CRAIG PATTERSON: Opening a Profitable Gym & Increasing Retention

All right, everyone. Welcome to another insightful podcast. We have an amazing guest with us today, Craig Patterson, owner of Mad Labs. They have been around for a while, but I'm gonna let Craig— first of all, thanks for being here, and I'll let you tell your background because I think people need to know how awesome it is.

Oh, thanks, John. Thanks. Yeah, we've been threatening to do something together for a long time, and I know when you wrote your book, My wife and I both put some comments. I thought that was a really good book. If no one's read that book, then I think it's a really good idea. It's a good start. Yeah, my background. I'm from— I'm in Vancouver, BC now. I've been here for about 25, 27 years. I was a mechanical engineer, worked for a couple of Fortune 100 companies, and, you know, it was really big on green building and sustainability and looking at buildings and systems. And how those things would last 200 years. That was kind of the goal. I think we're going to build it to last 200 years. So you looked at things very long-term. I sold my little engineering firm in 2004, and I just, I was kind of taking a break, Jon. I'd been working like hard for a decade, and, you know, I didn't really have a girlfriend, or I kind of came out of it all. I was like, I've got a bit of money, but not enough to retire on. You know what I mean? I screwed up the taxes on that a bit too. I could have used your help back then. Anyway, I ran into Greg Glassman at a charity event in Seattle for cancer survivors. And we just, I don't know, it was kind of love at first sight, I guess, at the time. We sat down and talked for 7 hours. And if anybody knows Greg, he's a pretty convincing person. He convinced me to start working out again. And I had been at college, I played hockey at McGill and stuff like this. And I got into it. I got extremely fit really fast. And then he convinced me to open a gym. I was gonna go open another engineering firm to destroy some guys I wanted to get back at, all this kind of stuff. Anyway, I just never got back into engineering again. I started working out and the next thing you know, my friends joined me. And then next thing you know, I ended up opening a gym and we opened, like I did a personal training business and I had that up to about, you know, about 25 clients, small group and personal training. And I was at a, you know, I get kicked out of all these places and I was at a personal training studio bringing in about $8,500 a month. And I gave the gym about $1,500 to $2,000.

Wow.

