MANAGING CUSTOMER RETENTION IN THE HEALTH AND FITNESS INDUSTRY: A CASE OF NEGLECT

MANAGING CUSTOMER RETENTION IN THE HEALTH AND FITNESS INDUSTRY: A CASE OF NEGLECT

Hurley, Teresa

International research confirms that customer retention is an increasingly important phenomenon in the successful operation of any business. This article examines customer retention in the health and fitness industry. The findings highlighted are extracted from a broader study examining the practice of relationship marketing in the industry. This study involved a mail survey of health and fitness operators in Ireland.

The findings indicate the need for a change in company culture, with greater emphasis by senior management on member retention as opposed to new member acquisition. Customer service is rated poorly and elements of this, including the provision for increasing member/staff interaction, early detection of lapsed members, calculation of the financial value of lifetime members, and the completion of exit analysis, need to be examined.

Introduction

The aim of relationship marketing is to identify specific client segments and establish, maintain, and enhance over time the client-firm relationship. Relationship marketing, therefore, places a major emphasis on customer retention, reflected in commonly used terms such as ‘retention marketing” and ‘zero defections’ (Reichheld and Sasser, 1990; Reidenbach et al., 1995). International research, particularly in the service industries, highlights the positive elements of applying a customer retention strategy. Gronroos (1990), Reichheld (1994) and Borna (2000), for example, emphasise the need for establishing and sustaining relationships with existing customers in order to increase retention levels and provide potential for future purchases.

Other findings indicate that gaining new customers is generally calculated as being at least five times greater than the cost of keeping existing customers; an organisation’s existing customer base becomes a key strategic asset (Schmittlein, 1996). Indeed, some researchers believe that the retention of customers is likely to be the single biggest predictor of future profitability (Petrison, 1993; Reinartz and Kumar, 2000; Kamakura et al., 2003). Eben (2000) similarly argues that companies can get a much better return by investing in existing customers than by acquiring new customers. Seroka (2000) highlights how companies that retain their customers while acquiring new ones experience faster growth than those that simply replace lost customers, and notes that the cost of servicing a customer decreases the longer the customer is retained.

The health and fitness industry is a growing service industry that relies on continued patronage by customers for its ongoing success. Mintel (2002) Ireland notes that the health and fitness market in the Republic of Ireland increased by 135 per cent in value from 1997 to an estimated euro300 million in 2003. With a further growth of 24.4 per cent to euro373.2 million by 2007 predicted, the ability of health and fitness operators not only to attract new customers in the future but also to retain them could determine the success or failure of many health and fitness operators.

Extensive resources are invested in recruiting new members to sports clubs and health centres, and it is critically important that those new members become long-term patrons. Thus, as a long-term repeat purchase business with a high degree of customer involvement, it seems clear that relationship marketing is a very appropriate theoretical framework to apply to the health and fitness sector. This paradigm offers the potential to inform thinking on issues of new customer acquisition, customer retention and even brand/company loyalty. Furthermore, since most research on relationship marketing has been completed in financial services industries, the health and fitness industry offers a useful possibility for validating the findings of earlier studies in a new market arena. Research by the International Health, Racquet and Sportsclub Association (IHRSA) in the United States (1998), the Fitness Industry Association (FIA) in the UK (1999, 2002, 2004) and Hillsdon (2003) demonstrates clearly the importance of applying customer retention strategies in the health and fitness industry.

A Conceptual Framework for Customer Retention

Berry and Parasuraman (1991) developed a framework for understanding types of retention strategies that has been widely accepted as the standard model for considering issues of customer retention. They suggest that retention marketing can occur at three different levels. Each successive level of retention results in increasingly greater customisation or individual service in addition to the potential for sustained competitive advantage and ties that bind the customer closer to the firm. The framework appears to offer considerable potential for understanding retention issues pertinent to the health and fitness industry. An extensive literature search failed to reveal any evidence of previous attempts to investigate this potential. This study endeavours to fill this gap by recasting the three level model in a way that may be applied to the particular conditions of the health and fitness industry as shown in Table i. This table outlines a range of possible incentives that are often used by health and fitness clubs to attract and keep members classified according to the Berry and Parasuraman model.

