Mission146
Posted by Mission146
Jan 28, 2020

Introduction

What could MoviePass, Planet Fitness and casinos possibly have in common? Until recently, the common thread between the three things was that they were all going concerns, but that is no longer the case with MoviePass. Another common thread is that all three identified and aggressively pursued all customers, including ones who were just there for as much value as possible.

The relentless pursuit of all customers has caused one of these businesses to fail, another to apparently be extremely successful and the final industry, casinos, too soon to tell. The casino industry is increasingly gravitating away from an attempt to appeal to value customers, but we have yet to see what the long term results of that will be.

Planet Fitness and Value

By this point, just about everyone has heard of Planet Fitness. Having recently announced the opening of their 2000th (!!!) location, this is a nationwide chain of fitness facilities that are geared towards the economical value customer.

Not to say that Planet Fitness discourages the fitness elite, but its, “Judgment Free Zone,” mentality is such that it is supposed to be a comfortable environment for those just getting into fitness. Unlike the local gym where you have a bunch of jacked guys and gals pumping the iron, you’ll see people of all shapes and sizes (mostly average to big) when you walk into a Planet Fitness. They do advertise access to a personal trainer, but from what I can tell, very few people avail themselves of those services.

In general terms, Planet Fitness has two types of memberships:

Basic Membership: The Planet Fitness basic membership is the lower cost (often $10/month, such as with the current promotion) which allows a person unlimited access to the 24/7 workout facility of choice.

Planet Fitness Black Card: The Planet Fitness Black Card Membership costs double ($19.99/month) but it includes access to any Planet Fitness location, not just the home location. In addition to that, when it comes to the locations that offer tanning beds, hydrotherapy and other niceties, the Black Card grants its holder unlimited access to those things. Additionally, the Black Card Member may also bring a guest with him/her at any time. I have heard that the guest can only be for the, “Home,” gym while others have said that it can be for any of the gyms...as with so many things, it just depends on which poorly informed employee you ask.

Speaking of employees, let’s focus on them for a second because they are definitely the biggest business cost of a Planet Fitness. Granted, the machines are probably fairly expensive, but those are a one-time cost and usually last for a good while. Aside from employees and the equipment, other notable expenses may include building leases, electric and water.

The average low-level Planet Fitness employee makes about $10/hour according to Indeed.

Just focusing on them for a second, let’s assume that there are about 2.5 employees on the premises at any given time during the entire year. We’re also going to ignore the fact that Managers, Assistant Managers and other travelling positions (such as machine techs) get paid more money than your basic front end employee.

2.5 * 365 * 24 * 10 = $219,000

Just with that, you’re at $219,000 just on your front end type staff. The reason that I am using this very lowball number is to illustrate a point. The point is that it would require:

219000/10/12 = 1,825

So, 1,825 Planet Fitness basic memberships, per location, just to cover the most basic employee costs which doesn’t include higher-paid employees, unemployment payments, Social Security tax matches or any other expenses for the establishment whatsoever.

More realistically, Planet Fitness would probably need something closer to 3,000 memberships, per location, just to have a prayer of breaking even if they really tighten the belt and keep expenses as low as possible.

Of course, as of 2017, Planet Fitness reported that they had about:

10.5 million members. Going with that number, which is almost certainly higher now, and the benchmark of 2000 locations, we see:

10500000/2000 = 5,250

The average location has well over 5,000 members, though it is almost certainly more than the number above given the opening of new locations since the 10.5M figure was reported.

While Planet Fitness locations are going to vary in size, the Planet Fitness where I first signed up probably had about 60 total machines, as well as some free weights. When I say, “Machines,” I’m including exercise bikes, treadmills, stair steppers and those types of things along with the weight machines.

In other words, if even 2% of the number of members (evenly distributed) were to show up in a given location at the same time, there might not be machines for all of them. That would normally present a problem, the demand not being satisfied by the supply, but Planet Fitness is a unique case in which it does exactly the opposite.

