Posted January 22, 2016

Free Market Economics and the Fitness Industry Evolution

Yesterday I had to bring my car into the shop to get some work done and found out they would have to keep it overnight to get everything done. As a result of this, I decided I should rent a car to be able to run some errands and go to and from work tomorrow. The car rental place is downtown, so I decided to take my first ever Uber ride to get there.

For those who don’t know, Uber is a ride sharing company which is essentially taking over the world due to the simplicity of their app, speed of driver appearance, and ease of operation within the system. It’s no coincidence that cab drivers are ticked because they fear this will cause some serious competition.

And they’re right to fear it, as long as they keep their business model as it is.

Yesterday Edmonton passed bylaw legislation to recognize ride sharing programs like Uber to be operated legally in the city, making it the first Canadian city to do so. After taking a ride with them, it’s easy to see how they became so popular. You open the app, say where you are and where you want to go, and you can see the car that will come to get you as well as how long of a wait you have. The fare is displayed ahead of time, and you don’t have to exchange money with the driver. It’s amazingly simple and a great use of existing technology.

The city could have easily just said screw it and blocked Uber from becoming a legal ride for hire organization in Edmonton, but as Matt Ridley in The Evolution of Everything: How New Ideas Emerge pointed out, any time state actions have tried to control free market competition it inevitably doesn’t work and ties up more resources than it’s worth. The market tends to find a way based on the desires of the customers, what they value and how they choose to spend their money.

This is one example of an evolutionary model of commerce. There’s thousands of others. You could look at a company like Blockbuster and how they couldn’t adapt to the changing world of streaming video services to see that consumer desires dictate progress. Blockbuster could have given away 10 rentals for a penny and still wouldn’t have matched one full-price movie through a streaming service in terms of usage, because the service was outdated.

Blockbuster had a net worth in 1996 of over $5 billion, and as of only 2010 that had dwindled to only $37 million. By April, 2011 the company and it’s holdings were purchased by Dish networks for only $233 million, and also assumed over $87 million in liabilities. That’s a lot of late rental fees left uncollected.

Along the same lines, you can see how music delivery services have had to change over time as well. When I was in high school and university, pirated music was starting to be massive, meaning things like Napster and Limewire garnered a LOT of attention from the music industry and law enforcement and were eventually shut down for violating copyright laws. This was a loud message to music producers though, as it showed that simply making records with one or two hit songs and a bunch of “others” being sold for $20 might become obsolete if an end user could just log on to their computer and download the one song they wanted. And especially if they could do that for free.

In time, this concept gave way to downloadable services like iTunes, which became even more popular when a device was made to play all of these downloaded songs: the iPod. This replaced the Discman and before that the Walkman as the desired choice for music listening on the go.

But in time even iTunes has become subject to evolution with streaming music services offering payments per month, not per song, and allowing users to access the entire world of music in high quality and without commercial interruptions. Services like Spotify and iMusic have captured a massive segment of the music access industry, and direct sales of CDs have plummeted in the past decade. Founded in Stockhom, Sweden, a net worth of over $1 Billion, and still a private company, Spotify is one example of giving consumers what they want and reaping the benefits from it.

While invention is cool, there’s still a need for basic things that have always been around. One example is a part for a car, or even something as simple as a broom. If you deal in commodities, you are subject to price competition in a way that’s different than if you provide an entirely differentiated service than anyone else can offer. If you and I each sell the same broom, but I sell it for $5 and someone else sells it for $8, they’ll probably buy my $5 broom, causing my competitor to either lower their pricing to match or to upgrade their broom to meet the value they’re requiring.

This assumes the commodity has no specialized valuation in the eyes of the individual looking to buy them. For instance, if my broom is just a broom, but my competitor has found a way to get a very popular celebrity to say their broom is so much better than anything else, is someone likes that celebrity they’ll likely buy the $8 broom even though it’s absolutely no different than the $5 one.

While this may sound far-fetched, it happens all the time. Think about this: what’s the most and the least you’ve ever paid for a t-shirt?

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My personal range is $5 at the low end and $245 at the high end. I’ve seen t-shirts that have sold for over $1000, and I’m sure someone out there will gladly lap up that cost to wear something that likely can’t be put into the regular laundry.

What is the difference between a $5 t-shirt and a $1000 t-shirt? I’m sure there’s something, but I’ll be damned if I know what it is, and it’s likely not going to be something to justify a 200 times price difference.

With that being said, another example of this valuation is the price of airfare for different cabins on the same plane. An economy seat can cost 10% of what a first class seat on the exact same plane going to the exact same destination would be, and doesn’t get you there any faster or help you experience any less turbulence. The main benefits to this difference in cabins is a plated meal with actual cutlery (no plastic sporks in sight), alcohol, and slightly larger seats. Some of the other things that could tip the benefits would be a free checked bag, on very long flights you can essentially have a pod that can turn into a bed, and in some cases First Class Cabins can rival some New York apartments for square footage, and cost as much as my first mortgage for a round trip ticket.

