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Wednesday
May012013

Sunk Costs—Beware!

By Hossein Noshirvani

March 2, 1962; October 19, 1987; and April 15, 1912—three seemingly unrelated dates that have a lot to do with the health and wellness industry.

I warn you, before you read any further, make sure you have a pocket full of bread crumbs because you’re going to need some help returning home on the winding road that’s my mind. Along the way, we’ll touch on economics, history, and, for good measure, philosophy.

© intheskies - Fotolia.comFirst, let’s talk about the dates:

• March 2, 1962—The day that Wilt Chamberlain sunk so many baskets, scoring 100 points in a single game.

• October 19, 1987—Better known as Black Monday, the day the stock market sunk 508 points, losing 22.61% of its value.

• April 15, 1912—The day that the Titanic sunk.

So, if you haven’t figured it out by now, this blog is about things that sunk.

What do the preceding historical examples have to do with our industry?

Simple. To open a gym, you need capital. Money, dollars, clams, dough, ducats, greenbacks, moola—whatever you call it, you need it. Because to open a facility—whether it’s a commercial gym, a hospital wellness facility, or a university rec center—you have to find the space, do the build-out, and buy the equipment to stock it.

In economic parlance, launching a serious fitness business has a high sunk cost!

So, without channeling my inner Adam Smith, or Alan Greenspan, or Scrooge McDuck, what does all this mean? To open a gym, requires a butt load of money upfront. (By the way, a butt load is an actual unit of measurement used to measure wine and other alcoholic beverages—specifically, 126 gallons … but I digress.)

Once you’ve got your club, there’s no real incremental cost for each new member you bring on. I mean, once you’ve got the space, and the equipment, and the staff, there’s no difference between having five members or six members. (Eventually, this isn’t the case, but let’s not worry about that right now).

© araraadt - Fotolia.comSo your job is to grow your member roll as quickly as possible so you can recoup your investment. Your goal is clear. Every decision you make is thoughtful and smart. And once you hit the magic number—let’s say it’s 500 members, each paying $25 a month—every membership you sell above that (501, 502, 503, etc.) is nearly 100% pure profit.

And that, unfortunately, is when bad decisions start being made. It’s odd really. After struggling, and scratching, and watching every penny that goes in or out, when you actually start making some money for yourselves, that, surprisingly, is when logic and good decision-making go bye-bye.

So, with that said, I’ve compiled a list of things that owners and operators should be doing, should be asking themselves, and should be keeping in mind.

Warranties matter. We’re not talking about undercoating for a car (we all know that’s a scam). When it comes to equipment, know and track your warranties. It can save you money, and, when the time comes to upgrade, the expense involved in having done so will pay for itself. You aren’t buying a loaf of bread for $2.99. You need to understand what it costs to keep the equipment.

Preventative medicine isn’t just for people. In a commercial setting, things break. Given the amount of wear and tear they endure, that’s to be expected. So be smart and put a system in place to keep your maintenance current. When a break occurs, track it. There are a number of systems out there that can help; Fitness EMS and Club Vitals are two that come to mind immediately.

Free—Nothing is free. Ever. Free is going to cost you … maybe not today, maybe not tomorrow, but eventually. And it’s going to cost you a butt load more than if you’d paid for it in the first place.

Learn to fish, because buying fish can get expensive. One of the scariest trends I’ve noticed is the outsourcing of everything. If you got into business because you didn’t want to have to do any of the real work or ever get dirty, then don’t be surprised when, at the end of the month, there’s no money left over for you.

Whether it’s replacing a deck on a treadmill, or calling a member to collect an overdue balance, if you want to maximize your profits, you or your staff—need to do the work. Can you imagine opening a restaurant, serving people meals, and, when the time comes for them to pay the bill, bringing in an outside firm to collect the cash? No, but that sort of practice has become commonplace in our industry.

• Total cost of ownership (TCO) should always be top of mind. You got into business to create long-term value, so every decision should include an analysis of long-term expenses. Among the many smart things that George Pappas, the COO of our company, George Pappas, has said is, “Long after they forget the price, they’ll remember the value.”

And last, but certainly not least …

• Your members are your most valuable asset. Every time you communicate with them, whether by phone, e-mail, text, or carrier pigeon—make it count. You can spend years building a relationship, but one bad experience can jeopardize all of your efforts—particularly today, when your members can walk across the street to another gym.

Let me be clear, I’m not advocating being a control freak—far from it. But when it comes to making decisions, think long-term. And when it comes to communicating with members, be thoughtful about who should deliver the message and how they should do so. In a competitive environment, one in which consumers have lots of choices, don’t leave anything to hope or chance.

If you consider these things, you’ll make a butt load of money.

- Hossein Noshirvani is the cofounder and executive vice president of Motionsoft, Inc., and can be reached at hnoshirvani@motionsoft.net.

Reader Comments (1)

Hossein, Well Stated! - Jay
May 16, 2013 | Unregistered CommenterJay Ablondi

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