Building Your Business Skills
Goal
To help you understand how the economic environment affects a product's price.
Background Information
Assume that you are the owner of a local gym and fitness studio. You've worked hard to build a loyal
customer base and your facility is top-notch, with the latest equipment and a variety of classes for
customers at all fitness levels. Within your area, there are three other gyms, each charging the same
price--$40 per month for individuals, $60 per month for a couple, and $75 per month for families.
However, you've become concerned because one of your competitors has just announced that they will
be reducing membership costs by $10 per month for each of the three categories of memberships.
Rumor has it that another facility plans to follow suit in the near future. You can't afford to get into a
price war because you are just barely marking a profit at your current price structure.
STEP 1
Divide into groups of four or five people. Each group should develop a general strategy for responding
to competitors' price changes. Be sure to consider the following factors:
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How demand for your product is affected by price changes.
The number of competitors selling the same or a similar product.
The methods you can use—other than price—to attract new customers and retain current
customers.
STEP 2
Develop specific pricing strategies based on each of the following situations:
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A month after dropping prices by $5 per month, one of your competitors returns to your
current pricing.
Two of your competitors drop their prices even further, reducing membership costs by $8
per month. As a result, your business falls off by 25%.
One of the competitors has announced that it will keep its prices low, but it will charge
members $2 per session for high demand classes such as Pilates.
Each of the competitors that lowers prices make an adjustment, with reduced rates for
families and couples, but they plan to return to $40 per month for single members.
All four providers (including you) have reduced their monthly fees. One goes out of
business, and you know that another is in poor financial health.
FOLLOW-UP QUESTIONS
1. Discuss the role that various inducements other than price might play in affecting demand and
supply in this market.
2. Is it always in a company's best interest to feature the lowest prices? Why or why not?
3. Eventually, what form of competition is likely to characterize this market?