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Leisure Management - A new way of buying

Market analysis

A new way of buying

In the first of a two-part series, Stephen Tharrett and Mark Williamson of ClubIntel investigate the influence of internet middlemen in the fitness industry

A new way of buying
Cycling is one of the most popular classes among ClassPass users PHOTOS: SHUTTERSTOCK.COM
Consider only offering your less popular classes to non-members PHOTOS: SHUTTERSTOCK.COM
The prices charged by Dibs vary according to how popular the class is PHOTOS: SHUTTERSTOCK.COM

Back in the mid-1940s, renowned economist and author Joseph Schumpeter said: “Situations emerge in the process of creative destruction in which many firms have to perish that nevertheless would be able to live on vigorously and usefully if they could weather a particular storm.”

Fast forward 70 years and his words could not ring truer. Today’s business world has been turned on its head by the newest capitalistic storm: internet middlemen. From food delivery (think GrubHub in the US and Just Eat in the UK) to dining (Open Table), lodging (Airbnb) to massage (Soothe, Zeel), ride sharing (Uber, Lyft) to fast cash delivery (Nimbl) and fitness facility access (ClassPass and Wildfire, to name just two), internet middlemen have changed the way consumers shop and buyers sell.

It’s a storm that’s driving many traditional businesses to the brink of extinction while making millionaires of the middlemen innovators. So how do these middlemen operate, and how should the fitness sector respond?

What sort of relationship?
An internet middleman is a business that leverages the internet and worldwide web to offer consumers attractive alternatives to traditional shopping experiences. A good internet middleman provides added value the traditional producer can’t provide and offers a service the consumer desires. For example, Airbnb offers homeowners a virtual platform to market and rent their properties, while also offering the sort of convenient and cost-effective means of reserving lodging that today’s consumers are craving.

But with the emergence and evolution of internet middlemen comes the billion-dollar question: When is the business relationship between seller, middleman and buyer a symbiotic one that lifts all parties, and when does that relationship become parasitic or even cannibalistic, potentially wiping out a business or even an entire industry?

How is your relationship?
Symbiotic relationships:
In this relationship, the internet middleman brings added value to the seller’s proposition while also helping the seller tap a new source of revenues. The buyer receives something they want, such as greater convenience or a lower price. The middleman benefits by growing its business and generating a profit. A great example of this would be Instacart, which has Whole Foods as a client. Consumers benefit by being able to purchase Whole Foods groceries online and get same-day delivery without leaving their home. Whole Foods benefits by reaching a new audience, driving incremental revenue at little to no extra cost. Instacart earns revenue by marking up the food price to consumers and by charging consumers a nominal fee. Everyone wins.

Parasitic relationships:
In this relationship, the consumer and middleman tend to benefit while the seller may or may not.

For example, Just Eat, GrubHub and Seamless (note that GrubHub and Seamless are two distinct brands owned by one entity) benefit the consumer by allowing them to order home-delivery food from a variety of restaurants – there’s more choice and added convenience for the consumer. Each of the aforementioned middlemen benefits by receiving a commission that ranges from 12–14 per cent of the sale. The seller benefits from new incremental sales, but may not generate incremental profit because of the commission paid.

If the restaurant fails to account for the commission in its marginal costs, it could actually lose money on the sale. If the restaurant’s profit margin exceeds the cost of the commission paid to the middleman, it’s a symbiotic relationship; if the commission exceeds the profit margin, it becomes a parasitic relationship.

Cannibalistic relationships:
This relationship is an example of Schumpeter’s “creative destruction”, where new and innovative business models make it impossible for some businesses to survive. In cannibalistic relationships, one party loses out while the other parties benefit.

Take Uber for example. The consumer wins through lower prices and greater convenience. Uber wins by generating revenues and profit. Existing car transportation businesses lose because they’re at a competitive disadvantage (due to higher operating costs and government taxes, and being less convenient).

