December 2007 • Admap 37© World Advertising Research Center 2007

SO, ARE YOU a Waitrose or a Lidlshopper? A few years ago, youwould have been one, neither, but

certainly not both. How things change.Now, British consumers are running ringsround marketers by being a Waitroseshopper on Monday and a Lidl customeron Wednesday. Marketing textbooks tellyou this should not be happening.

Prospering consumers used to shop atpremium-quality outlets, while thefinancially challenged (‘hard-pressed’and ‘of moderate means’ to use geo-demographics parlance) were reluctantguests at their local budget or value store.But not any more. And it is not just groceries where we now display extraor-dinary promiscuous buying behaviour.Chief executives now fly easyJet, peoplemix and match a £500 Hugo Boss suitwith a Debenhams shirt, and sales directors drive to a £26 per night Travelodge in their luxurious Mercedes.Figure 1 illustrates the pervasiveness ofthis trend.

How can this be? What we bought, andfrom where, used to represent an accurateindicator of who we were, and where we

were going, but this is no longer so. Preci-sion-guided purchasing is the new gamein town and if the best price for illy espresso coffee is the local Netto store,then off to Netto we go. If we then packthose Netto items into a recycled Marks &Spencer carrier bag, this sends a messagethat we are smart and ‘savvy’ buyers,enjoying the power we now wield, as the internet peels away the layers of theonce complex and mysterious world of consumer goods pricing.

So what has changed?This is our perspective on the challenge of getting inside the head of a mill-ennial shopper. ‘Cross-shopping’ appealsbecause consumers are fast realising thatdiscount or low-cost operators are notpeddling inferior goods. You can sleepwell at a £26 Travelodge, easyJet is not selling seats on obsolete aircraft and Aldi’sGerman dark chocolate at £0.89 pence is aBBC award-winning bargain.

Consumers are increasingly compelledto look at low-cost providers for them-selves, often with some dinner-partyencouragement from friends, and they

start thinking: ‘Why do I need to paymore?’ It is now a badge of honour to payless; it demonstrates wisdom. Simultane-ously, low-cost operators are furiouslybenchmarking their own products againstbranded lines to ensure that shoppers donot have to trade-off taste for a lower price.It is also not just groceries where they areinfiltrating. Pick up a universal serial bus(USB) phone from Lidl and make free inter-net calls for just £13, or a cordlesshigh-power drill for £10 from Netto.

Consumers are also finding the inter-net a liberating and far more enjoyableexperience to search, check and ‘compari-son shop’, now that the UK is migratingfrom clunky dial-up to super-fast broadband connections. We are nowapproaching 12 million UK broadbandconnections and a quick flick of a mousetakes us to PriceRunner where we caninterrogate the ‘honesty’ of a retailer’soffering by effortlessly checking the pricefrom at least ten retailers along with gen-uine user reviews. Never has there beenso much pricing transparency – and con-sumers are enthusiastically embracingthis new-found power.

Ray Algar, Oxygen Consulting, and Neil Burton, Holmes Place Health Clubs,assess the impact of low-cost operators

Low prices everywhere

FIGURE 1

Promiscuous buying behaviour

‘Download and playin a fraction of the

time it takes to driveto any supermarket

Apple iTunesBuy

tracksfor £0.50

ClothingHotels

HealthclubsMusic

TelecomsProperty

AirlinesGroceriesNetto

Lidl‘Where quality is cheaper’

‘Everyday big brandsat lower prices’

‘With prices thatnever fail to astonish’ Aldi

Bypass estateagents and sell

your home for £398HouseNetwork.co.uk

Online property portal

Roomsfrom £15

‘Great valueaccommodation’ Travelodge

Hotel Formule 1‘Stay in comfort atthe lowest price’

Membership from£6 per month

‘Judgement-free zone’

‘Simply fitness for£11 per month’

McFitGermany

PlanetFitnessUSA

easyJet

Ryanair

Flybe ‘Low fares with frills’

‘Come on, let’s fly!’

‘The lowest fares guaranteed’

‘Talk for free with Skype’Skype

Primark

QS

TK Maxx

‘Look good, pay less’

‘Designer labels for less’

‘Hot styles all at amazingvalue for money’

Low priceseverywhere

pricingstrategy

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pricingstrategy

Broken promisesThere is also a pervading undercurrent ofmediocrity in many service offers. Payinga premium price for a cruise, hotel, restau-rant meal or health club is no longer aguarantee of a memorable experience.Our service expectations are rising, whileactual delivery is often no more than adequate.

Be honest, when was the last time youwere left surprised and impressed by a leisure experience? Consumers areresponding by demanding that serviceproviders ‘unbundle’ the proposition intoa menu of parts, which are then ‘re-bundled’, according to budget and prefer-ence. Mobile phone companies havebegun this process. Why would you wanta phone tariff that includes text messag-ing when you never text? It is a morecompelling consumer proposition if indi-viduals choose the service elements thathave specific personal value. It is theantithesis of ‘feature-creep’, where serviceproviders continually add more and moreto their offer, both as a means of justifying

a higher price and because they areunclear of what consumers really need.

