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Sept. 20 2006 12:00 AM

           So, you are interested in opening up a wellness facility? You have a site selected, and you ran all the demographic studies possible to compile enough pages of information to rival War and Peace. Now the big question is What does this information tell me in terms of probability of success?

            Once you have determined your drive time radius with respective demographics and social economic status (SES) numbers, you can now begin to predict the size of the market that your wellness facility can potentially pull from. How you actually market, sell and retain this market as a wellness facility is not the intent of the article and can be left for discussion in future articles. Rather this is to make sure, before you move forward and commit both time and money in this new potential business, that you will not be fishing in the Dead Sea!

            To begin the evaluation process to see if the demographic and SES numbers are deemed feasible for a wellness facility, you should multiply the total population with the average industry market penetration percentage to determine the potential market.

 

Figuring Out the Potential Market

            In general, wellness facilities are a totally different model attracting a totally different market, the deconditioned/first-time exerciser and symptomatic population. With that said, there is limited research in average market penetration of these facilities targeting this specific market. Utilizing statistics from the health and fitness industry with an average market penetration of 12% to 14%, consisting primarily of the already fit, asymptomatic population, we have worst-case numbers to run. However, consider that your wellness facility is truly a different model than the typical "fitness center" with specialized intake and delivery systems. Twenty percent average market penetration would be a realistic and conservative number to determine your potential market. Using empirical research, to support the 20% market penetration, I have seen larger market shares, up to 36% in rural, blue-collar communities, give validity that there is a larger market waiting for a different model from the typical "Fitness Center" setting for the first-time exerciser and symptomatic population to begin a healthy lifestyle.

            For illustration purposes, say a drive time radius has a total population of 50,000. Average market penetration of 20% would yield a potential market of 10,000 that a facility can realistically pull from. Although potential market from total population is useful, I also would run this potential market analysis one step further from total population of a minimum household income. Rather than using only a constant minimum household income from a national average, I prefer to target the top 60% of the household incomes in the drive time radius to determine the minimal household income threshold. Using this percentage method avoids generalizing national industry statistics where individual markets may have higher or lower costs of living. Utilizing potential market share against household income allows you to not only know how many prospects you can pull from but more importantly, how many in your market can afford your products and services.

            To illustrate this point of household income, say 25,000 of the 50,000 total population are at or above the 60% minimal household income threshold, 20% market potential would provide 5,000 in your market that has a household income for your market to afford your services. As with any statistics, there are exceptions, and when it comes to predicting potential business, it is better to error on the worst-case scenario and exceed your pro-forma prediction when you open your business rather than vice-versa.

 

What Is Available?

            Once you determined you potential market, next you will need to estimate how much of this potential market is available. To do this, you will need to use your competition analysis report. From this report, you should be able to total all existing competition in your drive time to come up with the total number of people participating at these competing facilities. Subtracting the total number of people participating at competing facilities from total potential market will give you your available market share. This available market share is the realistic number that you should expect to pull from the total market. As poor as you may believe you current competition is, do not make the mistake that since you are opening a new facility that everyone will automatically jump ship to yours. Relationships and resistance to change are strong variables that enable existing facilities to retain members against new, cutting-edge facilities that emerge in a market regardless of their operating processes and state of facility. Using the numbers from the previous illustrations, if your competition has a total market share of 3,000, total population would yield 7,000 potential available market and minimal household income would yield 2,000 potential available market.

            Knowing your available market and competition, you should have a price point in mind of what you should charge for both residual revenues (monthly dues) and linear non-dues revenues (products and services). Without going into great detail of pricing strategies, due to your target market and business model, a general rule of thumb is to price at least 10% to 20% higher than the highest priced "fitness center" in your market. With your price point established, you can now estimate the potential you believe your facility should be able to generate in residual (dues) revenue. To continue with the illustration, competition analysis reveals the highest-priced "fitness center" monthly dues in the market at $50. With a 10% to 20% increase, you should be priced at $55 or $60 per month. With a potential available market of 2,000 from the minimal household income, you now can run your pro-forma revenues at the 10% increase price point of $55 per month to estimate your available market share (gross) revenue potential. In this illustration, the available market has the gross revenue potential of $110,000 monthly ($1,320,000 annual). It should be noted these are gross revenues from dues only and do not include other linear revenues. With proper member intake processes, combined with this specialized target market, linear residuals could add an additional 40% or $880,000 to the total annual gross revenue mix. From these gross revenue numbers you can now estimate the margins or potential profitability by subtracting your targeted expenses (start-up and base operating) to evaluate your potential NET return on investment over the stages of maturity of a new business to target break-even and profit-zone timelines.

 

            Mark J. Rullo, MS, CSCS, MES has over 17 years of club management and industry consulting experience with facilities ranging from personal studios to large chains and meical fitness centers. Presently, Mark is the Business Solution Consultant for the health and fitness industry and Territory Manager for Star Trac Fitness Products. Mark can be reached for questions at 724.972.8060 or via email mrullo@startrac.com or markrullo@comcast.net.

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