Does this make it worthwhile to spend 10 times or even 100 times as much as someone in economy to get to the same place at the same time? In some people’s eyes, yes.

This range is in response to consumers looking to spend money. Some people will absolutely balk at spending more than $10 on an item of clothing, and some won’t bat an eye at spending the equivalent of a small car on an accessory, meaning there had to be market developments to cater to both of these customers effectively.

Along the concepts of value you could look at the housing bubble of 2008 and how the market began to collapse following sub-prime mortgages where people were able to purchase extremely high cost houses for low mortgage payments, but then when the balloon payment came due that no one cared to discuss when they signed the agreements, suddenly a massive chunk of homeowners began to default on their mortgages and had to go to foreclosure. The sudden influx of supply into markets, often at lower than market prices by banks looking to recoup their losses, began to drag down the costs of housing in some key areas, and would eventually decimate housing in some regions entirely.

This collapse of the housing market predicated the recession of 2008 and lead to a near world-wide economic slow down,  causing US housing prices to plummet by 30% within the year. This was all based on value, not necessarily costs of production of the houses. A massive supply of lower valued houses and no demand from purchasers meant the prices continued to fall.

The big takeaway from these examples is that customers have chosen who they want to spend their money with, and what levels of service or experiences they want to spend their money on. No government influences or marketing ploy worked to push a service to the market that didn’t live up to the expectations in the consumers eyes, and in events where there was a groundswell of activity for a product that didn’t warrant it, the reaction quickly died. Just ask anyone with a Tickle Me Elmo how they feel after that whole debacle.

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Fads quickly fade when people stop seeing value in them. The fitness industry is no exception to this. There are a ton of examples we could use to look at concepts that sounded cool but didn’t pan out, and there’s going to be a lot more to come as well.

One of the emerging concepts is the use of technology to replicate the coaching experience. Wii Fit tried to do this a while ago where they had a fitness program that involved visual recognition within the computer and then provided feedback to help you get more from the workout. It was definitely a step up from just being told what to do on a video or DVD, but it didn’t create any massive evolutionary change.

There’s also a litany of coaching programs, apps, and even a section on Youtube devoted to coaching videos where a user can access them for free, and follow along as they will. Again, while these are solutions that do seem to be effective at delivering a coaching experience of sorts, they’re not making the industry shift in a new direction just yet.

Moore’s Law is an observation that technology tends to double every 18 months. What this means is that if you buy a computer with 256 GB of RAm today for $1000, in 18 months you’ll likely be able to get a computer with 512 GB of RAM for roughly the same cost. While not absolute, it’s generally consistent. We could say this goes for fitness technology and the adaptation of the experience a user could have, meaning what these technologies provide now will be massively different in 18 months and again in 3 years.

Likewise, in terms of getting a program that will help you get fit, train for a specific sport, or become the next Instagram sensation, there’s again no shortage of these, and many can be picked up for free or for a very low cost. This hasn’t stopped people from looking to real live humans to still take them through an assessment and give them a program designed for them, or from attending group classes like Crossfit or bootcamps where the workouts may not have any semblance of individualization, but operate in a group coaching scenario.

There doesn’t seem to be much that can outsource a coaching experience in terms of quality or technical automation. Essentially, this is like comparing a broom to having someone come over and clean your house for you. They’re two completely different types of service offerings. I don’t doubt there will eventually be a method of using artificial intelligence to adequately offer immediate feedback on performance in a meaningful manner with a program that was developed specifically for the individual involved, but it’s not there yet.

Because of this experience delivery, coaching seems to be able to generate a higher cost of service to deliver the program, coach the execution and provide an experience that isn’t available through an outsources or technological means as of yet. There’s also the perceived value in the eyes of the customer in terms of what that service is worth, with some individuals charging very high rates and others barely getting by.

Some “celebrity” trainers who have a lot of mainstream recognition can generate very high fees in relation to the industry average. The individuals I would think of in this case would be people like Gunnar Peterson, Harley Pasternak, Dan Saladino, Jeff Halevy, Joe Dowdell, Jillian Michaels, and Valerie Waters. I don’t know exactly what any of them charge for their services, but I am assuming it’s in the hundreds per session, whereas the average rate is roughly $40-60 per session, and in a semi-private or large group session it could be anything.

A big reason they’re able to charge these fees is because of not only years of experience, but massive value in the eyes of their clients. If someone has worked with pro athletes and A-list celebrities, they have to be good, and as a result they can charge more, right? There’s the same concept as the celebrity-endorced broom from earlier.

