Why I’d Never Invest in an Affiliate

invest in an Affiliate
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I’d never buy stock in a CrossFit Affiliate. Even my own. 

Now I’m not talking about taking on partners or allowing key staff members to participate in profit sharing. I do both. I’m talking about buying a portion of an Affiliate as a way to generate passive income. I don’t see a way that it works. 

I came to this conclusion after following the initial public offering of Peloton — the at-home spin class subscription. I’ve been really curious if technology will be able to bridge the gap between basement exercise equipment and actual fitness. I mean, who hasn’t used a treadmill to hang laundry?

Peloton has an interesting business model. They sell a $39 per month class subscription to accompany their $2,000 bikes. After announcing an additional app that non-bike owners could purchase, I considered buying stock in the company. 

Then I read the quarterly earnings report. 

New subscribers are growing, revenue is increasing and churn rate is low. But there was a number that jumped right out at me that would jump right out at any fitness pro: utilization rate. Average monthly workouts are dwindling near 11. Compare that with CrossFit’s 20 per month prescription. 

In short, how many people who pay for a service actually use that service. This is a number we follow on a daily basis in my Affiliate. I’ve noticed it correlates directly with churn rate, new members and profit. I really, really like this data point. Mainly because it’s a win-win: if my members come in more, they get more fit. If they get more fit, my business grows. It’s amazing. 

Dunbar’s Number

You’ve likely heard of Dunbar’s Number. It’s a theoretical limit on the number of meaningful relationships one person can maintain. Most estimates put this number around 150 people. You can remember 150 names, kids’ activities, occupations and goals

What does Dunbar’s number have to do with buying stock in an Affiliate? In short, the Affiliate model cannot — by nature — be scalable enough to produce profit sufficient to pay shareholders a reasonable return. You — the owner/operator — can support your first 150 members with the customer service one could reasonably expect from a $175 monthly membership. Your product will decline above this number. So, you need to bring on an emotionally-intelligent Coach who can also manage significant relationships with your next 150 members. That Coach will/should fetch a decent salary with some type of long-term benefits package. And so on.

Be realistic about numbers

Here’s the mistake every Affiliate “investor” makes: “I love CrossFit. I have some cash laying around. I pay $150 per month. There are 100 members here, so that means $15,000 of monthly revenue. If we pay Coaches $15 per class, that’s a HUGE profit.”

Ugh. I wish this were less common, but it’s not. In order for any business to work out long term it will need a team of full-time dedicated staff who share a common vision. Seventy-five members can pretty much cover a salary for a good Coach plus overhead. Because most of us operate 15-hour days, I divide Dunbar’s Number by AM and PM to cover a full day without requiring a team member to work from 5 a.m. to 8 p.m. 

As you can see, there will never be a meteoric moment in growth in any micro-gym. In order to see scalability on a level that could support staff and investors, you would need to drastically reduce your utilization rate. In my opinion, the ideal price-point is approximately $15 per month for scalable “fitness.” But let’s not kid ourselves — no actual fitness is gained for the price of Netflix. 

Matt Scanlon is the owner and founder of CrossFit Memorial Hill and TheHillKC in Kansas City, Missouri. He is also the co-founder of BUILD — a CrossFit program and research project dedicated to improving health outcomes for cancer survivors.  Matt's professional career began in healthcare management. As a result of this experience, Matt is focused on using CrossFit to improve health metrics for a broad population of people historically underserved in the fitness industry.  Located at the base of the National WWI Memorial, CrossFit Memorial Hill was founded in 2011 as a free community fitness resource. After gaining a following of nearly 1,300 participants in community pop-up WODs, Matt Affiliated in 2012.  In 2016, CrossFit Memorial Hill expanded to incorporate a private coaching business, BUILD, a TRX and bootcamp series, and various other specialty programs under the umbrella of TheHillKC.  Contact him at matt@thehillkc.com.