At level one, the customer is tied to the firm primarily through financial incentives such as lower prices for greater volume purchases and reduced prices for customers who have been with the firm for a long period of time. For example, ‘frequent flyer’ programmes provide financial incentives and rewards for travellers who bring more of their business to a particular airline. Similarly, discounted joining fees, special seasonal offers and the ability to freeze membership in health clubs provide examples of financial incentives specific to the health and fitness industry. However, since financial incentives tend to be easily copied by competitors, they do not generally provide long-term advantages to a firm unless combined with another relationship strategy.

Level two combines these financial incentives with social bonds to promote long-term relationships. Services are customised to meet individual needs and there is continuing contact between the firm and the customer. For example, the Ritz Carlton Hotel has a personalised consumer information system that allows the hotel to anticipate guest needs and to customise each visit even before the guest arrives through the use of an advanced computerised system. The computerised information is updated when something new is learned about a particular guest, and the information is available to all hotels in the chain. Social bonds may develop among hotel customers and over time these bonds that they develop with other customers may help prevent them from switching to a competitor. This is evident in health clubs also where there is an opportunity for social interaction among members. Indeed, members of health clubs often meet for social reasons as much as for exercise purposes. Annesi (1999) indicates that as many as 90 per cent of people prefer to exercise in groups rather than by themselves. He also maintains that members at risk of discontinuing their exercise programme can be saved from dropout if provisions are made for them to feel part of an integrated group and less out of place in a gym environment when they commence exercising initially. The first sixty days of membership are crucial in building customer relationships, developing regular exercise/usage patterns, and fostering social bonds. The levers used to foster these financial and social bonds in a health club environment are demonstrated in Table 1 and include organised member social activities, buddy weekends where members are invited to bring a friend to the club, guest invitations, referral incentives, loyalty cards, training partners and group activities.

Level three bonds are more difficult to imitate and involve structural as well as financial and social bonds. According to Czepiel (1990), a relational exchange is a social process that develops over time with the accumulation of service encounters. How many points of service contact exist between the member and the club on a regular visit to the centre? Could increasing the points of contact help strengthen the relationship? Czepiel maintains that the process involves the building of ‘psychological loyalty’ as a result of a combined economic and social bonding. This bonding involves the development of relational norms such as commitment, trust, mutual support, open communication, adaptability, shared responsibility for conflict resolution, cooperation and solidarity among participants (Macneil, 1978; Czepiel, 1990; Wilson, 1995; Nevin, 1995). Examination of company culture and methods used to obtain and keep new members, development of customer service programmes, staff training and education, identification of members who are at risk of discontinuing their new exercise regime, membership tracking, initiation of reactivation programmes for lapsed members, awareness of the financial value of members and completion of exit analysis could further the development of financial, social and structural relationships and ultimately customer retention in the health club environment.

Research Methodology

A mail survey was used to establish the current practice of relationship marketing in the health and fitness industry in Ireland. The Institute of Leisure and Amenity Management (ILAM) Ireland, the national governing body of leisure managers in Ireland, provided a mailing list of suitable participants based on the specific target markets including a range of small, medium and large health and fitness centres. This included contact names, addresses and telephone numbers of participants at senior management level. Because of the detailed and confidential nature of the survey, mail was addressed only to senior management.

A pilot survey was undertaken prior to distribution to ascertain any difficulties respondents may have with the completion of the survey. Ten health and fitness centres were asked to complete and return the survey in the enclosed stamped addressed envelope and valuable feedback was received. The survey was amended accordingly, typeset, photocopied and distributed to 210 companies throughout the country. A 39 per cent response was achieved.

The survey data for this study (n = 82) were thus collected from senior managers from a variety of health/fitness centres. Fifty-nine per cent of respondents were from private gyms, 6 per cent were leisure centres, 3 per cent were community/corporation centres, while hotel leisure centres and sports centres each accounted for 10 per cent. Twelve per cent were classified as other, which included leisure-related activities in community halls.