In many ways, the way they teach a squat will be entirely the same as myself (who isn’t charging hundreds of dollars, but still above average) and a trainer charging the average and living in the middle of nowhere, Wisconsin without any famous clients ever. That being said, there are some trainers who go out of their way to market themselves as the most expensive in their area, knowing they will recruit a specific type of client, regardless of the way they execute the programming.

Getting recognition and awards helps too. If you’ve had a chance to be on a television show or do your own media, you’ll likely have the ability to charge a lot more. Oscar winning actors have said they could pretty much add a zero to the end of their asking price after they won, meaning this was a massively beneficial award for essentially continuing to do the same thing they did before.

There’s also experiences that money can’t buy. Walking into a gym like Golds Gym in Venice, famed for being the heart and soul of modern bodybuilding in the golden era of Arnold and the like, makes you feel like lifting heavy and hard, especially when someone like Charles Glass just walks on by to give you a spot and tells you to do 20 more.

Then there’s a place like Mark Fisher Fitness in New York. If I could bottle what they do and sell it in any way, it would render bottled water, soda, and anything other than cannabis-laced alcohol entirely obsolete. You can’t help but feel good and enjoy yourself when in there. In discussing their culture as well as their financial success, check out this video:

And to see why they’re different, here:

You can’t replicate these experiences because they’re entirely organic to the individuals and spaces they occupy. While you can’t replicate them, you also can’t attach a true value to the experience that would reflect the individuals desire to pay. Someone who is a massive meathead like myself would pay the $20 drop in to Golds any time, and I’d also get a kick out of the atmosphere at MFF, and I know a lot of people who would love either one.

But because of these environments and the experiences individuals can have while there, they will continue to vote with their dollars to attend and experience these vastly different yet amazingly successful facilities time and again. They both contain very similar barbells, dumbbells and kettlebells, and they have roughly the same equipment as countless other gyms, personal training studios and health clubs around the world. What makes them special is not what they have, but how they use it.

If we view fitness as a commodity, the ability to have a room with equipment is that product. The user will pay a fee to use that equipment on their own and then everyone will be happy. This means any environment is a moot point as the commodity is the selling feature. This is where low cost retailers can capitalize on a market. Places like Planet Fitness and Snap Fitness offer very low enrollment rates and provide a bare minimum of service, low overhead, and the equipment people want to use. They are like the Southwest Airlines of the fitness world, in that they offer low cost fares.

Then there’s the boutique clubs, unique environments, and specialty locations. Cressey Sport Performance is a facility in Hudson, MA that caters heavily to baseball players. They have equipment and an environment entirely devoted to make baseball players happy and get the most out of them. You won’t find many pitching cages inside a Planet Fitness, or specialty squat bars either. They’re like the Virgin Airline of fitness: catering to a specific client who isn’t merely interested in paying the lowest cost possible.

Then there’s more high end boutiques and studios where the pricing is higher, but the experience is more customized to the clientele and what they would be after: some level of exclusivity, flexibility in scheduling, and service delivery. This is the private jet client.

Because of the vast demands of the customers looking to access fitness, the free market will support a large variety of trainers, applications, programs, and approaches to training. If price is the delineating feature that causes a client to want to train with one trainer over another, they’re viewing it as a commodity versus a service, meaning they’re going to get what they pay for. There is no problem with this.

If a trainer is worried about losing their business to lower priced competition, this is a problem. it’s essentially saying they acknowledge one of two things: either they are overpricing their services or they’re not differentiating their services adequately to build value in the eyes of their clients. Without evolving their model they will likely succumb to the pressures of competition in the free market and evolve much in the same way as Blockbuster, the Walkman and Tickle Me Elmo.

However, if they can continue to differentiate their services and offer a value that can’t be met with simple cost cutting, they will never have to worry about pricing. Louis Vuitton never goes on sale because they don’t compete on price. They also don’t view themselves as having any competition, so there’s no reason to reduce their prices.

Everything you’ve ever purchased involved some level of evolutionary thought to it, and was the product of someone previously thinking that product or service was beneficial to someone else. If the product or service is well known, it’s evolved form it’s initial offering based on the feedback of earlier customer sales, and the options and experiences they chose to pay for, and you’re choosing to do the same. Fitness is no different. We have changed how we pay for products and services over time, some people demanding more high end features, technology and service delivery, and some people opting for free or low cost delivery.

Outsourcing elements of fitness will undoubtedly make it easier to get into the hands of the end user to help them get more benefits from a fit and healthy lifestyle, but there’s no comparing an app to an in-person coach, and there’s a massive difference between a low cost trainer and a more exclusive trainer, even if the service they deliver is relatively the same. Building value means you will never have to compete on price, regardless of what service or product you offer. The market will choose whether this value or service is worthwhile or not.

In the meantime, if I ever need a ride somewhere I’ll be hitting the Uber app and wondering how the cab industry will evolve to compete.