This of course is capitalism at its finest, but for those whose industry is imperilled it may not seem that way.

The fitness middlemen
The health and fitness industry now finds itself immersed in a digital middleman economy – a stampede that has been led by ClassPass (classpass.com) and then followed by newcomers such as Wildfire (wildfire.life), Dibs (ondibs.com) and FitReserve (fitreserve.com).

In the recently released 2015 International Fitness Industry Trend Report: What’s All the Rage – conducted by the American Council on Exercise (ACE), IHRSA and ClubIntel (see HCM Oct 15, p78) – approximately 8 per cent of all fitness businesses surveyed said they participated in an internet middleman-driven programme, up from 3 per cent in 2013. This same report showed that 19 per cent of boutique fitness studios engaged in such a programme, and 13 per cent of traditional commercial health clubs. Other operators – such as non-profits, private clubs and so on – registered lower uptake.

The market leader, and the first to really introduce the fitness industry to the digital middleman phenomenon, is US-based ClassPass, which was originally branded as Classtivity.

ClassPass allows fitness consumers to purchase a subscription (membership) that gives them the opportunity to engage in unlimited fitness classes or gym visits at over 3,000 studios around the globe for between US$79 and US$125 a month (price varies by market, but is US$99 in most); the only caveat for the consumer is that they’re limited to three visits to any one studio or club during the course of a month.

Users simply go online and reserve a spot in a class at any participating club or studio in their market, from barre to cycling, dance to HIIT, pilates to yoga.

ClassPass currently has over 3,000 studios and clubs enrolled in its network in over 33 markets, including the US, Canada and the UK. Just this past April, it acquired competitor FitMob to further extend its reach. According to an article on techcrunch.com in February 2015, ClassPass is booking over 1.5 million reservations a month. Those numbers are likely to grow significantly as it pursues its goal of being in at least 100 markets in the next year.

According to the recently completed 2015 Fitness Studio Operating and Financial Benchmarking Report conducted by the Association of Fitness Studios (AFS), approximately 13.5 per cent of studios participate in ClassPass.

New kids on the block
Since ClassPass first entered the market, more start-up internet middlemen have entered the fray in the US market. The first of these is a company based in San Diego, originally called FitN and since rebranded as Wildfire.

Wildfire is similar to ClassPass in that it offers fitness consumers a monthly membership subscription that allows them to register for classes at partner studios and clubs (over 300 partners and 12,000 classes in the San Diego, Orange County and Los Angles markets) for US$149 a month. Like ClassPass, the consumer benefits from gaining access to a great variety of clubs at price points below the going market rate.

Wildfire’s value proposition differs from that of ClassPass and others in a few ways. First, justifying its higher monthly fee, consumers are not limited to three classes or visits per month per studio, and instead have unlimited access to classes at any partner studios. Second, Wildfire has been designed specifically for a mobile platform. Third, Wildfire contributes a portion of each customer’s membership fees to the Boys’ and Girls’ Clubs of Southern California, to support efforts to improve the health of young people.

The second entrant to the fitness internet middleman market is New York-based FitReserve, which launched in autumn 2014. Like ClassPass and Wildfire, FitReserve offers a monthly subscription that allows consumers to register for over 13,000 classes at approximately 190 studios throughout New York City.

However, there are some differences versus the other middlemen. FitReserve allows consumers to visit each of its partner studios up to four times per month, and members also have access to a studio’s entire schedule – there are no ‘blacked out’ classes as there can be on other platforms like ClassPass. It also offers its members additional benefits – such as discounts – through partnerships with other internet-based middlemen such as Uber and Zeel.

In addition, there are three different levels of FitReserve membership: five classes a month (US$79); 10 classes a month (US$149); and 20 classes a month (US$249). These rates are designed to be more in-line with the pricing offered by the studios themselves, thereby supporting the studios’ value proposition – although the FitReserve consumer still gets a significant discount on the cost of an individual class or session compared to purchasing directly from a studio or club (from 25 per cent to over 50 per cent).