was good, but if you took a vacation, you didn't get paid. And, you know, we were running out of space. And then finally all the personal trainers got together and kicked me out of there, uh, more so because their clients were trying to join our group and I didn't want to do that. Anyway, I opened a gym. We did it completely wrong. I mean, I got a couple of partners. I didn't have the confidence in me at the time to really do it on my own. Um, I think I had the money, but maybe not enough. Anyway, I had 2 partners, one's a doctor, one's another business guy, and we opened up and instead of doing like— I used to always do like 10 personal training sessions with a person before I put them in a little group and they needed to know something before I could just throw them into that thing and it was all pretty homemade. And anyway, we were told, you gotta go hire a couple of pretty young girls and the 2-day course, it should set them up and then you put people right into a group class. Over the next 6 months, I bet you we had 150 or 200 people come through the doors and they all just kept on churning out. It was unreal. We bled money like crazy and I'm like, why are we doing this? Like, what? This doesn't make any sense. You know what I mean? Like, I'm working my ass off and I'm not making any money and the people aren't— I can't make a relationship with them and they're leaving. And I mean, my partners didn't want to do the work, so they had a different opinion and different view of it. It was just like get more and more and more and then, you know, kind of get better in the first day experience. And anyway, finally I just said— I threw my hands up and said, listen, you know, I looked around and there were only last 25 or 30 people there with my clients that came over from the personal training business. They were indestructible. Like, they didn't, they didn't go anywhere. So I was like, I convinced my partners to buy me out and I, uh, you know, they gave me some, some money to get out of it and I started all over and I went back to the things that, um, that were successful. And it was, um, then shortly after, one of my friends from, uh, worked with me at Johnson Controls, he was like, yeah, I'm sick of the corporate life, uh, I want to be a coach. So he slept in, uh, in the underneath my desk in my one-bedroom apartment, and we, we kind of figured it out together. And, um, you know, we, uh, after losing so many clients and having such a bad experience, and like it kind of ruins your reputation, you have all those people coming through. We were like, okay, no more bring-a-friend days, no more free class on Saturday, no more free weeks, nothing. It's going to be one-on-one by appointment only. And we found, you know, we could at least 10 personal training sessions. And we started taking data. It was like we were both engineers and we started taking this big data collection. It looked more like an undergraduate class project, maybe even like a grade 11 student project or something like this. It was like Duotang folders and— And they were like, okay, what are we trying to accomplish here? And we were like, well, the clients have to be happy. And it was like, okay, what does that mean? You know? And it was like, so we got the SFU kinesiology department come in and design this big test and then retest them and the people would leave. And we're like, well, it doesn't really matter if we can't see them again or, you know, we don't know what their journey's on. So we just said, how about we just measure if they stick around, right? That's You know, and then today you see everywhere retention's the number one thing, but, you know, and then we're like, well, if they're only paying us $10 a month versus, you know, $300 a month, that's a big difference. So, okay, we said, okay, our first, you know, our first key data points will be, uh, they never leave and they pay us a lot of money. How about that? We're like, yeah, that's good. Those are 2 good data points. And then, you know, T-Bear was like, well, I need to make $100,000 a year. I just can't. I gotta go back to engineering. I can't live in Vancouver. I was like, okay, there's Data point number 3, total coach pay, going to make $100,000. Then we found ourselves, John, after a while working 50 hours a week. We're like, okay, it's got to be dollar per coach hour, vacation, all this kind of stuff we need. And when you're away from work, you need to be getting paid. So how do we do that? So those were our first 4. And then finally, after a couple of years, like the business wasn't making any money, I'm like, fuck, I can't, you know, the business has got it. Anyway, we came up with EBITDA and we set a target. to be about what rent is or 20%. If we could, you know, I think in our model, we take a smaller piece of the pie than a gym that's like fully cranking to the brim and bringing in 50 new members a month. But it's super sustainable, right? So, and then at the end of the day, what is it worth? And you would know this better than anybody. If the business is churning clients and churning coaches, it's not worth much. And especially if it's got a— a brand that you don't own, uh, probably worth a little less again. So yeah, so that's— that was 20 years ago, and we've been— we've just been a big trial and error around what works and what doesn't over the long haul, like what, what really works, right? So yeah, that's what we've been up to for, uh, 20 years now. We've got a couple hundred gyms around the world that we've trained up in our model. And, um, yeah, it's the long game. We're playing the long, hard, slow game, and it's, uh, it's not sexy. But when you get there, it takes a while to get there. When you get there, life's good. You know, you feel good about your clients, you feel good about your coaches, you feel good about your impact in your communities. People are happy. We never do any marketing. My gym does— gym's still there 20 years later. We got $1.1 million last year, about 18% EBITDA. My rent's gone from $6,000 a month to $21,000 a month. This is a problem. But I got those 3 coaches are still there. T-Bear's entering his 19th year and he makes, you know, between $80,000 and $100,000 and takes 7 weeks of paid vacation.

Wow.

Vacation. And, you know, he's got a family now. And Sheppy's been there for 17 or 18 years. Andy's been there for 18 years. And like Andy said, his best year ever. Like, I was like, Andy, how was your month in January? He's like, oh, nothing special. It was like a $9,000 check I cut for him, you know. So I was like, okay, you're, you're doing good. So yeah, that's what we're up to, John.

Yeah. So I mean, there's so many nuggets you just said in there. I hope everyone's picking up on some of them. The first one you mentioned, most gym owners at some point are going to consider selling, right? And just like business owners, you— it's an asset and you're hoping you can sell it for something.

Yeah.

And if your retention is bad, it's like an annuity. The buyer is basically buying an annuity, which is they're looking for a guaranteed stream of income. And the less guaranteed that is, The less the price is. And a lot of times when we look at it, we're basically the first bearer of bad news to the owner and they're mad at us. I'm like, look, I'm just telling you the numbers. And based on your revenue and the fact that you don't even have any, any net income, you're looking at selling the assets and you're going to sell them at like, what would—

Not barbell worth.