McFit, a German low-cost health cluboperator, charges members £0.30 pencefor a shower. Some may think that is daft.However, the reality is that many gymmembers do not like using club changingrooms, especially female users. So ‘freeshowers’ provides no added utility tothese members. In fact, if we really thinkabout it, all health clubs ‘charge’ memberswhen they shower after a workout. McFitis just being more transparent in openingits costs to members and then lettingthem choose. ‘There is no such thing as a free carrier bag’ is how one low-costretailer puts it.

This way for self-serviceYou wait in a queue ten-people long tobook next week’s Pilates class. The recep-tionist dexterously handles telephonecalls, while simultaneously logging classrequests. After nine minutes, you are at the front of the line and desperatelyhoping that there is one place left, and no

Create

Raise

Eliminate

Reduce

FIGURE 2

How to create a low-cost health club

• Lower joining barrier – fees, terms and conditions

• Self-service environment

• Longer opening hours – 24 hours, seven days per week

• Super-sized gym• Dramatically

lower pricing model – up to 70% lower

• Flexible/hybrid staff roles

• Materials/sundries – towels, chemicals

• Staff count – payroll, recruitment and training expenses

• Energy use• Number of suppliers

• Club size – facilities offered

• Capital requirement• Quality of club fit-out• Membership types

and fees• Programmes/courses

• Technology use – online joining, membership card dispensers, customer relationship management

• Operating efficiency – members per square metre/machine utilisation

• Loss-leading facilities – swimming pools, crèche, café bar, health and beauty, retail, studios, etc.

• Traditional staff roles – instructors, sales personnel, receptionists

Low-costhealth clubs:

a new customerproposition

‘Prosperingconsumers used toshop at premium-quality outlets, whilethe financiallychallenged (‘ofmoderate means’ to use geo-demographicsparlance) werereluctant guests attheir local budget orvalue store. But notany more’

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Decmber 2007 • Admap 39© World Advertising Research Center 2007

traffic warden waiting to welcome youback to your car. Fast-forward one week.‘Sorry, I have no record of you bookingthis class’ is the response from reception.In the rush, it transpires that the recep-tionist booked the wrong day.

No wonder self-service is sweeping the country. It is compelling for many reasons; it offers convenience, accuracy,speed, satisfaction and privacy. Give con-sumers the right tools and they will do itthemselves, and enjoy it. It is fun to checkin for a flight online, browse the aisles fora seat, cleverly avoiding seat 62c, which isuncomfortably near to the on-board toilet.

Sometimes, staff add little or nothingto the customer experience, so low-costproviders are eliminating them. Con-sumers are familiar with self-service; UKconsumers have been helping themselvesto groceries since the 1950s and gettingcash out of walls since 1967.

A low-cost operator is comingyour way soonLow-cost operators are not new. South-west Airlines, the American pioneer ofdiscount flights, is now 36 years old andeasyJet is heading for its 13th birthday.‘Making flying as affordable as a pair ofjeans’ was how it promoted its inauguralLuton to Edinburgh flight.

So, are any sectors immune from theseferociously efficient operators? Healthclubs used to be, but not any more.

Welcome to McFitRainer Schaller, a charismatic entrepre-neur, has been quietly buildingGermany’s largest (by membership size)club chain based on a ‘low fees’ strategy.McFit charges a flat fee of just £11.50 permonth, which is 62% lower than theaverage German club membership rate.With 83 clubs and more than 500,000members, this privately owned companyis consistently outperforming its rivals,measured by new club openings andmembership growth.

The product quite simply is a super-sized gym, a 27,000 square feet (2,500square metres) box filled to the brim withcardio-vascular and strength machines.Imagine the last time you toured a health

club, walking through reception, the cafébar, past the fitness studio, on to thechanging rooms and through to the pool.At McFit, the tour starts and stops withthe gym – everything else has beenstripped away.

In facility terms, this is the health clubindustry’s equivalent of the clothing sizezero.

A new consumer propositionFigure 2 illustrates the quest to eliminateall non-core elements such as swimmingpools, crèche, café bar, health/beauty,retail and studios. Aligned to this is a philosophy of reduction, a zealousapproach to scaling back to achieve harmony between efficiency and deliver-ing the brand promise.

‘Bring your own’ should be printed onthe reverse of a low-cost membershipcard to remind members that ‘frills’ arenot part of the deal. ‘Less is more’becomes the driving mantra. No need forreception desks here, because receptionstaff have been eliminated, along withgym instructors, sales staff and layers ofmanagement, replaced by a skeleton

team of new hybrid staff, ready to turntheir hand to an array of operational scenarios.

Once stripped back, the emphasisturns to adding new competitive factorsthat disrupt the industry norm and createa compelling new consumer proposition.Self-service is applied everywhere, fromjoining/booking online, automatic carddispensers and programming via touch-screen terminals. The reward isdramatically low membership fees.