The beginning of the year with its accompanying, “New Year’s Resolutions,” is generally considered one of the best times for demand for fitness centers and related things. This is because one common resolution is to lose weight and/or get more exercise. In most businesses, when the demand for a product shoots up, the supply is going to be controlled to some degree and the price of the product will rise up as well. Imagine if organic and non-GMO etc. etc. wasn’t such a big deal...the Whole Foods business model would basically collapse in on itself. People would maybe ask, “Why am I paying $3.79 for a bag of tortilla chips when I can get them at the major grocery chain for $0.99!?”

In the case of Planet Fitness, however, the demand does not result in a price increase. In fact, nothing results in a price increase. While they are advertising the, “New Year, New You,” $10/month special, the fact of the matter is that has pretty much been the price of their basic membership for years. The only thing that they are doing right now that they don’t always do is heavy TV advertising.

The question is: How does this all work? How can you have a location where, if a small percentage of the clientele (who are paying for use of the equipment) were to all show up at the same time there wouldn’t be any equipment to use? Why would people continue to be members at a place where they can’t get on the equipment?

The key is: They don’t show up.

This is where we can get into a comparison of the casino marketing tactics. Imagine that a casino sends me an offer that includes a good bit of free play, some food credit and a free hotel stay. There are three possible results to this direct marketing:

1.) The casino loses money.

-The way that the casino would lose money on these means is if I show up to take advantage of the offers, but I don’t do any negative expectation playing. In other words, I come and stay and eat for free as well as turning the free play into some actual cash.

Obviously, this is not the outcome the casino desires, but it is a possible outcome. The casino’s goal is more along the lines of:

2.) The casino makes money.

-In this scenario, I go to the casino and avail myself of some or all of the offers, but the expected loss of my negative expectation gambling combined with my actual cash spend exceeds the value of the offers. When this happens, the casino profits.

3.) Basically nothing.

-The third possibility is that I don’t show up in response to the offer, or maybe not again at all, and the only money the casino is out is the negligible amount that it cost to print up and mail the offer that I was sent.

When the third possibility comes to pass, the casino might respond by continuing to send offers, calling directly or improving the offers. After some amount of time, the casino might send a new offer with some verbiage to the effect that it’s been awhile since you visited and they would like to see you back.

You will probably never get such a letter from Planet Fitness.

The difference between the two entities is that they are both offering something at a good value, but with Planet Fitness, you are paying them one way or the other. The entire business model depends on the fact that most people are not going to show up regularly, again, there wouldn’t even be enough equipment for all of them if they did.

Low Cost, Low Commitment

From my telemarketing days, one phrase that will always stick with me is, “You can cancel anytime within the first thirty days for a full refund.” In the industry, that was called a, “Low Commitment,” sale and was one of our primary tactics.

The majority of workout facilities cost substantially more than Planet Fitness, but that is because they are for people who are not only more committed to working out, but the cost itself is geared towards generating higher commitment. Unlike Planet Fitness, they want the customers to show up there regularly, and to varying extents, go out of their way to encourage them to do so.

It is without doubt that Planet Fitness is the most well-known low-cost workout facility nationwide. It is because of that low cost that a low commitment is also generated. People may, “Start strong,” going to the location daily, or every other day, and getting that workout in. Eventually, it becomes every third day, then once a week and trails off into nothing.

The key is that the Planet Fitness customer was never seriously focused on working out prior to joining Planet Fitness, if they were, then it could be argued that they wouldn’t have become (if another option was available) Planet Fitness customers in the first place. They would go to some sort of gym with a focus on complete body health and high intensity workouts...not one that feeds you pizza and Tootsie Rolls.

Ultimately, the Planet Fitness customer generally stops going altogether, or may go frequently in spurts that last a few weeks or a month. They see that $10 come out of their checking account, if they even notice it at all, and it reminds them, “Yeah...I really need to make time to do that.”