Yeah, you're not going to sell them for what you bought them for. You're going to sell them for what they're currently worth based after use. So that's important. One thing I wanted to ask you, when I bought my gym, so I sold it about a few years ago and I owned it for 3. So it's been a while now at this point. But man, when, when I bought it, I, they had something like 18 coaches on staff and we were doing 7 classes a day. Most of them were part-time, some were considered full-time, but it was none of, it wasn't salary pay. It was all— You get paid to be in the class. And then to your point, if they're not in the class, they're not getting paid. You've lived both, it sounds like. So what are some of the challenges that gym owners are facing by not having a model that can sustain a salary and benefits and things like that?

Well, I think if we go all the way back to what— why are you doing what you're doing, right? Like the biggest misnomer or misconception or misunderstanding that independent gym owners have is they got to put people into a group class right away. They got to pay the coaches by the hour, right? away. Well, where does that come from? Like, where is that thinking? Where did that come from? Well, it goes all the way back to, I think, even before Curves, but I'm going to blame it on Curves. If you remember, Curves did that great big leap. All of a sudden they went from, you know, a few little shops to 10,000, right? And, um, you know, it was really— Greg was my mentor, and he was— I mean, we were— I was the 5th gym in the world. And I mean, in the next 3 or 4 years, I don't even think we got to the 30 or 40. You know what I mean? And everybody was kind of figuring out how to deliver this brand of fitness. And, um, in 2006 or '07, you just fell in love with Curves, and it was all— it was Curves talk. Curve, curve, curve. I'd go, what the fuck do those guys have to teach us? You know, a bunch of, uh, middle-aged, uh, you know, women pounding away on a machine. Like, it's totally different than what we're doing. Like, what? Anyway, the model was Really quick training for the coach, right? Put people straight into a group class and then open as many locations as you can. Because I mean, that's how I got sucked into it too, kind of, you know, it's napkin math. And you look at F45 or Orangetheory or any of those bar and Pilates and like they're coming up and they're going bankrupt so fast now. Like they're emulating the same model and the model depends upon selling a franchise or a license or a new marketing scheme. You see these marketing companies coming all the time. To someone who can do really simple math. It's like, okay, I've got this much square footage, I can put 300 people in there, and, uh, shit, if I get 300 people in there and I pay the coach this much an hour and here's my expenses, like, it's a real simple balance, right? Real simple P&L, hypothetically. And they're like, fuck, I'm rich. Okay, I got 200 members, $200 a month, uh, shit, I'm rich, you know? And then they can see that. And this is how F45 went from 500 to 1,500 gyms so fast is that anybody can understand it, anybody can implement it, right? I just need 300 members. So then they get caught in this, you know, putting people straight into a group class, paying the coach by the hour, and that is the root evil. It's the root cause. You're going to churn 70% of the people a year doing that. I don't give a fuck what anybody says. Excuse my language. You're— even you tighten it up with all the consultants and the client success managers and all the automation software, you're never gonna get over 50%, and that's a disaster. You need to save, you need to keep 80% of your clients a year. And with putting 'em right into a group class, the coach never gets to know them. They're not really becoming professionals. They can't make enough money. I mean, it just goes on and on. Where our coaches work in a co-op and they get 5, 6, 7 weeks of paid vacation once they get there and figure it out. We have an 18-month coach program. But I mean, my mission in life is to make great gyms, and you can't do that by paying a coach $25 a class and 4 nights for a personal training. You just— it will not work. It hasn't. We've been doing this experiment now for 30 years and it doesn't work. It just churns clients and churns coaches. And I'm here just to— I mean, we're an education company at the end of the day. I'm a college for personal trainers and gym owners. I'm here to educate. And I'm telling you, What not to do is this idea that you're going to get rich by running a group class and filling it full of people. It's not. It's never going to happen. The whole thing is designed to scale so that F45 can go out and build 1,500 new ones in five years. And if you look at that, like they do an IPO in 2021 for $18. Go check out what the stock's worth now. It's fucking two cents, right? The CEO sells all these shares immediately. And that thing tanks. And that is the model. The model is get rich quick. All right.

