. The lack of stability in pricing can also make long-term planning and budgeting more difficult for operators.
For boutique businesses in high density areas, where demand is high and pay-as-you-go models work, dynamic pricing could help to attract more customers and drive profits. However, some in the traditional fitness industry are still reliant on subscription models to ensure profitability, as they rely on the breakage [people who pay whether or not they attend]. The solution for those businesses could be to drive greater value and retention rather than using dynamic pricing.
Implementing and maintaining dynamic pricing systems is complex, but the emergence of AI makes this easier, for example, the use of predictive modelling to forecast demand, automating the process of setting and adjusting prices, analysing customer feedback to ensure fairness and ethics and providing data-driven decision-making, leading to better results and customer satisfaction.
Businesses may not be able to increase profits as much using this model, as customers will only pay for what they need or use, so Lifetime Value could reduce, as customers won’t be buying into a rolling subscription or long-term contracts.
Getting the pricing right is key. Charging higher prices in peak times can boost profits but if it’s priced too high customers may opt to go elsewhere for more affordable services.
