The Discount Death Spiral: A String of Huge Mistakes

A black skull spins in the middle of a purple spiral graphic.

Most fitness coaches are undercharging people.

Worse, the majority are stacking discounts on top of their too-low prices.

Discounting your rates causes a lot of problems.

Simple math says that giving a 20 percent discount to five clients means you’ll have to attract a sixth to cover the difference. That means splitting your attention more ways, onboarding more clients, losing more clients and working far harder for the same money. Most gym owners now understand the danger of discounts, but if you don’t, read this:

“Why We Don’t Have Sales (Or Discounts, or Paid-In-Full Deals, or Problems)”

What’s the most lethal discount to give? The paid-in-full (PIF) discount, where a client pays for 10 months in advance and gets two months for free.

As a mentor to many CrossFit gym owners, I’ve had a ringside seat for a few PIF bouts. Here’s one story.


Harry’s Tale


Harry opened his gym in 2016. He followed the typical template: working out in his garage, following CrossFit.com programming, inviting his neighbors to join in and then backing into a business. With interest from early adopters, he grew to 50 members and needed to rent some space. For the first time in his business, he needed money.

Instead of taking a loan, he self-financed by offering his members a deal: pay for a year in advance and get two months for free!


Mistake 1

Harry assumed his clients understood they were taking a risk. He thought they’d realize they’d lose their money if his venture didn’t work out. But most of his clients—who started as friends and neighbors—didn’t understand that. This is why many states have laws against PIF memberships now.


Mistake 2

Harry “financed his loan” at a much higher rate than any bank would charge. His rate was even more than most credit cards charged. Every “free month” is an 8.5 percent discount off his annual rate. Two free months meant Harry would have to cover the same bills but receive 17 percent less revenue.

But Harry didn’t notice a problem at first. In fact, everything seemed great: In January 2017, after taking a lot of PIF payments, Harry had more money than he needed. So he upgraded his equipment. He bought a new car and new clothes for his coaches. And things seemed great … until December.

In December, Harry was out of money. New-member growth really didn’t happen at the rate Harry expected, and all the PIF money from January was long gone. His business still seemed viable, and he was optimistic about January, but he had to pay the rent. So he went back to what he knew best: He offered another PIF discount of “buy a year, get two months free.”

His new members took him up on the deal. His old members said, “Wait. We still have two months left on our memberships.”

Harry generated a bit of cash flow to get him through the end of 2017. He got a few new clients in January. And at the end of February, his long-term clients asked, “If we pay for another year, can we get another 2 months off?”

Harry, who had been starving for cash for a few months, sighed with relief.

“Hell yeah!” he said as he started collecting the money.


Mistake 3

Discounts compound.

Harry’s “pay for a year, get two months free” deal brought him a lot of cash in March 2018. He bought his coaches some nice jackets and added a coffee bar.

But you already know what happened next: By December, Harry was worse off than ever. He was desperate for cash again. He realized he wasn’t going to “just figure it out” between cash-flow spikes, and he was trapped in a downward spiral. He knew he’d have to coach his current members for a full four months for free before he saw another cent out of them. And his new clients weren’t making up the difference—far from it.

Every month, Harry had to offer the same discount to newcomers just to pay the rent. He was trapped.


Mistake 4

Discounts boost the wrong metric.

Harry believed the answer lay in growing his headcount: with 20 percent more clients, he could fill in the cracks his discounts were creating.

But when your target is “more members,” you actually have an incentive to discount your membership more—and the downward spiral perpetuates.


Focus on This


Your enterprise is a high-value business.

Your primary metric isn’t headcount but client value: What’s your service actually worth to your clients?

Discounts erode client value in the name of “getting more people.”

In the next post in this series, I’ll tell you how to say “no” to discounts when people ask for them. After that, I’ll tell you how to incentivize future clients with a short-term bonus instead of tying yourself to a multi-year discount that will cost you thousands of dollars.


Other Media in This Series


“How to Say ‘No’ to Discounts”
“How to Sell With Bonuses”


 

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