Chapter 17, Evaluating Your Operation.

Tales from the Trenches: As the owner of ABC Fitness for 5 years, Paula had seen ups and downs, but the past 2 years had been very smooth with steady growthup
until the last 3 months. During this time a new competitor had come into the market and began offering programs that Paulas club was not, and she had lost many
members to the competitor. Although the new programs of the competitor were a factor, there were also other reasons why her members were leaving. In order to get
to the bottom of this decline, Paula personally called many of the members who had left, something the club had never done in the past. The information she gathered
opened her eyes to things that she was not aware of. Some of the comments included the following:
1. The change rooms were getting dingy and needed some upgrades.
2. Ive asked about Pilates and yoga classes for the past 2 years and no one has ever given me a good reason why this club wont offer them.
3. The new club has personal trainers.
These were just a few of the comments she received. She was shocked because had she known about these concerns previously, she could have easily addressed them.
Her club actually had personal trainers but apparently most members didnt know how to approach them and what they had to offer. Paula was not even aware that
members were interested in Pilates or yoga, and she thought members would prefer to see more treadmills as opposed to upgraded locker rooms. These comments made
Paula aware of the fact that she needed to spend more time working on her business as opposed to working within her business. If she had been paying better attention
to the needs of her members, she could have dealt with many of these concerns. A formal member feedback program and more informal contact with members would
have easily revealed that these problems existed. Paula also realized that there were probably other problems in her business that she was not aware of. With this mind,
she met with her key staff and decided to conduct a full evaluation of the entire business. This was a time-consuming endeavor, but the end result was a much more
effective and efficient fitness facility. Paula planned to implement formal and informal methods for evaluating the entire operation throughout the year. She realized that
one big evaluation each year was simply too much work and also did not meet club needs throughout the year.
Now, back to Chapter 17, Evaluating Your Operation.
The evaluation tools discussed in this chapter provide a generic approach to outcome-oriented management practices. This permits a snapshot view of the performance
of an organization that may be useful to club operators in planning for the future.
Within the fitness industry, there is a growing awareness of the need to develop meaningful standards and quality controls to measure the extent to which a program has
achieved its stated objectives. Because the industry has evolved significantly over the last 40 years, the evaluation process is becoming increasingly important in terms of
documenting the outcomes and processes involved in health and fitness services.
Evaluation Defined.
Evaluation is the process of determining the extent to which an organization has achieved its stated objectives. It measures the efficacy of programs as well as the overall
performance of an organization based on industry standards. If evaluation is performed honestly, it may yield negative rather than positive findings and may ultimately
result in program downsizing or elimination.
Goals of Evaluation.
Clearly defined goals and objectives are essential components of evaluation. You must measure each one to determine program effectiveness. Program participation
rates, attrition, post program behavior changes (e.g., weight loss, fitness improvements, stress reduction), and staff satisfaction are examples of areas that must be
measured in determining program success. Evaluation is part of the control function of club operations.
The overall goals of evaluation in the fitness industry are as follows:
1. To determine how effective a program is in meeting predetermined goals and objectives.
2. To provide comprehensive information about the full range of program achievements as well as possible weaknesses.
3. To measure the quality of a program based on accepted standards and criteria.
4. To appraise the quality of organizational management, such as the performance of staff or the effectiveness of policies and procedures.
5. To provide feedback for improving programs and recommending a direction for future reference.
6. To provide information for internal and external marketing of program achievements.
Models of Evaluation.
The following section will compare various evaluation methods necessary in determining whether the goals and objectives of a fitness facility are being met.
Summative and Formative Models.
In the past, evaluation was primarily thought of as summative. Summative evaluation provides information on efficacythat is, the ability of a program to do what it was
designed to do. Summative evaluation is carried out at the end of a program to measure its success or failure and make recommendations for the future.
Today, however, much of the evaluation process is formative, providing continual monitoring of a program while it is being planned and implemented. Formative
evaluation is a method of judging the worth of a program while the program activities are forming or occurring. This type of evaluation establishes whether goals and
objectives are being met, modifying them as necessary throughout the process.
In order to maintain their competitive edge, managers should routinely conduct evaluations on all aspects of the business and regularly adjust the mode of operation to
fit the needs of the consumer.
Process and Preordinate Models.
