How to Escape the Commodity Trap
Stephen Tharrett and James A. Peterson
The commoditization modelThe commoditization model is built on the concept that by mass producing products and services at a low cost and making them easily accessible to consumers at a relatively low price, a business can gain significant market share and eventually considerable profit. Furthermore, the more efficient a company’s level of mass production, the lower its production costs, and the lower the resulting price point for the consumer.
Over time, however, the competitive forces inherent in the commoditization process cause the commodities within a particular market segment to look the same, with the only notable differentiation factor being price. In turn, price becomes the means by which a product or service is differentiated, and low price becomes the primary market differentiator. Typically, a commodity-based industry evolves to a point where it is characterized by several attributes, including the consolidation of the industry into a few dominant players; the closing of many small and medium-sized businesses; an overall lack of growth and profitability for the remaining businesses in the industry, including the dominant players; and a lack of choice for consumers. Eventually, a commodity-based industry will not flourish unless a portion of that industry moves toward another business paradigm — an experience-based model that establishes a new value equation for the consumer and creates market differentiation based on some factor other than price.
Over the past 30 years, the fitness facility industry has evolved from being a small-business, entrepreneurial-based model, into an industry that is being driven by the forces of a commodity-based economic model. Just 15 years ago, only a handful of club companies existed that could legitimately be called commodity-based (such as Bally’s and 24 Hour Fitness). In 2005, nearly 50 percent of the fitness club industry was competing on a commodity platform. In addition to Bally’s and 24 Hour Fitness, companies such as LA Fitness, Lifetime Fitness, Town Sports International, Gold’s Gym, Curves, X-Sport Fitness, Spectrum Clubs and Planet Fitness, among others, are competing in the commodity arena. Even on an international level, companies such as Fitness First and LA Fitness, for example, compete on a commodity platform.
Inherently, nothing is wrong with this approach, except for the previously detailed scenario that having too many companies competing on the same platform can eventually result in a confluence of circumstances, such as discounts, price wars, overcrowding, consolidation, a lack of consumer choices and a stagnant industry. Inevitably, if that situation occurs, numerous fitness center operators will go out of business. On the other hand, in recent years, the industry has experienced many of the upsides of a commodity platform, for example, Lifetime Fitness’ successful IPO, the sale of 24 Hour Fitness for approximately $1.5 billion, the sale of Fitness First for close to $1.5 billion, the sale of Equinox for approximately $500 million, the explosive growth of Curves, and the continued growth of regional players such as X-Sport, TSI and Lifestyle Family Fitness.
However, the industry is also beginning to experience some of the downsides of a commodity-based approach; for example, zero initiation fees, dues of $19 to $39 a month, buy-one-get-one-free promotions, overcrowding of facilities, membership cannibalism between competitors and stagnant growth in membership industry-wide. Such symptoms of commoditization are causing some significant problems in the industry, including many small, independent clubs either closing or having to sell to the big players at lower than desired multiples; consolidation and creation of even more dominant players; financial difficulties and discounted sales for companies that once prospered; and an oversupply of fitness centers in the marketplace. This often results in a loss in membership growth, profit margins and profitability for everyone.
At present, the industry faces a challenge that can either become an incredible opportunity for growth or a confounding barrier to it. In response, the industry should foster an environment in which fitness centers offer a new business model that is different than the traditional commodity platform. For this scenario to occur, independent and entrepreneurial operators must begin moving toward an experienced-based model of doing business — one that will allow for considerable market differentiation that will open up the industry to a larger audience of consumers. As a consequence, fitness facilities will be established that compete on their ability to create a uniquely personal experience, rather than on the cost of a membership. In this situation, value will not be driven by price, but by the ability of the consumer to receive a personal and enriching experience. The end result will be more choices for the consumer, and more members and profit for every segment of the industry.
That said, there are six steps that can help to build an experience-based fitness center.
Establish a themeOne possible measure a facility can undertake to evolve into an experienced-based fitness center is to establish a theme, whether it is a single unifying theme for its collective self or a series of themes for the programs and services the facility offers. For example, an owner/manager might consider having a unifying theme built around a relaxing, non-intimidating environment, or instituting a theme that centers on the facility being the community resource for fitness and wellness.
