Modern health and fitness birthed itself in the emerging health club industry of the mid to late 1970s. People experienced the benefits of exercise in a loosely structured environment of support called a health club.

Initially, people joined health clubs to support their exercise habits, and we helped them on a hands-on, individualized basis. After all, there weren't that many clubs and there weren't that many members. We charged primarily for the activities that we generated for people, and we charged it by the service. Those who wanted racquetball paid for racquetball; those who wanted tennis paid for tennis; those who wanted a workout paid for fitness; those who wanted classes paid for classes. We rapidly found ourselves in the service business, charging people for the activities we executed.

We probably hoped to get into the experience business where we could charge people for the time they spent with us. We attempted that with the “bundled membership” — one price for everything, usually through monthly dues. Retrospectively, it appears we made three critical mistakes:

1. We actually down-priced ourselves by bundling and created less profit margin per customer than when we charged for services.

2. We obligated ourselves to selling a lot of memberships. We changed the game without a plan.

3. We thought people would respond differently than they did. They came into our facilities rather sporadically and did not always see the value of the time spent in the club. In fact, they saw more easily the negative value of the time not spent in their club.

Though we have had the potential to become a transformation business (in which you charge for the demonstrated outcome the customer achieves), we have never gotten there in most respects and with most customers. Why? As soon as the bundled membership form took hold in our industry (it happened by the mid-'80s), we shifted our thinking to selling memberships rather than delivering services. We started charging for stuff (our equipment and our classes) and that put us into the commodity business. We have not gotten far from that model in the past 20 years.

Today, it appears as though health clubs have become about memberships, not people or services. The operating principle is “build it, they will come,” and the delivery paradigm is “put in the equipment, set up the classes, offer the amenities and everyone will buy something.” Except it hasn't exactly worked out that way, as evidenced by our less-than-acceptable retention rates and our turnover in businesses delivering fitness.

Pine and Gilmore, in The Experience Economy (Harvard Business School Press, 1999), state that four universal elements exist that constitute how businesses create value — origination, execution, correction and application.

The health club industry originated well. We created new equipment, new exercise procedures and new classes for exercisers. Where we have failed is determining new aims for our business, which would get us to the transformative process (which, interestingly, would bring us back to the customer-comes-first mentality we started out with so many years ago).

Our execution peaked in the early years. Our focus became mass delivery of systems rather than guiding users, which would have put us into the transformative process of execution.

Our process of correction centered on fixing early mistakes, and later we corrected by simply building more and/or bigger facilities. We have not yet reached the transformative stage where our resolve would be strengthened by our mistakes, and we would create new paradigms of operation centered principally around individual customers, their needs and their experiences.

Our application has focused on selling the membership, establishing a brief fundamental exercise introduction and leaving the vast majority of users to figure it out themselves. We have not come close to the transformative, where we would initiate a series of encounters with each new customer to assure movement towards more satisfying, longer-term and higher-profit relationships.

Thus, we are a commoditized industry, now in the process of pricing de-stabilization. In that scenario, who markets the best at the lowest price has consistently proven to be the winner.

Michael Scott Scudder is a 30-year veteran of the fitness industry. He is a personal business trainer operating Fitness Focus, a consulting company that offers private workshops on pertinent fitness business matters. Questions and comments are welcomed by Michael at 505-690-5974 or mss@michaelscottscudder.com.

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