Process evaluation models delineate a set of steps and procedures to use in conducting an evaluation without identifying the judgment criteria, whereas pre-ordinate
evaluation models provide a process and specify the criteria necessary in determining the worth of a program. Pre-ordinate models begin with determining exactly how
an evaluation should be carried out, the type of information that will be required, and the best way to gather it. Member participation, interest, feedback, and instructor
evaluation are examples of pre-ordinate evaluation.
No single approach is correct in all situations. A combination is often used in evaluating fitness facilities and the operations.
Health and Fitness Evaluation Model.
Maintaining a competitive edge over similar facilities is a matter of survival. The quest for excellence separates the marginal operator from the successful operator.
Whether a facility is small, medium, or large, striving to be the best should be the goal.
Elements of quality may be measured in various ways. Regardless of the measuring system used, the end result should be to identify those areas that meet or surpass
acceptable industry standards and pinpoint areas that need further investigation and improvement. As an example, one of the most widely used systems for measuring
quality in the fitness industry is total quality management (TQM). TQM involves observing and measuring everything occurring within an organization so you can identify
weaknesses and improve operations. Operational procedures and policies must be reviewed and revised to examine how and by whom decisions are made and carried
out within the organization. TQM may improve worker performance, productivity, customer service, and profitability.
The purpose of an evaluation model is to develop an awareness of the management policies and procedures used in various health and fitness settings, provide a means
to measure the quality of those policies and procedures against proven methods, and point out the need to assess, improve, and change any areas deemed deficient. Use
evaluation as a vehicle for improvement and as an indicator of where to concentrate efforts within the business.
Within most health and fitness settings there are various levels of communication that are important to the success of the business. When conducting a facility evaluation,
the groups involved in the evaluation process generally include management, an evaluation coordinator or consultant, an evaluation committee, and staff.
1. Management. It is the responsibility of management to take the data obtained from the evaluation and use it to monitor established goals. Managers should
look for areas considered deficient, establish a plan for improvement, implement the plan with the assistance of personnel, and regularly review the results.
Having the support of management for short- and long-term planning is essential; consequently, a strong line of communication is needed between managers
and other members of the evaluation group. You can obtain this interaction through regular presentations and reports that focus on significant findings and
recommendations for improvement.
2. Evaluation coordinator or consultant. The role of the evaluation coordinator is to be the intermediary between management and staff. This task is often
performed by an independent, impartial consultant who has no ties to the organization. If you use an in-house employee, we recommend that both
management and staff approve the selection. The person chosen to manage this process will be responsible for analyzing data, reviewing results, comparing
data with industry benchmarks, and determining pertinent conclusions.
3. Evaluation committee. The evaluation committee usually consists of supervisors or personnel who have a vested interest in the evaluation process. They are
responsible for developing and administering the evaluation, reviewing the results with the evaluation coordinator, and providing recommendations for
improvement. The committee performs these tasks through regular meetings and brainstorming sessions for solving problems associated with the evaluation
process. Committee members obtain input from other staff to incorporate their ideas and to make them feel a part of the operation.
4. Staff. Staff members assist the evaluation committee in planning and conducting the evaluation, but more importantly, they are responsible for administering
the changes approved by management. We cannot overstate their involvement in the evaluation process. Providing a sense of ownership during the evaluation
phase helps ensure that staff members implement planned program, facility, or operational changes in a positive manner. Staff members are also responsible
for providing regular feedback on these changes so the organization can make refinements as needed.

Evaluation findings may be used as an external marketing tool. Promotional and advertising vehicles, such as newsletters and direct or private mailings, may be
implemented to communicate evaluation results to members.
As shown in figure 17.2, an ongoing cycle for evaluation implementation will help define new goals and objectives, establish strategic planning, and follow up on plan
implementation. This cycle allows for the continual evaluation of the business to ensure proper managerial techniques are incorporated.
Location Analysis.
Many club operators believe a facility either makes or loses money the day the lease for the location is signed. As in most retail operations, the three most important
factors of success are location, location, location.