Interesting. I, yeah, it's, I've met a couple trainers at F45 gyms and your model, yeah, what you're saying is accurate. In order for that model to work, they can't afford to pay someone for the expertise that's needed. And so really you've hired, they've hired babysitters who can show the video that the corporate or the franchise or puts off. And I asked one of them like, well, so what are your certifications? And I mean, this weren't, this wasn't her exact words, but she basically said, I'm, I'm fit and I like exercise. That was, that was her credibility.

Yeah.

Another thing you said too about the trainers, we ran into this all the time with our coaches. I wanted them, I, I asked them like, hey, while you're coaching, it'd be great if you could like Take some pictures, shout out the member, like give them some praise on social media, all for marketing purposes. But it's interesting. My coaches were good coaches. They were certified, knew their stuff, right?

Good people, all of that.

And, and they cared about the class, whoever's in that class, they gave them a good service. But outside of that, there wasn't really a good relationship per se. They, The coaches weren't going out of their way. If Bob didn't come in for a while, we see the report, hey, let's reach out to Bob. And, you know, it's not the same level as like, I have a relationship with you, Bob. We went through however many classes by ourselves before you came into the group thing. Like, I'm invested in your well-being. I'm guessing there's some sort of compensation structured around like retaining clients.

Yeah. So that's it. They're paid almost exclusively on retention. They're also paid more if they bring in referrals, right? So we give them enrollment training, communication training, account management training, personal development training. Like, our coaches have an 18-month program, basically teaches how to make money. But they start— the first step for every client is a one-on-one consult. You sit down and figure out why are you here? What do you want? And then what are the limitations? So they tell you, I want to be able to play with my kids when I'm 60, or I want to climb Mount Kilimanjaro, whatever it is, you know what I mean? Like, and then you sit down and go, okay, um, here's what's in the road. So you do a 3-day assessment, you know, and you say, well, here's what's in the road of you having that, and here's a plan, here's a 2-year plan to get there. And, uh, most client journeys, 80% of ours, um, are— we're trying to take the biggest tranche of civilization or humanity as we can. We can't take the sickest and we probably aren't interested in the fittest either, to be honest, because we're trying to get people off that sickness to wellness spectrum and have them have a good life.

Right.

Now, having said that, we've had a whole bunch of Olympians and professional athletes and all that, but that's not our bread and butter. If you're going after that, God help you, you're probably going to go bankrupt on that side of things. So, Probably. They're probably gonna do another, the 3-day assessment is one-on-one, you know, that's like $350. And then they're gonna do 12 or 15 or 20 personal training sessions, whatever they need. And then most, most of our community can go into a combination of personal training and group class. So they see their coach once every 4 to 6 weeks. We have a programming cycle that revolves all around that. And in the programming, like, um, everybody's got their own You know, sort of progression to whatever's happening in there. And then we have metacycles and mesocycles, all this kind of stuff. But for the most part, the coach is 100% invested in what's going on in that person's life. Like, what did you do this weekend? What were you eating this weekend? Where were you hanging out? Chances are they're friends now and they're, you know, they're playing golf together. They're going, you know, to the children's recitals and, you know, they're involved in their life.

Yeah.

Because if that person doesn't show up, they don't get paid, right? Which is a fundamental, massive difference between coaching a great group class or getting that percentage for the personal training session and then leaving. You know, you don't have any— you don't— you're not invested in what's going on in that person's life. You're not truly invested in their success for why they're there. I mean, I think most gym owners don't really know why most of their clients are even there. You know, like, why are you here? You here? Oh, you're here to do the workout of the day. Well, I mean, we got to go beyond that. You know, that's going to churn. You're going to lose them, you know, because they're not really invested. There's no— the human relationship's the most powerful part of what we do. I never worry about the next fitness craze. I never worry about the next marketing fucking toy. I never worry about, um, you know, apps and watches. And like, no one's— no one can compete with that relationship. You just can't, right? Unless they build a robot that's as good as Sheppy or T-Bear, like, good luck. You know, I don't have any competition. We don't do any marketing. Like, I don't pay for any paid marketing in 20 years. We do $1.1 million a year.

