Re: Economic model - Cheap classes, expensive gear

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Posted by ken Kurtis on November 21, 2000 at 23:05:31:

In Reply to: It's the american way, but not necessarily the right way... posted by Gerry on November 21, 2000 at 16:24:47:

(Gerry Smith wrote) 3. Shops see instruction as an effective loss leader. A student comes to the shop for a $99 entry level course but stays to spend another $2000 on gear. The shop did well in the overall transaction, but then everyone else has to compete that much harder.

This is actually one of the biggest fallacies in the business and one reason shops get into financial trouble.

The thought is that it's okay to lose $250 per person on the basic class (which probably costs a shop around $350 per person to teach when you factor in EVERYTHING, including overhead, personnel, electricity, insurance, etc., etc.) because this same student will buy personal gear from you.

However, personal gear usually runs anywhere from $250-400. And if you're marketing to a crowd that's price-shopping, they're not suddenly going to ignore price when it comes to basic gear so they'll probably try to go with the cheaper stuff, say around $300.

The profit on the sale of this gear, assuming you're able to maintain a 50% margin, is $150. So you're still $100 in the hole.

But now the assumption is that the students will spend $2000 on gear. Except these same people who came into the class based on price-shopping, once again, don't suddenly change their stripes. And for those that DO buy something, perhaps they just buy a reg/BC/computer package that sells for $700 and has a margin of 40%, or $280 profit, minus the $100 you're still in the hole from the class transactions.

Well that's not too bad you think because you've made $180 when all is said and done. Forgetting that you've probably invested about 50 hours of time to make all this happen (a whopping $3.60 per hour), this is still not a complete picture because (1) you don't teach a class with just 1 student, and (2) other numbers come into play.

According to Leisure Trend stats (they get actual number from stores and calculate national sales figures), the average class size is 6. 60% of those people buy the personal gear from the store where they take the lessons. 10% of those people buy some component of reg/BC/computer but for the sake of this discussion, let's assume that 10% buy the whole reg/BC/computer package. Here's the way the numnbers work out.

You charge $100 for the class times 6 students to gross $600. However, it costs you $350 x 6, or $2100 to teach this class, so you start off $1500 in the hole.

Now, 60% of your students (3.6) spend $300 bucks each on personal gear, for a gross of $1080. At a 50% margin, your net is $540, which means you're still $960 in the hole.

After the class is finished, 10% of your students (0.6) buy the $700 package. But since you can't have 0.6 people, we'll make it 1 student and ramp the package up to a $1200 one. At a 40% margin, you make $400 on this sale, which still leaves you $560 in the hole after all is said and done.

When you crunch the numbers, you can see why the "student economy" model simply doesn't work. You have to sell the classes for what they actually cost you, do a better sell-through on the personal gear, do a better sell-through on the after-class gear, maintain a better mnargin, &/or some combination of all those. But most of that means higher prices and if you're appealing to a low-price market, you've just poisoned your own well.

It's actually far more efficient to teach fewer students for a higher fee as they'll be better-trained, more likely to stay in the sport, and more likely to but the Big Ticket items from you.

But enough of all this. Thoughts? (If anyone even reads it this far down in the thread.)

Ken Kurtis
NAUI Instr. #5936
Co-owner, Reef Seekers Dive Co.
Beverly Hills, Ca.

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