Chris: 00:02 – This is Two-Brain Radio and I am Chris Cooper. Today we’re going to be talking about risk in the fitness industry, and with the commoditization of intensity, as I’ve been writing about for the last week or so, as well as big chains dropping their rates down to like $10 a month and all this technology coming into the market, a lot of gym owners are scared about what the future holds and their ability to compete. So what I wanted to do is bring an economist on the show to talk about how to mitigate the risk of commoditization, how to set yourself apart, and how to survive even an economic downturn. But I didn’t just want to bring in some math nerd. So I brought in Allison Schrager. Allison is an economist and she’s the author of “An Economist Walks Into a Brothel: And Other Unexpected Places to Understand Risk.” It’s a fantastic book.

Chris: 00:46 – It has great stories and examples from, of course, the Bunny Ranch, a brothel in Nevada, from the world of poker playing from Carnival Cruise lines. It’s a great book, and after reading it, I understood the risks associated in our industry and also in things like retirement. The best part about Allison is that she goes to Equinox Fitness. She has an online personal trainer and she’s got some great examples about why a person like her, very smart, very well spoken, constantly traveling, would use these services and what’s going to happen in our industry and why the mediocre are going to die while the very cheap are going to survive and the very high touch expensive services like CrossFit and personal training are going to thrive. It’s a great interview. I felt amazing after talking with Allison and I hope you do, too. Enjoy.

Chris: 01:39 – Allison, welcome to Two-Brain Radio.

Allison: 01:41 – Hi. Thanks for having me.

Chris: 01:42 – Oh, you’re welcome. I’m really, really excited to talk to you about risk and mitigation and entrepreneurship today. For those in the listening audience who haven’t read it yet, maybe you can just tell us a little bit about “An Economist Walks Into a Brothel.”

Allison: 01:59 – I’ve studied risk for years, mainly in the context of retirement finance. And it dawned on me over the years that we really weren’t explaining risk and risk concepts to people, yet figuring out retirement finance is just one big risk problem. And you know, in general, life is full of risk problems. And we often throw up our hands and say people are terrible at risk. You know, we need to nudge them along or get rid of all their risk. But really, I mean there’s a lot of tools to understand risk. We just don’t teach them and then get frustrated when people don’t understand them. So I really was motivated to help people understand risk better, the science of risk. And I noticed as a journalist, people respond better to stories than just being lectured on financial theory. So I traveled the country to meet interesting risk takers and sort of illustrate in story form how these concepts work.

Chris: 02:52 – Yeah. And there are some amazing stories in the book. My favorite was the professional poker player. Maybe you can share that story about how professional poker players mitigate risk.

Allison: 03:02 – Yeah. So I think that’s an interesting illustration of my point, which is that people who take risks regularly and have training in risk actually are very good at it. And you know, usually when people play poker, if they’re amateurs, they often fall into these behavioral biases that people love to talk about, like loss aversion. And that’s the idea is that you tend to play more aggressively when you’re down then when you’re up, cause you just hate to lose and you end up taking outsize risks when you’re down. And really if you’re behaving like rationally, then you would play consistently whether up or down, because statistically whether or not you’re going to win a poker hand, whether or not you’re up or down doesn’t really make a difference, so it shouldn’t impact your play.

Allison: 03:44 – So I met Phil Hellmuth who I’d never heard of because I don’t follow poker at all, but apparently he’s really famous. So whenever I meet anyone who plays poker, even casually, they’re really excited that I met him. And you know, he’s an interesting case because he is known. I mean, his whole brand is that he’s this very emotional guy who just loses control. But I found it fascinating that when he plays poker, he’s notorious for being the most patient, thoughtful, methodical player. Like when he plays, he channels this inner calm, which he does not possess at all when he’s not playing. So, you know, I tried to get to the bottom of like, how do you do this? How do you—cause he only plays 12% of his hands. Most poker players play 30%, and that’s what they call patient and he is not patient otherwise.