My goal is not to disparage Planet Fitness customers, as certainly a non-zero number of them do take fitness seriously around the calendar, but the entire business model is based on people NOT wanting to workout, just wanting to want to work out. The very fact itself that they belong to a gym and can pop in and out anytime they want to makes them feel good.

If just 20% of Planet Fitness customers showed up every other day, then Planet Fitness would be limited in what it could do. They would basically have two options:

1.) Allow people to cancel, and they certainly would, because they would have to stand around for an hour or longer just to be able to get on a machine.

OR:

2.) Open more Planet Fitness locations or expand existing ones. Granted, they are already doing the first of those two things, but demand is not the primary reason why. The primary reason why is so that the locations can be more convenient to people in order to get them to come and sign up (and very rarely return often) in the first place. They’re not looking for underserved markets because they have more than enough to serve the markets they do have, though raw membership numbers might suggest otherwise...they’re just looking to get more people in the door to sign that contract.

Where is the Value?

The value is in the fact that the memberships only cost $10 and $20, respectively, depending on whether or not one wants the Black Card membership. The majority of gyms cost $40+ per month, so it’s really not even in the same ballpark. Planet Fitness is a couple of cups of Starbucks coffee, other fitness locations are essentially an extra utility bill.

More than that, there are people out there who are going to have a use for Planet Fitness. What the low cost and low commitment business model enables them to do is open in markets that allow them to be the closest gym to a good many people. In some cases, people will join Planet Fitness simply because there was no other gym nearby.

Planet Fitness also works with an individual’s schedule because, unlike many (but not all) other gyms, they are open 24/7. Whatever your work schedule is, if you want to workout before or after work, it’s just on you to go to Planet Fitness.

Further, value exists in the Black Card for people that have to travel for work because, if they are in a town with a Planet Fitness, then they have access to a gym and know what to expect as all locations (in terms of equipment) seem to be basically the same.

Much like the player who uses the offers but doesn’t give the casino any play, Planet Fitness LOSES money on the people who actually use their memberships on an every day basis. Arguably, they could go in there and shower every day and it would cost Planet Fitness that $10 per month just for them to be able to do that. That doesn’t even get into machine breakdowns, employee costs, so on and so forth.

Hell, there are tanning salons out there where two tanning sessions are going to run more than what the Planet Fitness Black Card costs for an entire month.

MOVIEPASS MADNESS

One fundamental difference between working out and seeing movies is that most people want to want to workout, but most people just want to see movies.

The original idea behind MoviePass was that MoviePass members could pay a monthly fee, and in exchange, they would be issued a MoviePass debit card which would be loaded with the cost of a ticket for a particular movie when the person arrived at the theater. The person could view anywhere from 2-3 movies per month this way and would have to just pay for other tickets. The person could then swipe the MoviePass card as they would any other debit card and the ticket would be paid for.

The idea was basically popular with those familiar with it and resulted in a small cost savings for those who used it optimally.

In 2017, an analytics firm acquired a majority stake in MoviePass and changed the plan to allow for a $9.95/month payment which would allow the theater goer to see one movie every day. This change was insanely popular with the service’s users and the user base exploded to more than two million subscribers.

The goal of the analytics firm, believe it or not, was not to give customers an objectively ridiculous good deal. They believed that they could use the information provided by MoviePass users (mainly viewing trends) and sell that information for a profit on the other side. The idea was as long as they didn’t get absolutely killed on the subscriptions, they’d come out in the good.

They got absolutely killed on the subscriptions.

In fairness, the idea behind taking a small amount of money now in exchange for the perceived value later is not an entirely off the wall plan. Insurance companies do it all the time with the concept of, “Whole Life,” insurance, particularly those where the amount paid in premiums is essentially refunded if the customer does not die by then. That entire concept kind of flips things on its head, isn’t the goal for the insured NOT to die and that’s how the company makes money?

Not really.

