Category: Money

Okay, let’s say you open a bakery.

You are now the proud owner and operator of Tralfaz Bakery.

Congratulations.

Which means that you went out found a location, bought equipment, hired some people, opened your doors and you are now in the baked goods business.

Now the first question is, how do you make your money? How does Tralfaz Bakery operate?

Well, it’s pretty straight forward. You produce income by selling baked goods to the public. And you do this by purchasing raw materials — flour, sugar, eggs — and then using those raw materials to make sellable goods — breads, cookies and cakes. You mark up these goods accordingly and when you sell them, you can not only cover your overhead and invest back into the business, but pay for more raw materials — to make more sellable goods.

Boom.

So, the business model for your bakery is clear and linear. The more goods you sell, the more money you make. And as long as this process is not interrupted, as long as your costs and your customer base don’t change, the bakery will continue on successfully.

Now, let’s say you get bored with Tralfaz Bakery. You sell it and buy Tralfaz Motors; a car dealership. Which means that you make a profit by selling new cars. True, but in order to sell those new cars, you take in customer’s old cars in trade and resell them. Then, you also make a profit on the extras you sell to the customer; extended warrantees, service plans and rust treatments. And, you make a profit on servicing and repairing the cars that you sell. And, you make a profit on the markup of the parts you stock to repair those cars.

Your business model is still clear — even though it has multiple income streams — and is still linear. You make money by selling cars, car repair and maintenance services.

Okay, last one. You wake up one morning and sell Tralfaz Motors and decide to open up — ta-da — Tralfaz Fitness, a full service health club.

So how do you make your money?

Well, if you own a health club that means that you went out and leased a building. You stocked it with exercise equipment for both cardio and strength training. You allocated safe areas for fitness classes, as well as shower and locker space for customers. You hired fitness professionals and you priced memberships to cover your costs and build in profit. Then — you determined how many guests you can support at that facility, as well as how many guests you need to come in just to cover your costs.

And as long as the customers keep coming in, as long as the number of members remains between the base number you need to cover costs and the maximum number you can service from that facility — you’ll continue on successfully.

And that is what we call — a lie.

That’s not how health clubs operate.

At all.

Not even a little bit.

Health clubs operate by selling long term memberships to people and — now here comes the good part — then incentivizing them to — never come in.

Ever.

A health club makes its money selling annuities – long term financial commitments that produce an ongoing income stream at a 100% profit margin. They sell air.

What? That’s ridiculous.

Okay, let’s look at a few things.

An average corporate gym has about 10,000 paid members. But only 2,000 of those members actually use the facility. One-fifth of the people that purchase these memberships — do not use them.

Planet Fitness — one of the biggest gym chains in the country — has facilities that can support around 300 members per site. Yet each site signs up in excess of —-  6,000 members per site.

Okay, but that’s not the gym’s fault. If people aren’t disciplined enough to keep coming, that’s just how people are.

Well, let’s see if that’s true. And we can do this by looking at how gym workers are incentivized? How do they make money? By the number of pounds the members loose? By the fitness success of the members? By how happy the customer base is?

Nope. By selling new memberships. In fact, almost all health club employees have a sales quota that they need to meet each month and the high employee turnaround is largely due to individuals who can’t meet these sales goals.

Here’s a fun one. Track the response you get when you walk in the gym and ask for information on joining. Then track the response when you walk in a week later and ask for a towel.

The employees are not incentivized to give you towels. Travis, your buddy who signed you up for that great three year deal, doesn’t even remember your name now. In fact, they are actually incentivized to make sure that you stop coming.

Look at what happens at a gym between the time you sign up and once you stop going. Let’s say you haven’t been there in a month. Two months. Four. What happens?

Well, that’s easy. Nothing happens. Nothing at all.

No calls. No email reminders. No encouragement to come back. Because they don’t want you to come back. If you do, you are wearing down their equipment, using their water and towels and cutting into the profit margin. But if you stay away — that’s pure profit.

And that’s what gyms really are; financial institutions. They sell these long term financial agreements to customers, then they go the bank and show the cash flow. In fact, these gyms then take all this financial billing and sell that to another company. So they aren’t even collecting your money. By the time you are out the door, your payment has been transferred to the finance company and the gym hopes you never come back.

In fact, these annuities are the entire structure of the business model of a health club. They have a solid cash flow based on the complicated and long term contracts with members, and they have no limit with the number of new members they can sign up. In fact, the only limitation is the demographic of the region where the gym is located. If it could, a health club that can support 300, would gladly take on 10,000 members or more.

Here is a quick test. Walk into your gym after you’ve signed up and gauge the response you get from the staff.

Then turnaround and walk into your bank and gauge the response you get from the staff. The bank will be all over you — good morning sir, how are we doing today? Is there anything else I can do for you? Thanks for banking with us.

Because you can leave your bank. But leaving your gym is a little more complicated. Not only are there serious fees and penalties for cancelling, but the structure itself is  designed to keep you ever from cancelling it.

Recently, I decided that I didn’t want to spend twenty dollars a month — along with that high yearly fee — for the right to carry the Club Fitness key tag around with me. So after years of membership, I called to cancel.

I was told that I could not cancel over the phone. I had to come in.

So I went in. But I was told that I had to cancel with a manager and had to come in when one was on duty.

So I went back when a manager was on duty. But the manager was tied up. So I made an appointment to meet with the manager the following week.

When I got there a week later, the manager was tied up again and I waited. But the manager was never free to meet with me.

So after about four months of this, I called and said that I could not catch a manager and needed to cancel my membership — immediately. I was told that if I mailed in a certified letter stating that I wanted to cancel, that would take care of everything.

So I wrote a letter and sent it in certified. A few weeks later, the sender receipt came back to me signed.

There. Done.

Then I noticed the next month that I was not only billed again — but had the yearly fee billed as well.

So I made a copy of the certified letter, drove down to the gym to meet with a manager — who of course, wasn’t there. I left the copy of the letter, with a message to call my cell phone — ASAP.

Three days later, since I did not hear back, I called and asked for a manager. She was tied up. After telling the person on the phone that I would stay on hold —- forever, she suddenly became free.

The manager looked up my account, saw that they certified letter came in, saw that it was processed and that it was filed. And — congratulations. Done. I had now successfully —- given my one month notice.

What?

Yes sir. When you signed up, you agreed to giving us a month written notice if you ever wanted to cancel. So after being billed next month, your membership will end.

So what does all this mean? That gyms are evil?

No. But it does mean that they are unethical. That their business model is deceptive and their practices are deigned to get us to pay for something that we don’t use.

It’s an illusion.

So what’s the answer?

Well, just because you go to a health club — doesn’t mean you’re healthy. And just because you don’t go to a health club — doesn’t mean you’re not.

You are in control of your health.

And your money.

So you need to determine what you are going to do — and no prepackaged health club membership can do that for you.