Fitspace, a UK-based low-cost gymoperator, sells annual memberships for£11.60 per month, which is 72% lowerthan the national average price, and withno contract. You can join a Planet Fitnessclub in the United States for £5.50 permonth. The trade-off, you may be think-ing, is that low-cost clubs are situated oncontaminated brownfield sites withpanoramic views of the gas works, butthey are not. Fitspace shares a prominentsite in Bournemouth with Asda andCosta, and members benefit from freeparking. Similarly, McFit targets largetowns and selects sites on key arterialroads to attract commuters.

Low-cost gyms are attracting both experienced club users and first-timers

Neil Burton is the chief operating officer at HolmesPlace Health Clubs (Central

and Eastern Europe).nb@hfmanagement.nl

Ray Algar is the managingdirector of Oxygen

Consulting (www.oxygen-consulting.co.uk), a company

that provides strategicinsight to organisations

serving the global ‘active’leisure industry.

ray@oxygen-consulting.co.uk

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pricingstrategy

‘Do less, but do it well’ is another low-cost characteristic. Some new membersturn up perhaps expecting home-gradeexercise equipment thrown into a dirtyroom. Imagine their delight when they seewall-to-wall, quality commercial- gradeequipment from Precor. Consequently,

these clubs are attracting both experi-enced club users and first-timers.

The former group are attracted by theprice and the simplicity of the proposi-tion. They say, ‘I just want a clean,well-equipped gym.’ The first-timers likethe low joining barriers (small joining fee,low monthly price and short contract can-cellation period). The result is thatfirst-time club users represent up to 50%of some low-cost clubs.

Taking on the mid-marketThese low-cost chains have the ‘mid-mar-ket’ health clubs in their sights. Thecompetitive play used to be mid-marketversus premium, with the former claim-ing they could offer ‘more for less’.‘Affordable fitness’ was the Fitness Firstslogan as it redefined the small clubproposition.

The problem is that these ‘affordable’mid-market clubs now look flabby com-pared to their super-lean low-costupstarts. Figure 3 illustrates how the low-cost operators are competing with theirmid-market rivals.

For several years, the mid-market clubshave been living off well-designed clubsthat really impress during the sales tour,but soon lose their charm as members set-tle into an exercise menu that rarelychanges. What starts as a waiter-drivenservice quickly reverts to a help-yourself.As these clubs have quietly moved from‘advice included’ to a paid-for personaltraining model, they have left the doorgaping for low-cost operators to move inand take the high ground.

‘Why pay for something you neverget’ is the low-cost operator’s war-cry. Sothey remove the things that were notprovided, or used, and offer low, lowprices. Notice in Figure 3 that customerrelationship management (CRM) tech-nology is higher for the low-costoperator. This is because the complete-ness and integrity of customer data is anembedded characteristic of the low-costbusiness model. You cannot join a low-cost health club without providingaccurate personal information, includ-ing an email address.

Even premium-priced health clubscannot claim an email address for everymember. This means that low-cost clubscan now deploy email and SMS (text) tostay close to members, which represents astep-change in the typical member experi-ence, all for £14 per month.

So, will low-cost club operators sweepacross the UK as they are doing in Europeand the US? Access to affordable propertymay hinder their challenge, but it has nothindered Lidl in building more than 400UK stores, with 40 more planned for 2007.This is even with Competition Commis-sion constraints that prevent storepurchases from grocery multiples.

Lack of human talent will not hindergrowth, as these clubs are virtuallyunstaffed. ‘There will be no private UKmid-market health clubs in five years’asserts the director of one low-cost opera-tor we spoke with. Perhaps the biggestthreat we face is that someone from out-side our sector, with a huge war chest ofcash and a proven customer-centric busi-ness model, will build 1,000 shiny newfacilities and offer budget-busting mem-bership deals’ is Fred Turok’s view(chairman of LA Fitness).

So, how will the mid-market respond?‘By making sure the market knows whatwe offer, and what we do better’ was howRasmus Ingerslev, CEO of FitnessDK, Den-mark’s largest club chain, respondedwhen we posed the question. ‘Focusing onthe elements where the budget clubs can-not and do not want to compete,’ suggestsHerman Rutgers, the European directorfor the International Health, Racquet andSportsclub Association.

Fundamentally, the health club indus-try is entering a new chapter where theconversation is not about a race to thelowest price, but about clubs thinkinglong and hard about who they are, whatthey stand for, what they do really well,and their role in enriching members’lives. ■

More on pricing strategy atWARC.com

Medium

High

Low

Custo

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relat

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ip

man

agem

ent t

echn

ology

Range

of f

acilit

ies

Club

desig

n/am

bien

ce

Conve

nien

t loc

ation

Price

Hospita

lity

Advic

e/su

pervisi

on

Range

of c

ourses

/

prog

ram

mes

FIGURE 3

Strategy canvas for a low-cost vs mid-market health club

Mid-market health club Low-cost health club

‘Fundamentally, the health clubindustry is enteringa new chapterwhere theconversation is not about a race to the lowestprice, but aboutclubs thinking longand hard about who they are, whatthey stand for, what they do reallywell, and their role in enrichingmembers’ lives’

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