Here’s some simple math:
If you have a 15 percent profit margin and you offer a 15 percent discount on coaching at your gym, you’re giving away your profit.
That might seem obvious to you, but a lot of people don’t calculate profit margins at their gyms, so they really have no idea what discounts actually do to their bottom lines.
What happens if you have a very low profit margin?
Or if you have a good one but think your discount plan will generate lots of sales?
Let’s run some numbers. You might be surprised what they tell you.
We’ll pass on the complex situations created when gym owners charge some people full price but apply varying discount rates to all sorts of members—like a 10 percent military discount, a 20 percent paid-in-full discount, a 30 percent spousal discount, a buy-six-months-get-one-free deal, etc.
If you have some members at full price and others who receive discounts, the effects of discounts will be reduced slightly—but you’ll then have problems of consistency and fairness: “Why do they get 10 percent off but I don’t?”
We’ll just keep it simple and apply discounts to all members to illustrate their broad effects.
Scenario 1: Work for Free
Monthly Gym Revenue at Posted Rates: $10,000
Profit Margin Without Discount: 10%
Profit Without Discount: $1,000
Discount to Posted Rate: 10%
Profit With Discount: $0
Low profit margins can be completely cancelled out by discounts. If your business operates in a way that allows you to keep 90 cents of every dollar, you’re actually running an unregistered nonprofit when you discount posted prices by 10 percent. All fees paid go to covering your expenses.
Here’s a positive spin: If you don’t have any profit but you offer discounts, you could actually create a profit margin equal to your discount rate by getting rid of all the deals.
Would some people leave if you eliminated cut rates? Maybe. But probably not. Two-Brain mentors have a tested, step-by-step plan to help gym owners fix their rates without gutting their businesses. (I’ve used it, and I definitely did not lose all my members when I increased my rates.)
Take a small step in the right direction today: Don’t offer any more discounts to new clients. You can deal with existing discounts later with support from a mentor.
Scenario 2: Sink Your Ship
Monthly Gym Revenue at Posted Rates: $10,000
Profit Margin Without Discount: 5%
Profit Without Discount: $500
Discount to Posted Rate: 10%
Profit With Discount: -$500
Many gyms have low profit margins. Perhaps their rates are too low, or maybe their expenses are too high. Either way, discounted fees and very low profit margins are a death knell for a small business. Every person you sign up at a discount actually costs you money because the revenue generated isn’t enough to cover the costs of serving them.
How do gym owners usually solve this problem? They pay themselves less—and create a greater problem for their families.
People often fall into another trap, too: “I’ll use a discount to sign up more people, and my profit will increase.” But service providers don’t see the same profit jumps car dealerships, clothing shops and electronics stores see when they increase the volume of sales.
Here’s what actually happens: It costs money to connect with new people through ads, and it takes time to make sales. Then it takes time and effort to onboard new clients, and you have to spend time or money to retain them. Once they’re in the business, these new members require more stuff—time, space, classes and coaching, equipment, toilet paper, water, chalk, etc. Costs increase and eat into gross revenue.
Instead of generating “pure profit,” discounted sales often produce more gross revenue as well as increased expenses. They also produce decreased retention rates because sale seekers are always tempted to leave for the next fitness deal. Bad retention produces increased marketing and onboarding costs. And the spiral continues.
The discount/volume game just won’t save you in the coaching business.
Scenario 3: The Tricky Trap
Monthly Gym Revenue at Posted Rates: $10,000
Profit Margin: 30%
Profit Without Discount: $3,000
Discount to Posted Rate: 10%
Profit With Discount: $2,000
In this scenario, the gym has a good starting profit margin—the Two-Brain target is at least 33 percent. The gym owner is discounting from “a position of strength,” so to speak. Yet a 10 percent discount reduces total profit by one-third—$1,000 is lost. Because fixed expenses stay the same, the profit margin drops to 22 percent.
Here’s the kicker: With a 22 percent profit margin, you have to make about $4,500 of additional sales just to get that $1,000 back. Check it out:
Sales: $4,500 x 22% profit margin = $990
Let’s say you’re of the mind that new sales don’t increase costs that much. Ignoring costs of acquisition and all the other factors that make it very expensive to get new members, you’d still have to sell $2,000 more at a 50 percent profit margin to generate $1,000 of new profit.
After grinding your way to increase sales by 20-45 percent, you’re right back where you started: $3,000 in profit. Except now you’re worn out and your retention is bad.
And let’s be real: Do you have the capacity to increase sales by about 20-45 percent? Probably not.
But could you increase revenue by just 10 percent? That’s much easier. What if you acquired just a few new full-price members and sold additional services or even products to existing clients? Here’s what might happen:
Monthly Gym Revenue: $11,000
Profit Margin: 30%
Profit Without Discount: $3,300
One step further: Could a mentor help you slightly improve your profit margin by getting more from your expenses and improving your operations? Yes. Check out what a tiny 3 percent increase to profit margin does:
Monthly Gym Revenue: $11,000
Profit Margin: 33%
Profit Without Discount: $3,630
There’s an extra $330 per month added to our running tally, for a total increase of $630 per month over the starting point in Scenario 3. Multiply by 12 and you’ve got an extra $7,560 per year—in profit. Not revenue. Profit.
Discounts Kill Gyms
This simplified review should tell you a few things:
- Discounts eat into profit at gyms—or they create greater losses in the absence of profit.
- Discounts might improve gross revenue, but they won’t improve profit without significant and possibly impossible increases in sales volume.
I used a handy calculator at Growthforce.com to get these numbers, and I’d encourage you to play with your own numbers before offering discounts.
After you run the numbers, you probably won’t want to slash rates.
And if you want to learn how a mentor can help you acquire and retain full-price members, set your rates properly, increase your rates or eliminate discounts, generate greater return on expenses, and improve profit margin, book a free call here.