Allison: 04:34 – So it turns out he uses a lot of the risk-management strategies that you see in finance. For instance, he gets what he calls staked, which means he gets investors to pay some of his buy in and then he shares the winnings with them. So he never has more than $10,000 of his own money at stake. And that helps him stay focused and not taking too much risk. Then also, I’ve found this really interesting, cut a lot of little side deals. You know, they sort of, if it comes down between two players in a final round of a tournament, they’ll go aside and be like, all right, if the $2 million winnings I’ll get 500, you get 500 and then the winner keeps the remaining million. So you sort of have a certain guaranteed payoff and things like that help him stay really focused and rational, cause he doesn’t have that much money at stake and he always has some guaranteed winnings and this helps him not get too caught up.

Chris: 05:28 – That’s really interesting. And after reading your book, I looked for him on YouTube actually, and some of his tantrums are just legendary.

Allison: 05:35 – Yeah. And you know, you would never think he’d be known as the most patient player.

Chris: 05:39 – No. Well he does admit to you, I think, that he was putting on some of them, but all right, well, we’re going to talk about gym ownership today, and it’s I think an interesting topic maybe for discussing about risk because when you’re starting a new gym, you’re usually doing it because you’re not making enough money as a personal trainer. So you’re really not risking a lot of money, like less than $20,000 in most cases. But in many of these cases, the person opening the gym is a low income earner in the first place. You just don’t make a lot of money as a personal trainer. So it feels like the risk is huge. So do you think that to get more people opening gyms, you know, what can we do to help them kind of mitigate that risk even in their own mind?

Allison: 06:31 – Well, I mean, there’s different ways you can mitigate risk anytime you take on anything which is, you know, the classic hedging and insurance, which is, you know, don’t take too much risk. Maybe you don’t open a huge space, open a smaller space because if you over-leverage yourself and open up, you know, a hundred thousand square feet, you know, you’re going to probably be a little over extended. So it might be starting small. Insurance could, as I said, sort of have various payoffs in case you know, things don’t work out. It could be, you know, another line of business attracted to it. It could be renting out some of the space. There’s various ways, but I think mainly you have to think about what your goal is and sort of what you are going to bring to the market. As I said, and it can be starting small, especially with gyms right now.

Allison: 07:21 – I think in a lot of industries what we’re seeing in economics is sort of the superstar winner-take-all effect, right? So what you have is these sort of really big known national chains who suck up all the market. And so I think if you’re opening your own gym, you have to think about, you know, what are—people still can thrive in this market, but they kind of have to have this niche, very high-touch service. So it could be, again, starting small and have a have a lot of sort of personal treatment, offer something new and interesting.

Chris: 07:53 – That’s really interesting that you brought up the clear goal because even though my goal was kind of like escape poverty and buy groceries when I opened up a gym, I wouldn’t define that as a clear enough goal, you know? So what do you mean in the book when you’re talking about the importance of having a clear goal when measuring risk?

Allison: 08:12 – Well you shouldn’t just take a risk for risk’s sake. I mean you have to be very thoughtful about what it is. I mean if you are opening a gym, as I said, is it, you know, is this cause it’s what you really want to do? Do you want to be an entrepreneur? Do you want to do really enjoy fitness? I mean what is it that you like? As I said, it’s a risky thing and it’s a hard business. So you want to be really clear that this is what you want and what you love about it and how it brings you closer to your goals.

Chris: 08:37 – OK. So in my case, you know, it was more like a prospect theory, which you also talk about a book, which is, you know, the risk of loss is greater than the, you know, fear of not making it. So if I didn’t take the risk, for me, I wouldn’t have been able to support my wife and baby.

Chris: 08:56 – But for a lot of people opening gyms, they’re actually losing a higher-paying job or they’re moving out of like a high-paying career to do this risky thing. So why is the perception of risk different for those people than it would have been for somebody who’s broke?

Allison: 09:12 – I’m sorry, I don’t understand. What do you mean?

