Richard Branson posted a picture on LinkedIn recently which shows him grinning proudly in a t-shirt branded with the name of his health club chain, Virgin Active. In the accompanying article the serial entrepreneur talks about how proud he is of the brand, and waxes lyrically about how important inspiring people to be active and healthy is.
The trouble is, health club business models like those employed by firms such as Virgin Active are founded on quite the opposite. The profitability of such chains is really a bet that enough people will fork out for a membership and be too lazy to use it. Most gyms have more members than could possibly be accommodated, languishing their way through 12 month contracts they were aggressively sold while sales staff continue to chase sign-up bonuses because that is exactly what their compensation structure encourages.
Behavioural economists have long realised that in the sort of target-driven environment which characterises a sales team, the people that design incentives need to be careful what they wish for. When a financial bonus is awarded for one particular activity, it tends to encourage people to pursue that objective doggedly, to the detriment of any other objectives.
The Virgin Active compensation structure is a case in point. Membership team members’ monthly targets are solely based on new customers signing up – even if they quit after 31 days or never actually use their gym membership. It sounds reasonable enough, but in reality this gives employees who are supposed to be in charge of keeping customers happy no reason to do so, as bonuses, promotions and praise are doled out solely on the basis of sign-ups.
As a sales employee at the firm when I first graduated, I experienced first-hand the ludicrous game-playing this led to. Instructions to call people who had visited the club once at 9pm on a Friday evening and ask them to pay a £500 joining fee over the phone there and then, as well as orders to tell bare-faced lies to prospects about one-off offers, were just the tip of the iceberg.
From a customer perspective, the results of this business model are even more frustrating. With the end of the month looming, I recently visited the health club I have been a member of for over two years (the same branch where staff falsified records to pretend they had been keeping an eye on a swimming pool when a 25 year-old member drowned in 2011). After less than a month of neglecting to work out, staff informed me that I needed to pay another joining fee and commit to a new 12 month contract.
The situation was frustrating but hardly inexplicable – the strange reality of the firm’s incentive structure means a Virgin Active employee stands to gain a bonus upwards of £100 if they succeeded in forcing a customer to go along with such a rouse – but no benefit at all if a membership mistakenly cancelled by the club is reinstated.
So does such an attitude make sense for the business overall? If sales staff have sold a more expensive rolling-contract, then revenue loss ensues if a member leaves early. But if they’ve frog-marched a prospective buyer into committing to 12 months, then the behaviour incentivised by the sales bonuses actually makes commercial sense – membership staff are actually acting rationally when they annoy a customer so much that they simply stop using their membership altogether.
Yet in the 21st century business landscape, where authenticity is supposed to be prized above else by consumers and employees alike, such a strategy will inevitably cause ill-will among consumers, which eventually undermines any short-time commercial gain. And given that Branson’s commercial stake in the chain of health clubs is minimal – The Virgin Group owns just 20 per cent of the company – it’s this brand damage that he should be worrying about.
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