Four primary factors affect demand in the health and fitness industry:
1. Population density.
2. Travel time to the health club.
3. Household income.
4. Educational attainment.
In terms of population density, sophisticated club operators generally operate in markets where at least 50,000 people or more are within close proximity. Concerning
travel time, the primary trading area should extend no more than 12 minutes from the point of departure. The primary trading area is the area closest to the club location,
possesses the highest density of clientele, and extends no more than 10 to 12 minutes travel time from the location. Demographic studies have shown that 85% of club
members come from within 12 minutes of travel time, equivalent to approximately 4 to 5 miles by car.
Household income is a key determinant of member penetration rates and club pricing. There is a strong correlation between household income and club memberships.
One out of eight members of the general population is a health club member; however, member penetration rates among high-income segments approach nearly 30%.
Educational attainment also dictates demand for memberships. In general, the higher the education attainment of the people in the primary trading area, the higher the
membership penetration rates among that community.
The ultimate goal of location evaluation is to determine if there is an available market to support the new facility, and, for budgeting purposes, to estimate the number of
monthly memberships the facility would likely sell. Both quantitative and qualitative approaches must be used in evaluating a location for a new fitness facility.
Quantitative research refers to the collection of statistical data, whereas qualitative research refers to information based on opinions and values.


Quantitative Methodology for Evaluating Locations.
In evaluating a location, the following information should be researched:
1. Population density within the primary target trading area. For example, if a facility is seeking to target 18- to 55-year-olds, population density should be
determined for everyone in this age range within the primary trading area. As mentioned, this is generally within 12-minute travel time; however, it must be
determined location by location.
2. Education attainment and average income. This information helps determine if the area will have a higher- or lower-than-average market penetration.
Another influential factor is market positioning of the facility (for example, low-cost facilities would be more appealing to lower-income participants).
3. Traffic flow. This should also be researched since there is generally a positive correlation between traffic flow and the number of guests willing to drop in to
the facility.
Once secondary data are collected, it is necessary to collect primary data on the existing market area in terms of over- or under filled demand. Secondary data come from
the collection, analysis, and interpretation of sources of primary data, whereas primary data are collected firsthand, including original materials, surveys, experiences, and
so on.
To accomplish this, all potential competitors within the primary trading area should be plotted on a map. The following information should also be collected:
1. A map of competitors primary trading areas.
2. An estimate of competitors current membership.
3. The number of current competitor members who are inside the proposed trading area of the new facility.
Then, using the abovementioned secondary demographic information of the population within the target market of the new facility, determine how many members
would potentially purchase memberships at a fitness facility. A reasonable estimate must be made based on the available secondary data.
Finally, a calculation of the total potential market within the trading area less existing competition must be completed to determine whether the market has excess
capacity for a new facility or whether excess supply already exists. A location analysis examines averages relevant to the primary trading area; most licensed real estate
leasing agents are able to provide these averages based on a mapped primary trading area as laid out by the facility operator. Averages are dependent on the facility size,
operating costs, and overall operating budget, and they determine whether the facility will be profitable as indicated by a mean average of attending members. This mean
average does not take into account members who change facilities based on differences in services offered.
Qualitative Methodology for Evaluating Locations.
Real estate evaluation must also consider qualitative factors to determine the percentage of the market that the proposed facility will access. Some qualitative factors
include the following:
1. Brand awareness. Brand awareness is a measure of how readily members of a target audience remember a product, service, company, or commercial brand
and what the brand is about, as well as the consumers level of trust in the brand.
2. Product offering. This includes facility size and amenities as compared with existing competition, such as the amount of equipment, type of equipment, and
other amenities (pool, racket sports, ingress and egress into the location, ease of parking).
Qualitative factors will vary significantly by market area.
Industry Evolution and Differentiation.
With the evolution of the fitness industry has come increased sophistication in operators and business practices. In the early days of the fitness industry, operators were
typically focused on leasing space or providing equipment to members for an annual or monthly fee. The evolution of the fitness industry has seen significant increases in
consumer expectations.
From a competitive perspective, the number of clubs has increased at a significant pace. Based on information released by IHRSA, the number of adult commercial fitness
clubs has increased significantly over the past 10 years. In addition, there has been a significant increase in the not-for-profit and government sectors, including YMCAs,
hospital-based facilities, and government-operated facilities.
The commercial fitness industry originated in the United States in the 1950s and 1960s, with industry growth strongest over the last 25 years. There have been significant
changes in the competitive landscape during this time. In previous years, competition was limited to other commercial entities. However, today in Canada, for example,
the largest competitors of the adult commercial fitness industry come from the government and the not-for-profit sector.
Increases in competition have forced operators to focus on differentiation. Many operators differentiate their business by creating additional profit centers within their
facilities (see chapter 11 for more details). These centers include the following:
1. Juice bars.
2. Group exercise.
3. Personal training.
4. Nutrition.
5. Apparel sales.
6. Special paid programming.
7. Massage services.
8. Kids clubs (child minding).
9. Tanning.
Some areas of differentiation may not be profit centers, but they are almost all cost centers that require an increased level of evaluation to ensure they are operating in
the most efficient manner possible. As such, fitness operators today may operate 5 to 10 different cost or profit centers within their facilities, each requiring a different
level of expertise.
Management of Multiple Profit Centers.
The management of multiple profit centers within a fitness facility requires an operator to use consistent terminology and identify fixed and variable costs. Before
evaluation can occur, subjective evaluations must be determined for the fixed and variable costs associated with that profit center. Management capital may be
attributed to operating a profit center. This section will evaluate the different types of profit centers, focusing on both possible financial returns and management costs.
Juice Bars.
The incorporation of a juice bar or other food and beverage component into the operation of a fitness center followed a trend explosion in the 1980s alongside the
growth of the fast-food industry across North America. Consumers would often request that fitness operators provide beverages or other nutritional products, which
eventually led to the evolution of the juice bar. In addition to juice, sandwiches, and other such products, fitness operators would also often provide nutritional or
supplement products.
Juice bars became a point of differentiation and a selling feature used by fitness facilities to attract new members. This evolution continued as operators looked for
branded offerings, including franchises. These franchise offerings often resulted in a significant increase in sales per square foot because of members acceptance of the
brand and interest in the products.
Many fitness operators complain that a food service operation is one of the most difficult to operate within a fitness facility. It is not uncommon for such operations to
require hundreds of stock-keeping units (SKUs) for selling food and beverages. In addition to the large inventory that is required, staffing is also usually difficult to
manage. Regulations for the operation of food services also place further restrictions on the operator of the fitness facility to ensure the proper and profitable operation
of the profit center.
The primary evaluation reports used in profit and loss statements on a gross margin and net income basis, including a provision for rent, are as follows:
1. Weekly or monthly food costs.
2. Weekly or monthly labor costs.
A trend appears to be growing in the fitness industry whereby operators are outsourcing the operation of their food and beverage services to third-party operators. In
many cases, the third-party operators are coordinated through franchise companies who are able to offer a branded product and, as a result of doing higher sales, are
able to pay a higher rent to the operator. Thus, many operators are finding they are able to generate more income with fewer requirements for capital.
Group Exercise.
Group exercise is generally offered in fitness clubs as an included service. Some classes are often on a drop-in or fee-for-service basis. As such, this section will provide
comments on both.
Although many fitness facilities offer some or all group exercise classes as included in the membership fee, the vast majority of facilities do not evaluate them based on
performance or on return on investment. As a cost center, a free group exercise program may cost an operator 5% to 10% of the overall operating costs of the facility.
These costs should be controlled and funds should be expended in such a way as to generate the highest return on investment for the operator. Although returns may not
be quantified in terms of profit, the more people who take advantage of the service, the more likely those people are to maintain their membership and refer others, all
of which will increase memberships and reduce attrition.
In the last 10 years, there has been a movement to adopt pre-choreographed group exercise programs. These programs provide choreographed classes, including music,
which allows operators to outsource the development and management of programs. The classes are generally developed to appeal to a wider range of participants, thus
increasing interest in the programs. However, training instructors is often a challenge for fitness operators given labor shortages in these areas.
The primary selling feature of group exercise programs is the increased number of participants who attend group fitness classes, thus generating a greater return on
investment. Evaluation techniques include the following reports:
1. Cost per participant. This calculation takes into consideration the cost of providing the class divided by the number of participants in each class. Operators are
encouraged to track the number of participants in each class and then use this information to track and trend classes in order to eliminate nonperforming
classes and reward instructors who have high-performing classes.
2. Average number of participants per class.
3. Average number of participants per instructor.
Both the second and third evaluation methods encourage the operator to focus on which classes are successful and which classes need to be revamped based on
instructor or class. These results will skew based on time of day, club location, and so on; as such, they should not be the definitive method used to evaluate classes.
Case Studies.
This section explores case studies of programs offered within existing fitness facilities and how the programs can be evaluated to determine efficacy and membership
retention. By collecting pertinent information, management can apply this data to improve program implementation and create innovative ways to stimulate business
growth.
Case Study: Group Exercise Evaluation. The membership of a specific fitness facility will determine the number and type of group exercise classes offered. It is important
to take into consideration the average age of the membership for that specific location, patterns in traffic, and past participation rates.
In evaluating group exercise programs, it is essential to track the total number of classes taught per week, the total number of participants per club, and the percentage of
participation based on class capacity. By tracking this information, the cost per participant can be determined. In tracking the average cost, you may determine the
minimum cost per participant if and when the class is at 100% capacity. Capacity is based on room size and amount of equipment available. Figure 17.5 outlines three
different measurement devices used for evaluating the success of a group exercise program.
Case Study: Personal Training Evaluation. In evaluating the effectiveness of a personal training program, it is necessary to compare the return on investment with the
intrinsic value of the program.
Fitness facilities will often offer a personal training program on a break-even basis or at the risk of losing revenue simply because the intrinsic value of the program
contributes to overall membership retention. When evaluating the return on investment for a personal training program, the accrued gross margin should maintain at
least a 30% contribution rate for the program to provide any return to the company. Depending on how the program is offered (for example, whether training sessions
are offered on a pay-per-service delivery or pay-per-session basis), bad debt, or outstanding fees collected on a monthly or per session basis, must also be taken into
account before calculating the gross margin contribution rate. A personal training program must be evaluated by considering a number of key performance indicators
(KPIs). For instance, has the trainer maintained an average minimum number of hours of training per day? Has the trainer renewed a certain percentage of clients? Has
the trainer recruited a certain number of new clients? Individual evaluation indicates consistency of service across the personal training program as a whole and ensures
success of the program through maintenance of quality of service. See Key Performance Indicators for Personal Trainers for a sample form.
Personal training is one of the best ways to retain membership while providing clients with results-based training. A trainers service allows for the success of members
and is more likely to lengthen the life span of a membership. Having trainers on the facility floor also improves the overall optics of the facilitytrainers are more apt to
keep the gym floor in order and operative, and they are able to maintain the value of the overall facility by providing staff presence.
Advent of Technology.
The sophistication of the fitness industry has increased significantly with the advent of various new technologies. As more facilities add computer systems that allow
tracking of member activity and services, managers are able to use this information to evaluate trends and anticipate opportunities.
There are a number of fully integrated software programs that allow operators to track almost every area of their business. Functionality among software products varies;
however, management services typically include the following abilities, which all have advanced evaluation or reporting standards:
1. Membership management and tracking.
2. Prospect management tracking and scheduling.
3. Sales-lead tracking and custom contracts.
4. Front-desk and check-in solutions.
5. Workout manager for member fitness tracking.
6. Data entry for information management.
7. Performance reporting for club management.
8. Health club business modeling with artificial intelligence.
9. Billing and accounting system.
10. Cash or financial accrual reporting.
11. Payroll and commission modeling.
12. Collections solution for overdue payments.
Increased Activity by Private Investors and Public Markets.
The final aspect of the fitness industry evolution is the increased activity by private investment groups and the public markets in this sector. Listed in What a Year! are a
number of significant transactions that have occurred between 2003 and 2005 that show the increased interest of the public market and the banking sectors.
With billions of dollars being attracted to this industry, club sophistication is increasing to keep pace with the demands of the investment community. Investors are
looking for more sophisticated operators and as such are putting pressure on the entire industry to squeeze more juice out of the orange, so to speak.
The keywords for Chapter 17 are:
1. Bad debt.
2. Brand awareness.
3. Capacity.
4. Formative evaluation.
5. Key performance indicator (KPI).
6. Pre-ordinate evaluation models.
7. Primary data.
8. Primary trading area.
9. Process evaluation models.
10. Profit centers.
11. Quantitative research.
12. Qualitative research.
13. Secondary data.
14. Summative evaluation.
15. Total quality management (TQM).

This concludes the end of Chapter 17.