Pricing Goes to Zero by Will Phillips February 2010 A speaker at an International Health, Racquet & Sportsclub Association (IHRSA) event said that at some point in the future, health clubs would charge nothing to join! He believes that the true value is found not in joining fees, but in the membership itself as a highly selective audience, one that advertisers will pay to reach. When my wife and I moved from San Diego to Boston, the closest health club was a Planet Fitness and so we joined. Planet Fitness's membership is only $10.00 a month! Great parking, all the equipment I need, and never overcrowded. Of course there's no pool, personal training, group exercise, but for the basics, Planet Fitness delivers. Planet Fitness is a manifestation of the health club industry at its best. We are superb at designing facilities and stocking them with great exercise equipment. If you're going to deliver fitness and only fitness, Planet Fitness does it the best because they don't waste their time or income on service. They charge a low fee and deliver high value. One roundtable members who is a also a Planet Fitness owner, commented that it was hard to get used to the idea of only one person in the building. That person is at the front desk saying hello and goodbye, and signing up members. He was also surprised at the Planet Fitness direct mail marketing system which sends out $10.00 a month promotions every Thursday. The following Monday they'd sign up 50 new members. That's 200 new members a month, quickly adding up to the total 5000 to 8000 members typical in a Planet Fitness. How do you compete against Planet Fitness? One option is to provide dramatically different services such as group exercise, or you can go to free. Free is the next stage of development of our market. Chris Anderson's new book FREE—The Future of A Radical Price explores free pricing in some depth. Anderson is the editor of Wired Magazine and the previous author of The Long Tail. "People are making lots of money charging nothing," he writes. "Nothing for everything, but nothing for enough that we have essentially created an economy as big as a good sized country around the price $0.00." We have reached the point where we are reproducing and delivering digital content such as words, music, pictures or video that has become too cheap to measure. Actually, it costs quite a bit to develop content, but because the cost of storage and delivery is so low, the cost of delivering additional copies of the product (or additional members for a club) is approaching zero. As long as serving one more new customer costs next to nothing, the competition for attracting customers will drive prices towards zero. Anderson calls this the "freemium strategy." An example is Flickr, an online photo management application, which offers a free package of services, expecting a small member of users will upgrade to a package that requires a paid membership. Dozens of other online services use this strategy. Offer something valuable for free to get them in the room. Build trust and get attention, then sell a few. Visit a carnival and you'll still hear the familiar refrain: "Come one, come all, it's free!" Anderson believes that anybody can use the freemium strategy business model, but likely only one company can get really profitable using it (as in Planet Fitness). Many professionals are already using the freemium to premium model where individual consultants and firms give away content in convention speeches and magazines in order to generate paid work later. A recent report from MIT notes that established businesses rarely succeed by going down in price, because even though price may be lowered, costs stay the same. When competition heats up it's critical to go up or down, but not play in the middle. The middle is where companies lower prices but still deliver the same products and services they did in the past. How can we create a business design that is based on free membership? One option is to locate a free health club in a neighborhood that attracts homeowners with a $70K income minimum. This will provide the selective membership that can generate a profit in whole new ways other than membership premiums. Most of you reading this will never open a free health club, but at least you'll be prepared for a free health clubs opening near you in the next decade. Read Chris Anderson's Wired article: Tech Is Too Cheap to Meter: It's Time to Manage for Abundance, Not Scarcity In 1969, the Neiman Marcus catalog offered the first home PC, a stylish stand-up model called the Honeywell Kitchen Computer, priced at $10,600. The picture shows an aproned housewife caressing the machine, with this tag line: "If she can only cook as well as Honeywell can compute." That image should be on every cubicle in Silicon Valley; it's a testament both to what technologists get right and what they get badly wrong. Flickr is an online photo management and sharing application Show off your best pictures or video to the whole world. Securely and privately share photos of your kids with your family across the country, and more.