For one thing, you have the concept of inflation. The way that ends up working out is that the money collected from the customer over that thirty year (or however long) term has more in value now than it does when the money is returned on a dollar-for-dollar basis. For example, $12,512 is worth about what $25,000 was worth in 1989. If I can collect $25,000 from the insured between 1989 and now and then give it all back...the money I collected will have had more monetary power than does the money that I am giving back.

In effect, it just amounts to an interest-free loan over a long period of time. The insured might also manage to void his/her policy by way of non-payment or some form of death that the policy does not cover.

Usually, insurance companies are also financial investment firms, some even openly operate as both...so what will happen is that they will take the money coming in on this interest free loan, turn it into more money and then give the original amount of money back. It’s almost like a Ponzi scheme with the key difference being that the insurance company doesn’t even have to show the customer a profit of any kind.

For the customer it has value as opposed to investing that money because:

A.) They might not know how to invest well.

B.) There is a payment made if the customer dies next week, whereas the customer will not have been able to save up $25,000 by next week.

C.) The concept of Whole Life insurance is foriegn to a great many people. Some of them are amazed at the fact that such policies exist whereby they get all the money they paid back at the end. The traditional life insurance paradigm is, “If I die, I win; if I live, I lose.”

The point is that it’s not entirely unique for insurance firms, analytics firms and all sorts of other firms to be able to sell information for a profit over and above that of what they are being paid for the service provided. This is done with websites, apps, grocery store shoppers cards...pretty much just assume that it’s (or could be) being done unless someone explicitly says it’s not.

On the one hand, MoviePass was not performing terribly well prior to 2017 because they were pretty limited in the amount of value actually being offered and because membership was fairly low. After 2017, they just hemorrhaged money completely BECAUSE membership was so high.

People don’t want to work out. They do want to eat popcorn and watch a movie.

With the new $9.99/month and one movie per day model, MoviePass essentially lost money on almost EVERY. SINGLE. CUSTOMER. If the MoviePass subscriber saw two movies in the month during the cheapest possible (weekday matinee, anyone) times, MoviePass lost money. If the customer saw one movie in an entire month during prime time on a weekend, yup, MoviePass generally lost money on that customer.

They were just bleeding money without any way to stop the flow. People would see the same movie multiple times. People would go to movies several days in a row. MoviePass definitely wasn’t hurting for analytics data...but where they were hurting was charging $9.99 for the service and occasionally paying over $100/month for a customer to go and see the latest Avengers for the 15th day in a row.

The unlimited plan was eventually decided to not be sustainable...and you can read the rest of the MoviePass history for yourself if you want to. They would eventually cycle through a series of proposed fees and plans that changed roughly every twenty minutes, or so. The thing was that they had already given the moviegoers something awesome, which they came to expect and were not going to settle for anything less.

Why does $10/month work for one thing and not the other? I’ll say it again, people WANT to see movies. All of the customers were extracting as much value from MoviePass as they possibly could.

At one point, MoviePass tried to negotiate with the major cinemas to sell them the tickets at a discount, but the cinemas had no interest. It seems pretty obvious to ask, “Why would the cinemas do that when they could just reduce their ticket prices anytime they want to?” The reason why that question seems obvious is because it is incredibly obvious. Working with MoviePass doesn’t benefit the cinemas at all, however, they did come up with discount services such as AMC A-List that are good for frequent movie-goers...but not as good as MoviePass was.

What can’t be emphasized enough is that MoviePass and Planet Fitness were doing the same fundamental thing: Offering an unprecedented value for an in-demand service. The difference is that MoviePass customers were all committed to extracting maximum value from the service and Planet Fitness customers are not.

Casinos and Value

That brings us to casinos and value gamblers. The major difference here is that both MoviePass and Planet Fitness were both focused exclusively on attracting value customers for the service being offered. Casinos are not.

For one thing, if the casinos were only concerned with value gamblers, then slot machines either would not exist or would all return 95%+. The value customer only represents a small percentage of the overall casino market whereas the majority of casino customers wouldn’t know where to find the value to begin with.