Chris: 09:16 – Like, is it actually riskier for somebody to leave a high-paying job or is it riskier for somebody who doesn’t have much money to risk everything on opening up?

Allison: 09:26 – Oh, it depends how you define risk. I mean if you’re leaving a high-paying job, you might have more savings. So you can tolerate failure, you might have connections where if it doesn’t work out you can just go back to that high-paying job. Of course you have a bigger loss of income. So I guess it really depends how you define risk and what risk means to you.

Chris: 09:46 – So how can risk mean different things to different people then?

Allison: 09:49 – Well, this whole concept of risk free. Even if you’re investing, a one-year investment horizon versus a 20-year investment horizon, you know, have different risks involved and what sort of assets will mean no risk are completely different. So as I said, just like if you’re poor and trying sort of a moon shoot to sort of get you out of poverty, again, it’s a very different risk proposition than someone who’s making say $200,000 and sort of tries, you know, their dream. I mean, these are very different goals. They’re very different risk profiles and what risk means to each of them is very different.

Chris: 10:28 – Would you say that there is a little bit more resilience in somebody who really can’t afford to fail than maybe somebody who’s starting up and well I can always fall back on my career as a broker?

Allison: 10:42 – Not necessarily, I mean, I think it depends on the person. I mean, if you can’t really afford to fail—I mean a lot of, I think my last chapter I talk about uncertainty and risks you don’t anticipate and the key to dealing with risks that you don’t anticipate is the ability to sort of maneuver, be flexible. And if you’re just like, I gotta make this work no matter what, and nothing is going your way, a certain point, you do have to cut your losses and go.

Chris: 11:07 – Yeah. OK. So obviously the fitness industry does kind of, you know, rise and fall on the tide of the economy. As you know, people are leaving their jobs or losing their jobs, I guess, one of the things that they cut out is their gym membership. Should gym owners be worried about that kind of stuff? You know, if there is a recession looming, is that likely to affect us?

Allison: 11:29 – Yeah, for sure. I mean it is, as you said, what we call a pro cyclical industry, where you face a lot of extra market risk. Again, I mean a way you can manage that is just like people in finance look for assets that don’t move with the markets, as I said, is you could try to make your business more market resilient. As I said, offer particular services that you know, are more likely to have long-term customers. I mean, a lot of the gym business model is to have people join and not actually show up. But the problem is when people lose their jobs, they start looking a little bit more carefully at their credit-card statements and they’re like, what’s this reoccurring $50 charge? Let’s get rid of that. So, but if you have people who go to the gym all the time and are really engaged with your product, even if they have less money, they’re more likely to keep it up.

Chris: 12:15 – And you also said that people who suffer most in like an economic downturn would be the people at the extreme ends of the spectrum, right? The lowest earners, but also the highest earners. So should we be maybe targeting clients who are, you know, within the middle of that spectrum, but toward the higher end then?

Allison: 12:34 – Maybe, I mean it depends on the community you live in and where people are. And as I said, what your comparative advantage is. I mean, I mentioned that, you know, people at the low end and high end tend to suffer more in recessions, but high-end people also have—I mean, no one feels bad when an investment banker loses his job in a recession because he has so much money in the bank, he can ride it out. So I mean if you do manage to tap into that market, you know, odds are they’re not going to cut back much on their gym membership if a recession happens cause they probably still are making decent money or have decent savings from somewhere.

Chris: 13:09 OK. – So most of the people listening to this podcast will own a gym with about 150 clients. They’ll have a very high-touch service. But there’s also this tendency to want to like rent space or compete with the big globo-gym chains like Gold’s. Now if there is an economic downturn coming, do you think that a small micro gym owner would be better to focus on their higher end, higher-touch services or to drop their rate as low as they possibly can and just kinda like weather the storm?