The third entrant to the fitness internet middleman market is a company called Dibs. Dibs’ value proposition is more closely modelled on platforms such as Open Table for restaurants, and to some extent many of the hotel booking platforms. The Dibs platform is described as a B2B (business to business) platform with a consumer-facing value proposition that leverages real-time dynamic pricing – a principle used by airlines and hotels. The platform allows individual boutiques to establish their minimum and maximum price points, and then uses sophisticated algorithms to offer consumers real-time prices based on the studio’s / club’s supply and demand dynamics: if the demand is high and supply is low, the price goes up; if the demand is low and supply is high, the price drops.

The Dibs platform does not offer a subscription model: consumers can only purchase one class at a time. This, combined with the dynamic pricing – which can mean consumers actually pay a premium on the usual price for high demand classes – is designed to maximise value capture for the studios and prevent the platform from becoming a competitor.

Dibs generates revenue by taking a percentage of the fee that the studio earns from each registration, similar to GrubHub and Just Eat in the restaurant segment. From the consumers’ perspective, Dibs will allow them to book a class at any of their partner studios with the understanding that they will pay a price based on the studio’s price parameters and supply and demand dynamics. To gain access to the most popular classes, consumers will pay more; for less popular classes they will pay less – think airlines’ capacity and load models.

Weighing it up
But all that glitters may not be gold: each of the middleman business models brings different considerations for the operator.

ClassPass probably drives the most traffic, but also generates the lowest value capture and would be the most likely to drive a studio’s clients to switch. Fit Reserve and Wildfire may not drive as much traffic as ClassPass due to their market presence, and might be less likely to cause clients to switch due to their higher price points. They also bring slightly more revenue per guest than ClassPass – but that’s balanced by the fact that they probably drive slightly less traffic. All three are subscription models, so will ultimately compete with studios when it comes to conversion.

Dibs would bring studios the highest price point and most value capture, and since it isn’t a subscription model it doesn’t compete with the studio. Due to the dynamic pricing, it’s likely to allow the highest conversion. What’s unknown is whether it will drive the same levels of traffic, as its price point can potentially be higher than the studio’s own list prices.

We’ll explore this in more detail in the next edition of HCM (January 2016), looking in depth at the ClassPass model.

For now, however, the crux of the argument is this: while the middlemen’s delivery against the consumer promise of convenience, flexibility and value is unquestionable, it’s less certain whether partner businesses benefit – and indeed a number of operators are beginning to look at wrestling some of the power back from the middlemen.

For studios that are struggling to fill classes, or for new start-ups with limited marketing budget that want to get their name out there, internet middlemen can offer benefits, certainly in the short-term. However for established operators – unless strict parameters are applied to their relationship with the middlemen – the risk of undermining their own business by cutting profitability, undermining perceived brand value and introducing the risk of loyal customers switching to the middlemen is very real.

Make it work for you
When comes to the fitness studio market, internet middlemen are here to stay. So how do operators make sure they secure symbiotic relationships with these middlemen? Here are our five tips:

1 Don’t devalue your brand by discounting too deeply – that is, don’t accept a 50–60 per cent discount. Negotiate for a price that reflects your studio/club’s value to the consumer. Remember, these internet middlemen need your studio or club to enhance their value proposition, so take a tough stance and be prepared to negotiate for more. Even a few dollars more per class can make a significant difference. The more studios/clubs under your umbrella, the more negotiating power you have.

By way of example, in video gaming the digital platforms get 30 per cent and the developer/publisher gets 70 per cent. Massage internet middleman Soothe takes 30 per cent of revenues and gives the remaining 70 per cent to the massage therapist. While neither is ideal, it’s certainly better than what’s currently being offered by the middlemen players in today’s fitness market.