The original idea behind attracting value gamblers with things such as 100%+ video poker games is that attracting those gamblers fills up the casino and creates a great optic. Unfortunately for those customers, the casinos tend to do pretty well on that optic without them anyway.

Also, to a certain extent, the value market failed the casinos. Among those at all gambling savvy, it is pretty well-known that the Las Vegas Strip offers worse returns on just about everything. If value gamblers were an important market segment, then they would have all been flocking Downtown to Fremont as little as a decade ago while the Strip casinos would sit empty. Not to say that the opposite happened, but the value gambling centers did not eat away at the clientele of The Strip enough for The Strip to be required to focus on the value gambler.

This becomes even worse in most regional markets because those casinos are more focused on, “Regulars,” than tourists. If someone is looking to spend a week somewhere, then a small town casino with a handful of tables and a thousand or so machines is never going to compete with destinations such as Las Vegas and Atlantic City. However, for one day visitors, whatever is in driving range is what is in driving range.

Another thing with value gamblers is that the people who visited with them were thought to play bad games, so these visitors coming along with the value gambler would more than compensate for the fact that the value gambler is just that. This might not be the most politically correct view, but slots eventually rose to popularity because they gave the wives something to do while the husbands were busy playing low house edge table games.

Additionally, it might have been thought that these value gamblers might spend money elsewhere. For example, on the hotel stay, in restaurants at the various bars. As it turns out, the value gamblers also came to expect to be offered tremendous value (i.e. comps) on those things, as well. They wanted to play a positive expectation video poker game and also be given free stuff to entice them to come and play that positive game some more.

Slowly but surely, casinos came to the realization that they weren’t making any money from those people anyway. Someone could come in and play penny slots for twenty minutes and be a better value for the casino than someone playing 9/6 Jacks or Better for six hours. Just look:

Slot Denomination: $.01

Assumed House Edge: 12%

Spins Per Hour: 800

Bet Amount: $0.80

267 * .8 * .12 = $25.632 Expected Loss

Video Poker Denomination: $0.25 ($1.25 bet)

House Edge: 0.46%

Hands Per Hour: 800

Bet Amount: $1.25

4800 * 1.25 * .0046 = $27.60 Expected Loss

Okay, so my value gambler is sitting there for 18x longer, is probably getting more free drinks and may well expect more in comps than my slot player who lost $25+ in expectation in a period of twenty minutes.

Look, I lament the rapidly deteriorating state of recreational value gambling (as opposed to AP) as much as the next guy, I really do...but why do I care if the second guy is in my casino or not? Is the between $4-$5 an hour he is losing really at all important to me compared to the guy who is losing over $75 per hour?

MoviePass’ money would have been better spent just to open movie theaters in underserved markets and just charge for tickets. They sought the value customer out and the value customer sucked for them because they extracted all the value that they could.

Similarly, the casinos no longer have any reason to be interested in the value gambler. Best case scenario, the casino makes almost no money off of them. Worst case scenario, the casino loses a little bit of money due to the fact that they are there.

Conclusion

People can say, “Oh, it’s bad for business.” “They’re cheap.” “This is going to cost them in the long run.” They can say any number of other things.

Unfortunately, none of those things will be true.

Resort fees were supposed to be this big ordeal that would cost the casinos egregious enough to charge them all sorts of customers. Didn’t happen. Instead, you now have Tribal Casinos with little hotels located in Middle of Nowhere, U.S.A. who followed suit and started charging resort fees.

Paid parking will irritate enough people that they’ll never come back. Nobody is going to put up with paid parking, that’s for sure. Didn’t happen. Golden Nugget is the only casino in Atlantic City, for one example, that still offers free parking for everybody regardless of card level. The only reason (most) locals-type casinos don’t do it is because they would never get away with it as they are not destination properties. They rely on people who visit multiple times per week, not as an annual or semi-annual jaunt, so those people simply will just stop going entirely rather than pay for parking every day.

Shame the casinos all you want to, but the more gambling expands across the country, the worse it gets for value gamblers. The casinos simply have no interest in them. In ten years, the best video poker in the country is probably going to pay in the low 98%’s, except maybe for online casinos.