Allison: 13:42 – Well, I would say focus on the higher-touch services because you know, it’s just really hard to compete with a Gold’s who has scale. And like everyone’s going to drop their prices. But you know, also the problem with gyms is you drop prices too much, i’s sort of like you’re signaling, you know, lower quality. And especially if you’re going to compete with the big chains, if you want to compete with these superstar economies, what people still can do well on a small business owners is these sort of high-touch services and as I said, a personal good experience. And also if you cut your prices too much, what happens when the economy booms? People really hate it. I hate it when my gym increases their fee, you know? So it’s hard to increase fees again when they go up and you don’t want to lock in a situation where you’re having all these customers at a loss and it’s really hard to increase their fees later.

Chris: 14:34 – It definitely is. Tell me about your experience with that as a gym client.

Allison: 14:39 – Yeah. Well, I mean I have a weird relationship with the gym. I’ve always gone to absurdly expensive gyms because it’s the economist in me has this theory that it makes more sense to pay a lot and go to a gym than pay a little and not go to the gym. So even when I was a graduate student, I went to Equinox and it was probably like 10% of my income, but I went all the time because I felt so guilty that I was paying so much.

Chris: 15:04 – Is that prospect theory in action on the other side too?

Allison: 15:08 – No, it was a commitment device, it was totally rational. As I said, it’s just about my preferences, like behavioral biases in economics or departures from rationality are really just about acting inconsistently or in ways that might not be in your best interest. And this was totally my best interest.

Allison: 15:24 It was a completely rational, thoughtful strategy that I worked out. Like I remember I was taking a behavioral economics seminar in grad school and they were saying, oh, well you’ll go to the gym, but not if it’s snowing. And like I had to walk a mile to my gym and I’m like, I go when it snows. I never miss a workout because this is 10% of my income. Also, you know, I was a graduate student in New York and that’s a hard life. You know, you’re sort of really struggling to get by. But like going to this fancy gym made me feel like special and important. So it kind of became this source of joy, going to a gym where like, you know, that was beautiful and it felt luxurious and that was the one nice thing I did for myself all through grad school.

Chris: 16:03 – That’s really interesting. So if I own a gym and I do, and it’s pretty high touch, you know, 150 to 200 clients, how important is that feeling of like, OK, you know, I’m paying more for this experience?

Allison: 16:16 – Well, it’s not like I like Equinox cause I pay a lot. I like it because you go in, it feels really comfortable and good. Although it’s interesting with them because they’ve now really hooked me because they’re developing all these technology apps where you have remote trainers. So I was in the beta group for that and now I have this trainer in San Francisco who texts me every day and tells me to go to the gym.

Chris: 16:43 – And does that make you want to go to the gym even more?

Allison: 16:45 – Oh my God. Well I have to, I mean, he gets—even when I go on vacation, he’s like, I didn’t see you worked out today. You know, I came up with a program you can do it in your hotel room. No excuse. It’s like I just went to Paris with my mother on some like celebrate-the-book-being-done vacation and I was working out every day. I’ve never done that before. I feel so—it’s fascinating to me, this whole thing with Jeremy, that’s my personal trainer who lives in San Francisco, because it’s just like, one of the reasons I’ve even signed up for it is I’m just fascinated by this whole concept because, you know, the first industrial revolution, what it did is it took sort of consumer goods, like cloth and things like that, and made it accessible to the masses cheaper. Before, like fancy cloth was only accessible to very rich people. But the industrial revolution made like basic consumer goods accessible to everyone.

Allison: 17:40 – And this particular industrial revolution, this sort of tech revolution, what it’s doing is making high-end services accessible to everyone. So my remote trainer is a fraction of the cost as an in-person trainer, yet I work out with him every day for a fraction of the cost. So what I’m doing is I’m getting sort of what would normally be, I mean like, I don’t know how much is a trainer every day, seven days a week for a month? Like it’d be like a couple thousand dollars, right? Yeah. Like for a small fraction of that price. And I mean, so this is where the economy is going. But it doesn’t replace in-person trainers. What it does is it means if you’re going to be an in-person trainer, you’re paying a huge premium. I mean there’s advantages. Obviously my trainer being in San Francisco can’t do everything an in-person can, you know, I think I’m getting injured a little bit more. My form’s not as good. So there are trade-offs. So an in-person has to be really good to justify the extra expense and also still has, I mean ideally I think the program I’m in, I think remote trainers work best if you are seeing in person once a month at least to make sure your form is OK. But I think it is like for me, this fascinating microcosm of where the economy is going, right. In general I’m training more, it doesn’t necessarily replace in-person trainers. It works best with them. But people who would normally be priced out of daily training can now get that service.