A fitness center benefits by having a theme that ties together its programs, services, people and facilities so its membership clearly senses the theme. Exhale, New York, N.Y., a successful group of facilities founded and managed by Annbeth Eschbach, features a theme that is based on the mind and body. Collectively, the facilities, programs and experiences that members receive in Exhale support and reflect that particular theme. Another organization that does an exceptional job with employing a theme is Western Athletic Clubs in California. Using a sport resort-oriented theme, Western Athletic Clubs create an onsite encounter that enables all members to feel that they are at a resort.
Produce and direct an ‘act’Producing and directing an “act” for your fitness center involves creating a script for the experience that you want your members to perceive. In essence, look at your facility as a stage, your equipment and programs as props, and your staff as actors. Take the script and have your staff act it out, using your facilities, equipment and programs as the key instruments to help establish the desired member environment. Back in the early days of Crunch, Doug Levine did just that. Crunch facilities had a theme that was perceived as irreverent and non-judgmental. When a member entered a Crunch facility, the design, signage, program descriptions, attire of the staff, and interactions between employees and staff all spoke clearly to this theme.
Make it transformationalAccording to Joseph Pine II and James Gilmore in their book The Experience Economy, transformation represents a personalized experience. In essence, the primary goal of a fitness center that adopts the transformation alternative creates unique experiences for each member, rather than one overriding experience for everyone. To create transformations, a club’s staff needs to know the facility’s members well enough to be able to create memorable experiences that are perceived as uniquely personal by each member. Such knowledge involves knowing more than just each member’s name. The staff must also know the personal interests and participation patterns of the members.
This transformational approach requires a commitment to two-way interaction between the members and staff. The underpinning of this process is all about building and sustaining relationships. Larry North Fitness Clubs in Dallas, Texas, is an excellent example of an organization that pursues a transformational strategy. Staff members at Larry North Fitness Clubs take the time to learn about the members and what their goals are. They then do whatever they can to help each member reach those goals. Clearly, these staff members are focused on creating transformational experiences for their members.
Make staff the differentiatorTo create positive experiences, your staff members should be part of what makes your facility different in a meaningful way. In fitness centers where people are the differentiating factor, the quality of the staff and the ratio of these quality people to members are essential. The key point is that people form relationships, which are the foundation for a strong economic platform. Lord Burleigh once remarked, “Win hearts and you have hands and purses.” Lord Burleigh’s point has a relatively straightforward application for the fitness industry: When a fitness facility has great relationships with people, its members are far more likely to extend their support and spend their dollars. In addition, fitness centers that care about their employees invest in their employees and allow them to take a sense of ownership in creating a positive club experience. This experience provides the fitness center with a distinct competitive advantage that can allow it to overcome the imminent forces of a commodity-based market.
Community involvementOne of the most meaningful steps a fitness facility can take to create relevant experiences for its members is to establish an environment where members see the fitness center not as a facility, but as an actual member of the community. When prospects and members view a fitness center as part of the community, they tend to perceive a connection that they don’t discern from a commodity player. This perception of connection is essential, given that research clearly shows that individuals are far more loyal to a relationship, even a perceived one, than they are to a commodity. In this regard, health/fitness organizations such as the East Bank Club in Chicago, Reds in Lafayette, La., Healthworks in the greater Boston, Mass., area, and the Atlantic Coast Athletic Clubs that are headquartered in Charlottesville, Va., are all viewed by their members as important entities of their respective communities.
Dare to be differentIt is relatively easy for a fitness center to do what almost every other facility does, whether it’s to have the same brand of equipment, offer the same packaged group exercise classes, provide the same personal training packages, etc. Unfortunately, sameness is the foundation for becoming a commodity. Why not have performance coaches instead of personal trainers? Why not offer personal training packages based on functional needs rather than on the number of sessions? Why not designate group programs as social group exercise programs instead of as group exercise classes? Why not have performance agreements with members so that they can see your desire to work with them in achieving a goal? The list of ways that you can expand the envelope on how to deal with members is almost endless. The key point is that you need to challenge the status quo if you are to break out of the commodity trap. Clubs such as Zoom in Frisco, Texas, and Bodies in Motion in Century City, Calif., are two organizations that dare to be at least a little bit different and, in doing so, are establishing a successful niche for themselves in the industry. While many more possible measures exist to convert to an experience model, the aforementioned action steps represent a legitimate start to the desired process of change. Not every facility can or should move in this direction; however, those fitness centers that make the decision to change will find that they are entering into a business model where value is not based on price, but rather on the experience. When this situation occurs, facilities will be able to command a price schedule for services and offerings that requires no discounting or fire sales — one that, instead, makes a positive statement about the rightful place of your fitness center in the marketplace.
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