That's awesome.

It's all referrals. It's our reputation is awesome. Our referrals are awesome. Our coaches are, they're dragging me into the fight. Like, they're going, Patty, we need to raise our rates. Like, how many coaches come to the gym owner and go, And I wanna be the one on the front lines going to each client and tell 'em why they gotta pay 15% more this year. Like, that's the difference, you know what I mean? And they're like, we need to change the programming thing. Like, they're dragging us, me and my wife, like we're on the business side now teaching other gym owners and they're constantly evolving. They're constantly changing this thing up. And then they're talking to all the other gyms in our network and then this thing is just, it's an evolving machine. Yeah. Is just moving forward with the times. And instead of pushing my coaches all the time, they're like pulling me. I'm like, ah, man, you know what I mean? That's— people are gonna get upset about that. And they're like, fuck it, we gotta do it. We have to do it. This is the right thing to do. So yeah, that's the cool part is I'm the old hag or nerd or whatever now, right? And they really are an amazing group of human beings that I found on top of the model The model works, right? And we had, we had a 13 or 15% price raise last year that we had to do. And I made one phone call, right? And, and I see, I see these things like advice columns out there, like you're going to raise your rates, how do you do it? And most of them say a group email. I mean, you couldn't do it any worse than that. Here's— you're getting a price increase of 15%. Here it is, an email. Our gym, every, every client got a personal conversation, a sit-down with a coach. And explained what was up, you know, and we lost one person outta 317 or something like that, right?

Yeah. That's amazing. I, I would say the only team member we had at our gym that was as committed as you just described your coaches was our GM and he was on salary and it was basically his job description to be committed. But not, not going out at like the coaches again, they were great, but none of them would've done something like that.

Well, they're not incented to do it. It's not, there's no other fault. I don't care who it is. You can put Gandhi in there, Mother Teresa, it's all going to end up the same way is they go by where the incentives lie. And I'm going to add one last thing in that model. If you can hire all the best consultants in the world, there's good people there and there's smart people there. But in my opinion, not much of my opinion and all the data that I've seen, where it ends up is exactly what you described. It ends up with a GM with all the responsibility on their shoulder with a whole bunch of coaches that are partly invested. And not fully invested. So all those communications go from client through the coach up to the GM. And the GM, you know, is making quite a bit of money, but they're holding it all together. So then if you're trying to sell that, you know, you can only— the only person you can sell it to is whoever wants to do that job.

Yep.

Because you have a business that's relying on one person, and if they get sick or if they say, fuck it, I've had enough— excuse my language again, Joe— The business is done, you know. So ours has a huge stable platform of full-time coaches, and we lose them now and then. I had a coach that was with me for 11 years, and his wife is like, I'm done with Canada, we're moving back to the Czech Republic. And he was like, okay, right? And, uh, yeah, we, we're still transitioning his clients. He left 9 months ago. So yeah.

Yeah, uh, makes so much sense. And I can tell you from my experience, when we deal with gym owners who are selling their gym, I would say about 60% of the time the buyer is the most invested person, like team member they currently have, whether that's a coach or someone in a GM type of responsibility, because that's pretty much the only person interested.

Yeah. When you're selling a job, you can maybe get what, 2 to 3 times, uh, total compensation or—

Uh, most of the time these guys are selling their assets. Like they just, they don't have enough net income, uh, which is one of the reasons why they're selling it, right? Like To your point, you know, your rent is crazy and probably makes you nauseous, but you're still right around 20%, which is great. Most gyms aren't operating at that 20% sustainable. Like, why would you ever want to sell? It's a great annuity for you. You get fulfillment out of it. But these guys who are selling are the ones who it's like, oh, I had 5% this year of net income, but last year I had -10%, -15%.

And if they're paying themselves anything, they're probably— if they're even, you know, if they're paying themselves a salary that was even $20 an hour, That number, the profit number doesn't exist. It just, it is a, for me, it's like, I know that there's a lot of gym owners there and I've seen so many of them go bankrupt, John, and they would go bankrupt before they would call me. And I, you know, there's something in the psyche of not wanting to ask for help. And I get that. But if you're a gym owner and you're listening to this and you're doing the classic model that's out there, that's in, you know, functional fitness gym, Pilates studios, CrossFit gyms, you name it.

Yeah.

It wasn't designed for the long-term success for the client, the coach, or especially you, the gym owner. I mean, we've looked deeply. I did a 2-year study of 1,600 gyms with Zen Planner, and I know the numbers inside out. They're going to churn at an unsustainable rate, and the coaches really aren't— the whole model is not set up for long-term success. It's set up for the people at the top to enrich themselves quickly. And it's really that simple. And if you're an independent gym owner, you can do it a different way. And I really encourage you just to look at some of our education, right? I have a 22-minute video that explains how it all works. And like, we've been doing this a long time. And the people that— anybody that sees it usually gives me a shout and they're like, I wish I had had this 5 years ago. You know, it kind of makes you— it restaples their head on. And I get in trouble all the time. I mean, I've been sued so many times and threatened and all this just for saying The truth. And the truth is this is not set up for the long-term success for anybody. It's set up for the short-term gain. And then now the marketing companies, you know, you got all these gyms half full because they're going to churn. Then the marketing companies come along and they fill them up, but they— it churns even faster. So now you need to put a— bolt a mastermind onto that and get all the people in that broken model figuring out how to make it better and better. And then you pay for that. And then, you know, we've seen them— I've seen 4 of them come and go now in the last 8 years. And it's, uh, My mission is to crush all that, to be honest.

Yeah.

Yeah.

Well, thanks for being here, Craig. Tell us, uh, and we'll put the URL in the show notes, but where do they go watch this 22-minute video?

Yeah, so I created a little landing page for you, John. It's madlabbusiness.com/insight. So, uh, you go on there. If you go on Mad Lab Business, you'll find it. But I've got like, uh, we've got another one I've got like 16 hours of courses that teaches all of our— we have 9 laws that are based on the 6 key performance indicators. So, after tracking those 6 key performance indicators for 10 years, it produced 9 laws. And then, for the last 10 years, it just works out. It's just kind of how nature works. It's like we've uncovered something. I didn't find it. It exists in nature of how the thing stays in balance. It's kind of like a thermodynamics equation or something, you know, energy in, energy out, this kind of stuff. Anyway, yeah. So I've got 50% off of that. It's normally $1,000. So for your listeners, it's $500. And then for the people that are still like, you're scared about selling personal training and you want to put people in a group class, there's a big fear around that. It's not that hard. It's not that hard. I have a thing called Personal Training First, and we're really proud of it. It's something my wife and our head of coaching put together. And, uh, the feedback we get is, man, you gave away everything. And I'm like, that's just the first 2 laws. It'll teach you how to implement like one-on-one personal training, um, before they go to a group. And it's, uh, yeah, I think it should be worth a few thousand dollars, but we're charging the price of one personal training session. It's like $97 or something like that.

Wow, great. So madlabbusiness.com/insight. Again, it'll be in the show notes if you—

was it forward slash or backslash?

Well, whatever. The slash.

The slash. Yeah. Yeah.

Thanks again for being here. I, you guys, it's, it's interesting. There's so much information out there when it comes to what's the right way to run a gym. I would just say this, unless you're 100% satisfied with the state of your gym and your like work-life harmony equation, if there's any element of like, huh, I wonder, at a minimum, go and check out the 22-minute video. Right? Like, information doesn't hurt us. And that's why we bring guests like Craig on to help expose you to other things that might be exactly what you're needing to, to turn the corner on whatever it is you're trying to do. So thanks again, Craig. And guys, remember, profit is a choice. Have the courage and wisdom to choose it.

I like that. Thank you, John.