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An entrepreneur considers a second location — but it may not make sense. Here’s our advice.
Q: I own a private gym. We’re profitable, and my current space is small, so I’m eager to expand. Should I open another small gym somewhere else or just get one big, new space? — Kevin, New York
A: Kevin’s question could be about any business; many entrepreneurs grapple with the same question. But gyms are a perfect way in, because the business is straightforward. You have many up-front costs in equipment and regular costs in rent and staff. And it’s a gym, so people pay to … use the gym! But a creative owner can find lots of other ways to make money — with classes, personal trainers and more.
I’ve seen Kevin’s gym, and it’s nice: He has only 1,500 square feet, which is tiny by industry standards, but he has an 8 to 15 percent profit margin per year. That’s great. And yet, I asked, how often does his gym run at maximum profitability — making as much money as is possible in the space? He dug into his books and came back with a number: It happens 10 percent of the week.
Once a business starts making consistent profit, many entrepreneurs believe they need to invest significantly more money in order to spark additional growth. But that’s not always true. Opening a new facility is risky — it means you’re effectively doubling down on quantity instead of quality, by focusing on new space instead of making your old space as great as it can be. So I asked Kevin another question: Can your gym be more profitable without adding space?
Then I told him about Luka Hocevar.
Luka is the owner of Vigor Ground Fitness and Performance Center, in Seattle. He began in a 1,000-square-foot garage, which did just fine. But then Luka began tinkering with ways to maximize it. He offered group coaching sessions for a fraction of the cost of one-on-one training, building community and trust. Then he split those sessions into three tiers — a large group, a small group and semi-private instruction, which ranged from $347 a month to $650 a month — to maximize revenue on an hour-by-hour basis. These groups could be scheduled to all use the gym in efficient, well-organized ways. For example, during the 7 a.m. hour (high time at a gym), a large class ran at the same time that three coaches worked with smaller groups. Meanwhile, another coach could do a strategy session with a high-paying client in one office, and another coach could work on nutrition plans with another client. Luka was generating up to six revenue streams at once, all without needing more space or employees.
The result: His revenue doubled per month, and clients loved how busy and energetic the gym felt. Luka even saved money, because his trainers were earning more in less time. He eventually did max out his space, at which point it made sense to grow. Now his gym is 4,600 square feet, and his revenue has tripled.
Luka’s experience should make Kevin — and anyone! — consider some big questions. Among them: What is your current profit margin, and how close are you to running at maximum capacity? What one thing could you do to immediately increase profit? Is it smarter for you to increase what you charge or to take on more clients? (Hey, it could also be a combination.) And where are you, the manager or owner, spending most of your time — and how does that directly influence revenue and profitability?
If the answers to those questions lead in the direction of “We make as much money as possible,” then, yes, it’s time to think about real estate. But otherwise, there’s work to do.
That’s the realization Kevin came to. He’d been avoiding hiring another employee but realized that was holding him back. Kevin is his gym’s best salesperson — but by not hiring someone else, he was spending too much time on the gym floor working with clients and not enough time finding new customers. So he hired a part-time coach. In one month, Kevin made more money in additional revenue than he spent paying the new guy. It’s a great start.
Opening a new location seems like a hard move, but it’s really the easy way out. That’s because, even though it’s a big and risky investment, it’s predictable. A guy like Kevin knows how to open a new location, because he already opened the old one. The harder work comes from looking inward and rethinking how you do business. There’s risk there, too, of course. But the payoff is far greater.
Originally published on Entrepreneur