Chris: 19:11 – And you’re probably getting better results because you are training every day now.

Allison: 19:14 – Oh my God, I’ve never been in such good shape. I’ve never been someone who works out every day. And now I said I have to, cause two of the big benefits of training are accountability. Like you have to show up and two, someone tells you what to do when you actually get to the gym. And so I get both those needs met.

Chris: 19:33 – How does Jeremy deliver the training to you? Is it, oh do this today or is it here’s your week in advance?

Allison: 19:39 – I get a week in advance. And what we do is there’s three days where I do like weight training with him. And so Equinox has filmed all these videos of the routine. And so he’s like, so there are all these videos of the things I have to do. And they even gave me an Apple watch so he can monitor my heart rate as I do all the exercises and confirm I do them and see how hard I work. And I also do videos of me doing the things where form has to be a little bit more precise.

Allison: 20:12 – And then on days where I’m not weight training, he is like, all right, you’re going to do yoga or you’re going to go for a run and he can confirm I do this based on, you know, me wearing the Apple watch and seeing what I did.

Chris: 20:22 – There is no escaping Jeremy.

Allison: 20:24 – No. Like I was in Paris like on an eating and shopping trip and he’s like, why didn’t you go to the gym? You know, I gave you a workout, there’s no excuse. And like next week I have to go to a work trip in Switzerland. And he’s just like already like, all right, well, you know, you can do the following things. I’m like, I’m not going to have any time and I’m going to be jet lagged. He’s like, you know, and I feel very accountable to him. Like there is no escaping Jeremy.

Chris: 20:48 – That’s really interesting. So, we say in our market, which is kind of small-group and personal training, that there is a commoditization effect right now and there’s a lot of downward price pressure because there are more and more franchises like Orangetheory, you know, Fit Body Boot Camp, Barry’s Boot Camp, stuff like that. But what you seem to be saying is that going the other direction and having even more frequent touch points even though it’s not done completely in person is probably a hedge against the commodity effect that we’re seeing now.

Allison: 21:21 – Yeah, because the thing is what I said, like the two primary things you get from going to a trainer, the accountability and being told what to do when you get there, that is very easy to commoditize. And as I said, you don’t even have to do it in person. Like Equinox is sort of a high-end version of that where I get harassed every day to go to the gym. But like for like probably 20 bucks, I could probably get like a lower-touch version of that. So, but think about the industrial revolution, right? So cloth became available to the masses, but there was still fancy beautiful Louis Vuitton fabric that was handmade but still got this big premium. So just because you create this new sort of commoditized market doesn’t mean that the luxury market goes away.

Allison: 22:04 – In fact it becomes a bigger premium on that. So as I said, there’s a lot of things I don’t get from virtual training or sort of someone who’s not very well trained. So what you have to do to really differentiate yourself is be that high touch. I’m getting something that I couldn’t get from an app or sort of someone who just got a certificate on the internet or is following sort of a standard orange sort of program. I’m actually giving you something customized. I’m actually giving you a very sort of specialized service that you can’t get elsewhere.

Chris: 22:33 – Is that a really common trend that the hedge against commoditization is, you know, increased specialization?