There is sufficient demand for the gambling product that value customers are simply not needed. If you need proof of concept, look at literally any state lottery report.

Comments

FleaStiff
FleaStiff Jan 28, 2020

Exercise machines are probably leased, not owned.
Use of a gym is self limiting, too long a line means don't come back for awhile.

Casinos need a mix, but don't know what mix. Casinos can avoid catering to 'sharpies" but never know when a ploppy will become rich. Few people go to a casino as an individual, most go as a couple or foursome. Paid parking? We can always change policies or 'comp' certain players.

Mission146
Mission146 Jan 28, 2020

I'm honestly not sure about the exercise machines, though it seems that most of them are Planet Fitness branded, but those could just be cover plates. According to this document filed with the SEC:

https://www.sec.gov/Archives/edgar/data/1637207/000119312515230459/d888681ds1.htm

The franchisees are required to purchase the exercise equipment directly from Planet Fitness Inc., which would lead me to believe that they manufacture their own devices. It also makes sense considering how many locations there are.

I don't know so much that casinos need a mix of players, at least, not anymore. There was a time that they attempted to cater to the value gambler in the big markets, but I think that time has passed because they realized that they don't really need them. Part of that, as much as anything, might have to do with the fact that Las Vegas is, "More than," just a gambling destination at this point.

As always, thanks for reading and for the comment!

odiousgambit
odiousgambit Jan 28, 2020

>Slowly but surely, casinos came to
>the realization that they weren’t
>making any money from those people

I think more than anything else they discounted the possibility that a good percent of the players would play fairly close to perfect strategy. It probably only needs to be maybe 5% of the players for it to become unacceptable. You and I would still be looking at the 95% that play awful strategy and accept it, but the bean counters are expert at claiming stuff all "comes off the bottom line" - a tactic that hits the bullseye for reaching their audience: owners and upper management

Mission146
Mission146 Jan 28, 2020

OG,

Thanks for the comment and that's a really good point! The high returning aspect of the games themselves may not be the only cause, but also the accessibility of information (strategy guides, practice games, strategy analyzers online) that make it easier to play the high-returning games much closer to optimal. In effect, not only were more people seeking out such games, but they also knew how to play them better.

FleaStiff
FleaStiff Jan 28, 2020

A foursome (one sharpie and three ploppies) goes to the Vegas SwellStrutter Casino which is so busy catering to Gourmands and ShowGoers that they offer nothing of interest to the Sharpie. Fine. The casino doesn't need the Sharpie and knows it. All the sharpies actions relate to his companions, not the casino. The casino can change if demographics change but the casino doubts TSA Groping, long lines, etc. will disappear and the casino doubts a resurgence in Vegas for Gambling will take place. The sharpie's Local Indian is large, spacious and at the very least Just as Good. Under these circumstances neither casino needs to cater to the Sharpie and neither casino knows which ploppies will become Rich Sharpies in the future, yet each casino is aware that players age, trends change, ant the future often turns out to have been unpredicted. Casinos know that the Future Gamblers of America are their future customers whether they be ploppies or Sharpies. What happened to the Poker Boom or the Blackjack Boom? casinos have to worry about that now.

IndyJeffrey
IndyJeffrey Jan 29, 2020

Great perspective, thanks.

The more gambling expands across the country, the less Vegas will rely on gambling. Which, I guess, it what you are saying.

Mission146
Mission146 Jan 29, 2020

Pretty much, they have already had to remake themselves! Thanks for reading and commenting!

sammydv
sammydv Feb 02, 2020

I don't know if you mentioned it in this article, I read through it and maybe missed it, but Movie Pass just filed for BK, right after you posted this information.

Mission146
Mission146 Feb 02, 2020

Thanks for reading as well as the comment! As state din the introduction to this article, MoviePass is no longer a going concern. It's bankrupt and does not seem to have any potential buyers in sight.

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