Findings and Discussion

While the data in this study provided much insight into the general nature and dynamics of relationship marketing in the health and fitness industry, the focus of attention in this paper is largely on customer retention practices and strategies. (Note that in the discussion percentages add to more than 100 in a number of instances where respondents indicated a multiple choice.)

Recruiting New Members

Forty-one per cent of respondents rely on standard methods of recruiting new members such as advertising. Twelve per cent and 9 per cent use leaflets and newsletters respectively, while 12 per cent use direct mail. Supermarket promotions were used least often (7.1 per cent). However, only 27 per cent seek referrals from members with a mere 14 per cent using guest invitations for this purpose. The majority of operators listed word of mouth as their biggest source of member recruitment. The data suggest that senior management have an opportunity to leverage their current membership base as a means of enhancing new member acquisition through the introduction of guest invitations and referral incentive programmes.

Patterns of Use

Developing customer relationships is an integral part of any customer retention strategy. The findings revealed that 66 per cent of members were regular attenders while 34 per cent were non-active. Since non-attending members are less likely to renew membership, the tracking of attendance rates becomes an integral part of any customer retention policy. Thomas (2001) emphasises the link between customer acquisition and customer duration. Only 14 per cent of members in this study were found to stay with the club for at least 3-6 months, while this figure increased to 27 per cent for the 1-2 year membership period. This indicates that the longer a member is retained, the greater the chance of retaining the member in the long term.

Distinguishing Factors

Ninety-eight per cent of senior managers identified equipment as the most important factor in distinguishing their business from that of their competitors, while 95 per cent listed classes as distinguishing elements. This is surprising given that most health and fitness centres now offer broadly similar equipment and classes and therefore these homogeneous factors are unlikely to represent a significant means of differentiation. Eighty-one per cent attributed atmosphere and 73 per cent noted staff, while service and facilities were identified by 40 per cent and 51 per cent respectively as key distinguishing factors. The low weighting attributed to service is significant given the substantial contribution it could make to maintaining a sustainable competitive advantage for operators in the future.

This is consistent with the findings of Kelly and Davis (1994), who indicated in their research that health club customers receiving higher levels of service quality are more committed to the health club than those whose service experience was average. It has also frequently been noted that in competitive markets, customers will not return, despite attractive benefits, if the organisation’s core service is of poor quality and results in low satisfaction scores (Danaher and Mattson, 1994; Palmer and Mayer, 1995). Senior management should therefore note the important role that customer service plays in the development of any customer retention strategy.

Marketing Approach

Only a half (50.7 per cent) of senior management surveyed were more concerned with keeping existing customers than gaining new ones. At a strategic level this would indicate the need for senior management to examine their company policy in relation to the development of a focused customer retention strategy. In some organisations, cultural changes may be required at management level if this strategy is to be successful. This would further strengthen the retention strategies employed at level 3 of the model outlined in Table 1. One third of respondents (34.3 per cent) maintain that the health and fitness industry is now becoming so competitive that they have constantly to search for new members. It could be argued, however, that this constant search for new members may be driven as much by failure to retain existing customers as it is by intense competition. International research findings suggest that a concentration on customer retention as opposed to new customer acquisition may reap positive rewards. However, despite these findings, the Irish health and fitness industry still appears to place a greater emphasis on new customer acquisition as opposed to customer retention as part of its overall marketing approach.

Developing Customer Relationships

Stewart and Kamins (2002) emphasise the positive effect personal relationship building may have on customer retention. However, the majority of those surveyed in this study tend to rely on non-personal methods to enhance customer relationships. Sixty-two per cent of respondents use notice boards while 21 per cent use customer surveys. Only 12 per cent of respondents use social events and 9 per cent make service calls to customers. Eighty-one per cent had never used birthday cards as a means of enhancing customer relationships.

Respondents were also asked to indicate the number of points of contact normally encountered by members. Ninety-four per cent greeted their customers and 91 per cent always concluded the visit with a farewell. Sixty-six per cent used programme supervision while 51 per cent provided classes as a means of contact between staff and customers. Social activities were adopted by only 25 per cent of those surveyed. Evidence from international research would suggest that increasing social aspects within a health club could have a positive effect on customer retention, an aspect which appears to be currently underrated by Irish health and fitness operators. Conrad (1998, p. 27) reported that ‘someone who works out with a friend is 50 per cent more likely to stick with their exercise programme than someone who exercises on their own’. The introduction of training partners, group induction programmes and social activities in health clubs could therefore help promote customer relationships.