In the restaurant business, the internet middlemen take a percentage of revenues – in some cases as much as 14 per cent – but even in these instances, the restaurants control the pricing. As the seller, you’re incurring all the risk and all the cost, so make it worth your while.

2 Protect your existing client base. Your clients are paying fair market price to engage with your studio or club. They shouldn’t be shoved out to accommodate a lower paying guest who has no intention of becoming a member or regular client. This means that, if you have classes with high member occupancy levels (greater than 80 per cent), you shouldn’t open them up to low paying guests. However, it should be noted that some of the internet middlemen don’t want you to ‘black out’ classes.

Take, for example, a yoga studio we spoke to that was getting 75 per cent of its visits from ClassPass. In essence, the ClassPass guests were pushing out the regular clients. Furthermore, make sure you provide more for your members and regular clients than you do for the internet middleman guests, such as making sure the members get the top instructors, the most convenient times, the signature classes, the best music and the most care. If you do this, you’re likely to lessen the chance of your regular clients switching to become middleman users, and with it avoid sacrificing high margin business for low margin business.

3 Limit your offerings. If you look at these internet middlemen services from a yield management perspective (what airlines and hotels do with seats and rooms), then you can lessen the parasitic elements of the relationship and garner greater benefit for your business.

Limit these guests to classes with low occupancy percentages (below 50 per cent occupancy). If offering gym time, limit the hours they can access the gym. Note however that one studio told us that, when it limited the classes that ClassPass guests could use, the guests tended to leave negative online reviews.

If all your classes have occupancy levels under 50 per cent, then you have an entirely different set of issues to address and ClassPass or other internet middlemen might be what you need.

Make sure any classes you are opening up to internet-driven guests are at times that are unappealing to your existing client base. You might even consider creating a few classes you know members will never visit, and using these as your offering for internet-driven guests. However, note that certain middlemen require that classes on your schedule be made available to their members.

And manage the process. Monitor usage and occupancy on a daily basis so you know when the guest traffic may be interfering with your clients’ experience. We refer to this management process as yield management.

4 Create a conversion incentive. If you want more visitors to convert to your studio or club, then find an incentive that shows it’s better value to be a regular client than a temporary visitor. This involves demonstrating the benefits of being part of your community – access to best instructors, best classes and so on – rather than a transient visitor. Remember that these internet-driven guests will pass through your door a limited number of times in a month, so you need to capture their heart and feet at the onset. As Tom Cruise pulled off in the movie Jerry McGuire, you have to get them at ‘hello’.

5 Monitor switching behaviour. One of the dangers that comes with any internet middleman service is the possibility of existing clients, even the loyal ones, abandoning you for the middleman. If they can get what they perceive to be an equivalent offering for half the price, they will switch. Those who are at the highest risk of switching are infrequent users (less than twice a week), the quiet ones and those you don’t have as much personal contact with. It’s critical that you monitor usage and identify the high-risk clients and reach out to them. Don’t give them a reason to abandon you.

Learn from the present
What happens in the future is anyone’s guess. With new internet middlemen emerging on the health and fitness scene, it will place pressure on all of them to create value propositions that foster symbiotic relationships and bring value and profit to all the players.

Not only will internet middlemen need to reconsider their value proposition, but studio and club operators will need to get considerably wiser in how they negotiate and work with these middlemen.

About the authors

Stephen Tharrett and Mark Williamson are the co-founders of brand insights and member experience firm ClubIntel (club-intel.com). Together they have over 50 years’ experience in the club and hospitality business.

Stephen was formerly CEO of the Russian Fitness Group, senior vice president of ClubCorp and president of IHRSA. Mark has been a VP of market research, consumer insights and employee insights for ClubCorp, Match.com, Brinker International and Applebee’s. They can be reached at [email protected]and [email protected]

A complimentary abbreviated version of the AFS report is available from ClubIntel.


Mark Williamson (left) and Stephen Tharrett

Originally published in Health Club Management 2015 issue 11
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