Product Differentiation – The Fitness Club Market
The market for fitness club membership is one of monopolistic competition. We would categorize it as monopolistic competition for a few different reasons. For example, there are a lot of different fitness club brands out there both small and large due to relatively ease of entry into this market. I experienced this fact personally when I witnessed a friend of mine opening a fitness club a few years ago, without a tremendous amount of capital. This ease of entry means there are a significant number of sellers, and so a lot of competition within this industry. If you live in a densely populated city or suburb within the United States chances are you have a selection of different fitness clubs, more commonly referred to as gyms, within a few miles of your home.
Another quality of this industry is that firms within it can and will use advertising to increase profits. They use various methods to help consumers differentiate their products from those of their competitors. Product differentiation, also known as non-price competition, just may be one of the most important aspects of the monopolistically competitive market because each brand has a monopoly over its own product (Miller 2014).
We could say product differentiation in the fitness club market is what makes it what it has become today. As of now, 41 million Americans are members of a fitness club. About half of that number belong to a commercial club (“Fitness Industry Analysis” 2015). The industry was mostly made up of clubs in the 1970’s & 80’s that offered aerobic exercise due to its popularity at that time. Gyms of that time did not have as much competition as they do today, and the market was not nearly as fragmented. Through the 1990’s and 2000’s, gym memberships grew tremendously. The demand for fitness club memberships were rising rapidly, and clubs were becoming much more differentiated. By the 1990’s there were various different types of fitness clubs available, such as commercial fitness clubs, country clubs, health spas, corporate fitness clubs, non-profit clubs such as the YMCA, and many more. Today, revenues for this industry have increased to 33 billion annually making it a profitable industry.
In this industry each firm only holds a small share of the market. Advertising can certainly help a firm differentiate itself and help increase profit margin. A certain club located near my home uses mass marketing. From personal experience it is quite effective, I have actually joined this gym twice over the years. The particular club has many prominent billboards in the area plastered with their advertisements. They use a plain black background and bright eye catching letters. The message is almost always the same, it refers to the fact that they offer “NO CONTRACT” and “NO MONEY DOWN”. Due to the fact that most fitness clubs make the member sign a contract to be members, this is an effective differentiation. This also helps reinforce this specific brand to consumers because they always use a certain font, combination of colors, and their company trademarked (logo). They also hand out free magnets with their slogan out for free, so many cars in the area now drive around promoting the brand for them every day. Advertising costs add to fixed costs for a firm, so firms must decide how much to spend on advertising to maximize profit margin. Typically advertising will be carried out until the extra revenue from one more dollar of advertising just equals the dollar of additional cost (Miller 2015).
Another way firms in the fitness club industry differentiate themselves from competitors is to offer extra services or incentives to members. For example, some clubs began to offer childcare. This led to competitive advantage for those particular clubs. Nowadays, just about every fitness club offers childcare, so many gyms made this service free to again differentiate themselves from similar clubs. Some other extra services clubs are offering include swimming, saunas or whirlpool, massage, tanning, many unique classes, and even chiropractic or acupuncture. All these services help make each brand of club just a bit more different than another and give consumers the incentive to join their club over another.
In the fitness club industry there is a difference in equilibrium in the short-run and the long-run. In the short-run, it is relatively easy for firms to enter into this industry. Firms are able to make economic profit, as their entry shifts the demand curve left, while some will experience economic losses at this point. Price is typically well above marginal cost in the short-run.
In the long-run, firms that experienced losses will leave the industry, this will create a shift to the right along the curve for remaining firms, but eventually, because there are so many other firms offering similar services, economic profits slowly drop off and eventually be reduced to zero.
Firms in the fitness club industry must differentiate to compete with their competitors. This differentiation is definitely a good economic decision, but firms must be sure to maintain economic efficiency when differentiating, by creating services at lowest possible average total cost if they want to maximize profits.

References

Green, B. (n.d.). Five of the Top Fitness Trends Influencing Consumer Demand, by Bryan
Green. Retrieved April 29, 2015, from http://hotelexecutive.com/business_review/1382/five-of-the-top-fitness-trends-influencing-consumer-demand

Miller, R. (2015). Monopolistic Competition. In Economics Today: The Macro View (Seventeenth ed., pp. 555-572). Upper Saddle River, NJ: Pearson Education.

Sachitanand, R. (2014, August 31). Why gyms and health clubs are finding it hard to stay profitable - The Economic Times. Retrieved April 30, 2015, from http://economictimes.indiatimes.com/magazines/panache/why-gyms-and-health-clubs-are-finding-it-hard-to-stay-profitable/articleshow/41281833.cms

Schwartz, E. (2015, January 18). Behavioral Economics Explains Health Club Memberships.
Retrieved May 1, 2015, from
http://www.econlife.com/behavioral-economics-and-health-club-memberships/