Financial Value of Member

Senior management response to this area demonstrated a low awareness of the financial value of members in the industry. Only 45 per cent had ever calculated the financial value of a lifetime member to the club. Venkatesan and Kumar (2004) and Lemon et al. (2001) emphasise the lifetime value of customers. A greater appreciation of this by senior management could help highlight the importance of member retention and refocus attention in the health and fitness industry away from new member acquisition towards member retention.

Exit Analysis

According to Reichheld (1996) companies need to study failure to reveal the deep-rooted causes of customer defection. Despite these recommendations, only 52 per cent of senior management sought to discover why customers leave their club. Most relied on standard methods including letters (19 per cent) and surveys (25 per cent). Seventy-two per cent reported using interviews. However, based on experiential evidence and having probed this response in greater detail, it would appear that these interviews are more representative of an informal talk with ex-members as opposed to the structured interview approach. Only 22 per cent reported using telemarketing despite its cost effectiveness and time efficiency.

A report in 1998 by the IHRSA in the United States demonstrated the importance of these former member markets. The study revealed that 29 per cent of former members intend to join another club within a year of discontinuing membership of their previous club. The report also indicates that there are currently 26 million former health club members in the US, so the IHRSA study suggests that 7.5 million of them – 29 per cent are ready to join a club in the coming year, and a full 42 per cent said that indeed was their intention. In a further study by the FIA in the UK (1999), one third of all lapsed members stated that they would rejoin their former club if they received a letter inviting them back, and one quarter of all members interviewed stated that they would definitely rejoin if joining fees were waived. Senior management would be wise to note these findings in the context of the Irish health and fitness industry and discover why members discontinue membership of their club and develop reactivation programmes that would effectively target and reactivate these lapsed member markets.

Summary and Conclusion

The objective of this article has been to examine customer retention in the health and fitness industry. A conclusion from the findings suggests that the Irish health and fitness industry is not advanced in its knowledge, practice and application of relationship marketing principles, despite international research evidence supporting a strategic approach to customer retention in this market arena. A case of neglect is evident. The industry structure in Ireland, although not as advanced in a number of aspects, is largely similar to its overseas counterparts; there is no evidence to suggest that the international customer retention strategies highlighted in this article would not succeed locally.

However, in order for these strategies to be successfully applied, research from this study suggests that a cultural shift may be required if customer retention levels are to be enhanced. Greater emphasis must be placed on retaining current members as opposed to constantly seeking new members. This requires senior management support and staff training if this new philosophy is to be endorsed as part of an overall customer retention strategy.

The findings from this study also suggest that customer service is still not receiving the recognition it deserves but could be used as a key sustainable competitive advantage for health and fitness operators in the future. By increasing the number of points of contact with customers, employing personal methods to develop customer relationships, providing more social activities, increasing awareness of the financial value of lifetime members, tracking non-attending members and initiating reactivation programmes, senior management and employees can contribute greatly to improving customer service elements. As a result of a properly executed customer service policy, greater distribution of guest invitations and referral incentives, customer referrals may follow, thereby increasing the lifetime and financial value of retained and loyal members. Again, this will require continuous staff training and senior management support to improve aspects of customer service and develop effective customer retention strategies.

The introduction of retention strategies at strategic, operational and tactical levels could provide the means to achieve the recommendation set out above. Such a strategy would provide a competitive advantage for health and fitness organisations, and ensure that managing customer retention in the Irish health and fitness industry is no longer a case of neglect but rather a proactive means to superior performance in a competitive and dynamic market arena.

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Author

Teresa Hurley lectures on sports management at the Centre for Sports Studies, University College Dublin. Her research and publishing interests lie in the area of relationship marketing and customer service. She also works as a consultant in the heath and fitness sector.

Copyright Mercury Publications Ltd. 2004

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