One of the biggest questions I see gym owners ask online is how to set pricing. While this is one of the most important questions owners should be asking, I often see answers that, if accepted by the owner, could literally put them out of business tomorrow.
How much should I charge for tuition?
Often the answers people provide have to do with the length of time or nature of the class or team practice. While that is one of the questions I would ask, it’s certainly not the only one.
Demographics
When I’m working with an owner to establish their pricing on services, I ask the following questions:
- What is your market like?
- How much can I buy a 3 bedroom, 2 bathroom house for, on average?
- What is the minimum wage in your state?
- What is the average median household income?
I ask these questions because, without them, I have no idea if I’m talking to someone in Long Island, New York or Stockton, Missouri—two vastly different communities that should be charging vastly different rates for services. Any gym owner looking to build a pricing structure for their gym has to know their community. Knowing what they can afford and what the average family looks like in your area will help you make a lot of decisions over time. If the average household income is under $50,000, you’re likely going to see more families interested in less expensive options, such as recreational class programming and novice. However, you also might find that a licensed after-school program could be incredibly beneficial. If the average household income is closer to $80,000 per year, you might have major success in all-star cheerleading—recruiting kids for prep and elite teams that travel to end-of-season events. Now, I’m not saying it’s not possible to get both at either price point, but tailoring your program to the community is extremely important if you want to find that profit point early on in business.
When I opened my gym, I had 325 kids by the end of the year, but just 22 of them were all-star cheerleaders. Though cheer had been my passion and motivation for opening a gym, my community’s demographic just couldn’t support that. However, several new factories with high-paying positions have since come to our town. Our military base continues expanding. The influx of large, high-end homes has increased, and they’re not sitting on the market more than 30 days before they’re sold. Along with this increase, we’ve seen a greater drive to all-star cheer. That doesn’t mean I’m finally in a wealthy community. In fact, when I compare our demographics to most, my city is still in the bottom 20% for median household income, but the increase has helped those who couldn’t previously afford competitive programs to do so.
Operational Expenses
We’ve told you hundreds of times how you can’t look to your competitors to establish pricing. You don’t know how much they’re paying for rent, labor cost or utilities. But you know what you’re paying (or if you’re a new gym, you should at least have a forecast of what you’ll be paying.) By calculating your total expenses to operate and dividing those among the number of athletes in your gym (or the anticipated number of athletes if you’re a new program), you can establish your “cost per athlete.” This number tells you what you must charge to ensure tuition covers your expenses. Of course, we also offer things like birthday parties, private lessons and events, but those often are offsetting expenses and allowing us to continue investing into new and expanding programs.
Profit Margin
Once you have a cost per athlete, you can add a profit margin. I recently had a valuation done on my gym by Frank Sahlein and his team at 3rd Level Consulting. They said they see profit margins all over the board, but a 20% profit margin is a great accomplishment. That said, if you’re forecasting the cost to operate, most people calculate it far too low. They forget about buying cleaning supplies, employer withholding taxes, unemployment insurance, fire extinguishers, and other items that are absolutely vital to running a gym—but often not included in those forecasting spreadsheets.
So, setting a profit margin at 30-35% is always a good plan. Here’s what that might look like:
Monthly Operational Expenses: $11,000
Number of Athletes: 132
Total Cost Per Athlete: $83.34
Add 35% Profit: $29.17
Total Monthly Cost of Tuition: $112.51
Putting It All Together
This is where you’ll now go back to the demographics. Is this something your area can actually afford? If so, use a bit of pricing psychology to finalize that number, and you’re set!
If not, you’ll now have to start diving deeper into those expenses. Cutting expenses is a steep cliff, and I don’t ever recommend starting here. In fact, unless you’re spending thousands on Lululemon for your staff each year, you’re likely not going to be able to cut those expenses down more than a few dollars per person. So, you’ll need to look at vacancies. Do you have a team of six? If so, I’d focus on recruiting six to ten more athletes for that team. Do you have three handsprings classes all at 50% capacity? Sure, you could consolidate and cancel one, but the saved labor expense won’t impact your tuition cost half as much as if you were to focus on filling those classes. Spreading out the cost to operate among more athletes is the number one way to drive down prices.
That means if you’re simply marketing by word of mouth, it’s time to formalize that process and start increasing your marketing through emails, Facebook and other grassroots marketing methods.
If this concept is new to you, I’ve essentially outlined the coaching call I’m about to do tomorrow. In fact, I’m sending the unedited copy of this blog to her as soon as I’m done, so she can prepare her numbers for our call. By using a combination of math and demographics to set your prices, you’re building a structure that will work for you long-term. When you set your prices at $89/month because that’s what you believe your customers can afford or that’s what your competitor is charging, you’re truly hurting your chances of being successful in business.
If you’re always hurting for money and lacking in cash flow, kids get stressed out coaches. Parents get burned out owners. Husbands get burned out wives, and kids get burned out moms. Setting your prices right from the beginning will set you on a far greater path to success than any advice anyone in a Facebook group can ever give you (unless of course, you came to this blog from a link in a Facebook group 😉).
For more information on how to get your own personal mentor through the Next Gen Academy, visit nextgenowners.com/book-a-call and chat with a member of our team today.
Key Takeaways:
- Demographics matter: Understanding your community’s economic landscape is crucial for setting pricing that aligns with what families can afford and the types of programs that will be most successful in your area.
- Operational costs are key: Accurately calculating your gym’s operational expenses and setting a profit margin is essential for determining the minimum tuition you need to charge to sustain and grow your business.
- Avoid competitor comparisons: Relying on competitor pricing without considering your own costs and market demographics can lead to financial strain and ultimately harm your gym’s long-term success.
