Two Tiered Memberships Lead to Angry Clients
Everyone is looking to save as much as they can with the bad economic news. Every bit helps and now more than ever your clients are more aware of piece prices and also any charges associated with orders. The same holds true in the regular world as consumers look to save on everything from coffee to cereal. Private label brands continue to outperform more expensive national brands as people try to extend their resources. Memberships in all types of civic organizations are suffering and charities are having some of their worst year in decades. Smart business owners are doubling their efforts to gain customers from weaker competitors but not all of their decisions make sense.
Take for instance the local fitness center that is struggling to increase their membership base as customers have moved to a newer less expensive nearby competitor and others have just decided there was no longer enough money in their personal budgets to pay dues. There are three ways this business could have made an effort to make up for the lost revenues. The first and easiest method would be to increase the per person revenue. In this setting that would be accomplished by extending the services offered such as opening a juice bar or adding equipment or classes that require additional fees. Other opportunities would exist in terms of selling promotional gear to clients but that ship has sailed so to speak and the days of "cool" gym gear are gone. Another option is to simply raise monthly rates which in good times might work but in the recession it would simply result in customers either forfeiting their memberships or going elsewhere. That leaves the third option which is the age old method of increasing sales which is to obtain new customers. This is easier said than done and most gyms have already exhausted potential clients in any given area. After newspaper ads have failed and signage in the streets have blown over the only way to draw people into the gym are special offers. The problem with any second tiered pricing strategy is that it will inevitably alienate the customers that have stayed with you all along.
In this case new customers off the street or those that have been gone for a few months are rewarded with paying one third of what steady clients are required to pay. It may increase sales initially but it will create a significant amount of negativity amongst old members and will cause some to outright leave and go to other facilities. The only way to pull off this type of discounted membership is to offer existing clients something in return which is either a discount on premium classes or at the juice bar. Perhaps giving them a piece of clothing with the gym logo would also help but all too often the gym owners blinded by the influx of what will mostly turn out to be short term customers see the money coming in the door without realizing they have won the battle but lost the war. Newspapers are littered with stories of these types of programs going bad and facilities vanishing. In fact many States have now adopted laws that protect citizens with insurance in the case that a facility were to vanish.
Consider your sales activities closely and weigh the possibility that an existing client may not view it as favorably as new clients. In the end it is customer retention that will keep you profitable not new customers constantly jumping from vendor to vendor shopping only on price. No business will ever survive catering to clients that shop purely on price.
The Invisible Shoe is Already Dropping
With jubilation on Wall Street this week comes the ridiculous news stories and hype of the economic return of the US. The stark reality is the winds pushing against reasonable growth are far stronger than the tailwinds the markets can provide today. There is some good news at first glance with the major banks reporting profits but a closer inspection would again show that the reality of the situation is that without taxpayer funds and massive federal support many banks would still be in trouble.
The single biggest factor that argues for continued difficulties is the rapid contraction again of available credit to both consumers and small businesses. For various reasons this critical issue remains under the radar of the major media outlets and most financial reporters likely because they are disconnected from that segment of the economy. When they report from the floor of the Dow they are not capturing the pulse of a majority of the economy that produces a majority of the new jobs over the last few decades. What they instead see is the one portion of the corporate sector that can borrow which is large corporations. Last week I had "Fools Rally 2009" stamped on an Alicia Klein Bookmark and sent it to an associate in the markets. Why do I say this with certainty? Because the lifeblood of the economy is being cut out of it as credit to small businesses has already contracted 25-30% or trillions of dollars since last year. Even worse leading expert Meredith Whitney reported in a recent Wall Street Journal article that another 1.5 trillion will be chopped from available credit to small businesses and consumers by the end of next year. Some may shrug off this news thinking they are immune as their customers pay via cash or check but that does not account for the fact that your customer may pay you with a check but they likely pay at least a few vendors with credit cards or lines of credit. When those vanish entirely or are decreased they now have less spending power and the previously rapid paying check customer may be on a restricted cash flow. Worse yet the psychological impact of reduced lines or the fear of reduced lines changes consumer behavior and will have a negative effect on commerce as the dismal September retail sales figures show.
So what is being done to support 38% of the US GDP? Not a thing is being done. There are no government programs providing direct loans to small businesses. Banks are not lending which means the engine that drives a third of our economy and 50% of our employment is being strangled. The pace is accelerating and anyone reading financial forums such as creditboards or myfico forums will see that in the past week many big name banks have been furiously chopping lines. Their favorite tactic is slashing lines right after payments are made in full. It's a trap as they don't want to see high balances but the moment a consumer pays off the line to avoid interest they are sometimes being closed out entirely. This can be absolutely fatal blow to a business that had expected to be able to use that credit again the following month. Profitable businesses are failing all over the US not because sales are poor but instead because the recent changes have left them without the cash to operate. Take for instance recent reports of a new tactic by the banks that involves them holding the available credit for up to two weeks after a payment is made. In essence a customer makes a payment today prior to the due date or statement date expecting to be able to use it the next day. Instead the payment is made and credited against the balance but the bank does not release the funds for 7 or sometimes 14 days. No doubt it is a temporary mechanism for reducing potential exposure without directly cutting the lines.
It is likely that banks are about to accelerate the credit closures to prevent the potential exposure that the holidays bring. This may be good news for their losses but it is terrible news for the economy and for anyone running a small business in this country. The question now becomes what will it take for Washington to offer support for small businesses when trillions have been given out with little explanation to major corporations foreign and domestic?