The Gym Membership Is the Product
Theme parks charge admission, then sell you food. Golf clubs charge a membership, then a green fee per round. Warehouse clubs charge annual dues, then sell at near-wholesale. Cloud providers charge for the account, then for what you use. Phone plans charge monthly, then for the overage.
This is a two-part tariff: a fixed fee to be in, plus a price per unit consumed. It's everywhere, and the usual explanation for it — "it makes the entry price look lower" — misses what's actually going on.
The counter-intuitive bit
Here's the golf club version. A member will pay up to $100 for their first round of the season and progressively less for each one after — the usual downward-sloping demand. Each round costs the club $20 to put on.
Play with the two levers.
A membership fee and a price per round
Each round costs the club $20 to put on. The member will pay up to $100 for their first round of the season and less for every one after. Find the combination that earns the club the most.
costs the club $20 to provide
they will pay up to $800 at this round price
Club profit
$1,800
best possible is $3,200
Rounds played
40
80 at cost-price rounds
Value the member keeps
$600
surplus above the fee
Single price would earn
$1,600
at $60 a round, no fee
- Demand for rounds
- Surplus the fee can capture
- Margin on each round
- Cost per round
Drag the round price down towards $20 and the green triangle swells: cheap rounds make membership worth more, and the fee can take it. Push the round price up and you earn a margin on each round but shrink the thing you were going to charge for at the door. The best the club can do — $3,200 — comes from pricing each round at cost and charging the whole surplus as the fee. A single price with no fee tops out at $1,600.
Show the numbers
| Strategy | Per round | Membership fee | Rounds played | Club profit |
|---|---|---|---|---|
| Your settings | $60 | $200 | 40 | $1,800 |
| Best single price, no fee | $60 | $0 | 40 | $1,600 |
| Best two-part tariff | $20 | $3,200 | 80 | $3,200 |
Start with a high price per round and no fee, and the club does adequately. Now do the thing that feels wrong: drag the price per round all the way down to $20 — exactly what it costs — and then set the fee as high as the member will tolerate.
Profit roughly doubles.
Why that works
The green triangle is the member's consumer surplus: the gap between what each round is worth to them and what they paid for it. It's value the member captures and the club doesn't.
When you charge a high price per round, you earn a margin on every round, but you suppress how many they play and you shrink the triangle. When you price rounds at cost, the member plays as much as they possibly want, the triangle swells to its maximum — and the fixed fee is the instrument that lets you take it.
The general result: set the per-unit price at marginal cost, and extract the surplus that creates through the entry fee. The per-unit price should do one job — get the quantity right — and the fee should do the other — collect the value. Trying to make the per-unit price do both is what leaves money on the table.
The classic treatment is Walter Oi's 1971 paper, elegantly titled A Disneyland Dilemma: should the park charge for admission or for rides? The answer is both, with the rides priced near cost.
Where the theory meets reality
The clean result assumes one customer, or identical customers. Real businesses have a mix, and that's where the design gets interesting.
One fee can't fit everyone. Set the fee at what your heaviest user will bear and you lose all the casual ones. Set it at what the casual ones will bear and you leave money on the table with the heavy ones. This is why a two-part tariff so often becomes a menu of two-part tariffs — small plan with a low fee and higher per-unit rates, large plan with a high fee and lower rates. Customers sort themselves, which is the whole trick.
A fee you can't justify is a fee people resent. The theory says take the entire surplus. In practice, a membership priced at exactly what the customer would tolerate leaves them with nothing, and people who get nothing out of a relationship end it. Most durable versions of this leave real surplus on the customer's side deliberately.
Free-with-overage is the modern default, and it's the same structure. A phone plan with an included allowance is a two-part tariff where the per-unit price is zero up to the cap and painful after it. So is a SaaS plan with seats included. The economics haven't changed; the packaging has.
The customer-side effect people get wrong
A common claim is that once someone has paid the fee, they use the service more to "get their money's worth". Half true, and worth being precise about.
The sunk-cost version — I paid for the gym so I must go — is a genuine psychological effect and it fades fast. January memberships are a well-documented illustration.
The real and durable effect is different and more useful: once the fee is paid, the only price the customer faces is the marginal one. If a round costs $20 they'll play a lot. If it costs $70 they won't. The fee changed whether they're a member; the per-unit price governs everything after. Which is exactly why pricing usage near cost is the profitable move — you've already been paid for access, and every barrier you put in front of usage now just makes membership worth less next year.
If you're designing one
- Find your true marginal cost, and start from the assumption that your per-unit price should be near it. If you're pricing usage at 4× cost, you're suppressing the thing you're selling access to.
- Work out what access is worth, across segments, when usage is cheap. That number is your fee ceiling — and it's bigger than it would be if usage were expensive.
- Build a menu, not a price. Two or three fee-and-rate combinations, designed so different customers pick different ones voluntarily.
- Leave surplus behind on purpose. The model says take it all. The relationship says don't.