elasticity of demand - case study: health clubs

Elasticity of Demand for Health Clubs

The health club market provides an interesting case study in using the concepts of price elasticity of demand and income elasticity of demand

Price Elasticity of Demand

Price elasticity of demand measures the responsiveness of demand to a change in the own price of a good or service. When demand is inelastic (e.g. demand curve D1 in the diagram above), consumer demand is relatively insensitive to changes in price.

Elasticity tends to be low when the product is viewed by the consumer as a necessity, or when it takes up a small percentage of total income. Elasticity is low when there are few close substitutes and when the consumer has developed a strong sense of brand loyalty.

A relatively elastic demand curve is shown by D2 in the same diagram.

What of the price elasticity of demand for health club memberships?

Regular gym users regard their health club visits as an important feature of their weekly exercise regime. They are unlikely to cancel a membership if fees rise from time to time. The majority of gym members pay their subscriptions using direct debit. They may take some time to realise that their monthly charge has changed. And, for most consumers, having made the decision to commit themselves to a membership of between £25-£50 per month, a small rise in fees is unlikely to lead to a cancelled membership.

Some towns and cities are well served by health clubs in both the premium and economy segments of the market. When there is genuine market competition, price elasticity of demand should be higher.

Income Elasticity of Demand

Income elasticity measures the responsiveness of demand to a change in consumers' real income. Although some fitness fanatics may regard their membership as a necessity (giving a low but positive value for income elasticity), for many consumers, an individual or family membership is often seen as a luxury item in their annual budget.

Normal luxury products have a highly positive income elasticity of demand. When the economy is strong, and incomes and employment are rising, we expect to see strong growth in market demand for health and fitness activities. This encompasses health clubs together with other activities (including sports-based holidays).

In an economic slowdown, discretionary spending on health clubs may fall-although in the short term, thousands of members are committed to an annual fee.