A low-cost pricing strategy is tough to swing when you own a small business and there is little scale to economize. You're too small.

Plus, conventional wisdom says a start-up following a low-cost pricing strategy is on a sure path to failure. (If Horace Greeley was alive today he'd say, "Go differentiate, young entrepreneur.")

I fall squarely into that camp. Tell me you're starting a new business in a mature industry and you plan to be the low-cost provider and I'll instinctively cringe. So I found someone who thinks--and definitely acts--differently.

Here's another in a series where I connect with someone smarter than me and discuss a specific topic. (There's a list of previous installments at the end of this article.)

This time I talked about price and value with Eric Casaburi, founder and CEO of Retro Fitness, the rapidly expanding 80s-themed fitness franchise approaching 100 current locations and over 150 by the end of 2013.

You started Retro Fitness during one of the greatest economic booms in history. Yet you dramatically undercut prevailing prices. Why?
There is a pricing vertical in almost every industry: High end, intermediate (which is the worst place to be, especially now), and low cost.

The average gym was offering $39.99 to $49.99 per month memberships. Our approach was, "Do you remember when gyms were affordable?" (In fact that was one of our early tag lines.)

So we bypassed the intermediate level and set our membership price at $19.99. I decided that if we could make money at $19.99, people would fall in love with us.

Low-cost providers are typically no-frills operations--customers accept the trade-off between price and value/service. What did you decide to cut?
We didn't cut anything.

Here's the thing. If you're in retail, unless you are Wal-Mart you don't want to be Wal-Mart. You want to be, say, Target: Nice finish, nice atmosphere, good prices, a little better service--a retail experience done well at a low cost. We want to be Target.

Prospective members often say, "Hold on. You have better treadmills, better TVs, iPod integration, movies, a smoothie bar, great personal trainers. What's the catch?"

It's awesome as a business owner to be able to smile and say, "There is no catch."

Who is your target customer?
When we were starting out, everyone in the industry targeted baby boomers because they have greater spending power. I thought, "Wait. Most of those people might say they want to work out, but they don't actually work out. They would rather relax and have a nice dinner."

So we focused on Generation X: They're educated about physical fitness, they're getting jobs and getting promotions, they're building a family. I understand them because I'm one of them.

Remember, we started out building gyms in suburban New Jersey. Our target audience could afford to pay more, but they loved to say, "You're paying $50 bucks. I'm paying $19.99. And my gym is better." That's our goal: Provide an exceptional value proposition.

Still, you have to keep costs down somewhere.
We do, but not where it touches the customer. For example, I was able to negotiate great deals with vendors because we were growing and scaling and they were smart enough to want to take that ride with us.

Real estate is also a key. One of my best assets is my real estate knowledge and ability to analyze demographics. Sam Walton used to fly over towns and look for steeples and schools. I couldn't afford a plane, so I drove around and sat in parking lots and watched and talked to everyone I could find.

The goal is to find a great location, one that's like being at the corner of Main and Main, yet still be able make a profit. Everything starts with making smart location and real estate decisions.

It also helped that you were willing to open facilities unlike what others built and in locations others wouldn't.
Early on I considered putting a facility in Manahawkin, New Jersey. People said I was crazy: It's a small town (but there was no competition) and everyone else was building 30,000 to 40,000 square foot facilities. Mine was going to be 10,000 square feet.

But it penciled really well. The math worked.

Everyone around me disagreed, including my partner at the time, and I almost walked away. I'm so glad I didn't because that gym catapulted us to success. It was so profitable I was able to hire people I couldn't have afforded, do things I couldn't have done--it really taught me how to operate and basically who to be. It's still a phenomenal gym.

In essence, I decided I would rather have three 10,000 square foot units than one 30,000 square foot unit. That decision made me think seriously about becoming a multi-gym owner and it made me think a lot bigger.

I assume you also offset the low cost of membership by selling additional services and products.
That's another problem in the fitness industry. A lot of gym owners want people to sign up for a membership and then never actually come to the gym.

As a gym owner I want you to come to my gym five times a week, because when you're there you might want a smoothie, tanning sessions, clothing, time with a personal trainer. If you're just sitting at home paying your membership we can't sell you anything. And eventually you'll stop paying your membership because you're not getting anything out of it.

We want members in the gym every day. One, that means they love working out and love our facilities. They'll be long-term customers. Two, that gives us the opportunity to meet even more of their needs.

I get that, but the problem with upselling or "further-selling," a goofy term I heard recently, is that it can be really, really irritating.
If I go to buy a tailored suit the salesperson will try to sell me shirts and ties and belts and everything he can because I may not be back for months. He gets one shot at me. He has to sell hard. I get that.

We see our customers all the time. We get to talk to them, hang out with them, see what they want and need, and then we can support those needs. It's much more seamless and natural. When you're close to your customers you can be what I call a "serviceman," not a salesman.

Say you often order a fat-burning shake at our smoothie bar. I know you're trying to lose weight, so I can recommend other weight loss products. If you often order muscle-building shakes I can hook you up with a personal trainer to make sure your workout regimen gives you the best shot at reaching your fitness goals.

When you frequently see your customers all you have to do is listen, pay attention, and provide the services they need. You don't have to push. You don't even have to ask.

They'll tell you what they need.

Check out other articles in this series: