The Issue: New Franchise Is A Tough Sell

New franchise operators struggle to compete with scads of chains. Peter Taunton set his fitness franchise apart with an unusual fee structure

(Monday, March 10, 2008) - Less than a year after launching three small, independent gyms near Minneapolis, Peter Taunton believed he had a business concept ripe for franchising. His Snap Fitness health clubs cost relatively little in terms of overhead, maintenance, and personnel, and had proved simple for him to run on his own. What's more, he says all three locations had turned a profit less than 90 days after opening. So in 2004 Taunton, experienced in the fitness industry but new to franchising, registered his concept as a franchise and began to court potential buyers of all stripes, emphasizing the gym's profit potential.

There were few takers at first. The problem, according to Taunton? Fierce competition. Although the number of potential franchisees—unit operators who pay a monthly fee for marketing, technology, and other kinds of structure and support— has grown over recent years, so too has the number of franchises. More than 2,700 companies have started franchising since 2004, according to Arlington (Va.)-based researcher FRANdata.
Appealing to Novice Franchisees

Taunton came up with a strategy to distinguish Snap Fitness from other franchises in three main ways. Instead of going after any potential buyer, he would target first-time franchise operators (BusinessWeek.com, 8/31/07). These franchisees would have less capital to invest, so he planned to sell units that required limited physical space and few amenities. (An initial investment in a single Snap Fitness gym typically runs around $232,200; a typical McDonald's (MCD), by comparison, is around $1 million.)

Taunton also observed that many first-time franchise owners were looking to keep their day jobs and act more as investors than day-to-day managers. With this in mind, he offered technology that would allow them to manage their club remotely. It works like this: Members use a key to gain access to the 24-hour gym at any time and operators can monitor the space via in-store cameras. Membership processing, sales data collection, and other accounting can also be done on the same, proprietary, Web-based application.

These were experimental concepts in the franchise world in 2004, but they weren't entirely new. Anytime Fitness, a franchise started two years earlier, also in Minnesota, used scaled-down health clubs and remote management to appeal to novice franchisees as well. Taunton knew one of the first questions he would get from any first-time buyer would be "How do you compare to Anytime?" So he came up with a compelling answer: the flat fee.
Flat Fee Pays Off in Volume

Whereas a majority of franchises take a percentage of monthly revenues based on different formulas, Taunton decided Snap would charge a flat monthly fee regardless of market, membership numbers, or store performance. This was perhaps the most important differentiation point. The flat-fee model would mean lower individual-unit revenues for Taunton but he projected it would pay off in the long run.

Taunton says there were doubters in the industry who told him he wouldn't be able to generate enough revenue from these low fees to support his initial franchisees. But the quick rate at which he sold franchises—18 by the end of the first year, more than 100 by the end of the second—helped him realize what he calls a "tipping point," where he could comfortably provide infrastructure and support to new and existing franchisees. He now has some 1,350 franchise locations, says his company had revenues of $19 million in 2007 (nearly 100 times the $202,000 revenues of 2004), and he expects to have 2,000 locations by the end of 2008.

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