Allison: 22:38 – I would call that an economy-wide trend. Like, I think that if you, as I said, I mean on the one hand, like when I talk to trainers at my gym and they see I’m using an app from their employer, I think they get a little nervous. Obviously because of the one hand it seems like it’s gonna you know, take out a lot of the market, but it really takes out the mediocre part of the market. So if you want to make sure you don’t get taken out, you got to sort of, I said, focus on high touch because in the future, as I said, think of it as like, you know, cheap cloth versus, you know, fancy cloth. You want to be the fancy cloth cause you get a huge premium on high touch, high-skill services still and sort of the mediocre part of the market gets wiped out by technology.

Chris: 23:21 – That is really interesting. So as a client approaching a gym, let’s say that, you know, maybe you’ve been to gyms before, you didn’t get good results. You know, you’ve had a bad experience. Are you more likely to see a cheap option? Like, I’m going to try this out and see if I like it, or are you more likely to see an expensive option? Like I need somebody to solve the problem for me?

Allison: 23:46 – Well, I think in, you know, it depends on the person. I mean, I said I’ve always, even when I’ve had no money gone to an expensive gym and I’m a very sort of, you know, like I’m very suggestible, so if Jeremy tells me to go to the gym, I will. But I have friends who go to sort of low-end gyms. Of course they never go. They join low-end gyms, but they tend to peter out in their commitment. So I think, yeah, a lower price point makes people maybe feel a little bit more open to experimenting, but I think they also are more open to ending. Also, if you’re not having a good experience at the gym, you don’t want to go.

Chris: 24:18 – Yeah. I think that’s really a big option for a lot of people that own micro gyms is, you know, working with people who’ve had a bad experience before or they recognize that, you know, they’ve got a wasteful spending pattern of paying $20 a month for a gym that they never attend.

Allison: 24:37 – I bet though it’s gotta be hard to compete if you’re a small boutique gym owner with the big chains who just have the scale where they can always undercut you. So you really have to offer a differentiated product.

Chris: 24:49 – Yeah. Can you maybe explain how the big chains mitigate their risk against an economic downturn when they’re only charging like 10 or 20 bucks a month?

Allison: 24:58 – Do they charge that little?

Chris: 24:59 – Some of them do. Yeah. Maybe I shouldn’t tell you this, but yeah.

Allison: 25:03 – Yeah, I can’t leave Equinox. Jeremy has me hooked in.

Chris: 25:08 – It’s interesting that you said Jeremy instead of Equinox has me hooked in. So would you say that over time you’ve kind of like upgraded your service to now include Jeremy? Could you go to Equinox without Jeremy?

Allison: 25:18 – Yeah, I definitely could. I mean, he is employed by Equinox, so it’d be hard to separate him out from that. Like I couldn’t quit Equinox. I’d have to quit him too. Although it’s interesting. I also saw the other day that Equinox has a new program with their in-person trainers that they are now developing programs that monitor you the same way Jeremy does when you have off days with them.

Chris: 25:43 – I think that’s really smart.

Allison: 25:45 – Yeah. So I mean that would also be, as I said, like this is I think—especially if you’re owning this sort of smaller business, I think the better hedge is to develop sort of this person who feels like completely dependent on you. And like Jeremy texts me constantly, so my day just sort of, now it feels off if for some reason I don’t hear from him.

Chris: 26:06 – Oh boy. We do talk about ascending our clients in these micro gyms. And you know, people usually start at a higher price point. Maybe they go to group training and then you know from there they go to personal training. But there is this kind of middle ground. Usually there’s such a big price difference between group and personal training that this might be an option for people. But do you see yourself, you know, paying more and more and more to Equinox every month as you go from general Equinox member to having this service to maybe one-on-one personal training later?

Allison: 26:37 – Maybe. I mean this isn’t a very expensive service. So it hasn’t really increased my expenses that much, but it has made me a lot more dedicated. I mean before that I was just doing classes and I was sorta like I could do classes anywhere, why am I at the most expensive gym in the city? But now I’m actually getting a very particular service and I wouldn’t know how to quit it. And also it feels like a very unique service. It’s strange because it feels very personal. Yet I’ve never actually met the guy in person. And in some ways I got to say it’s nice cause I had an in-person trainer and he was a lovely guy but it also felt like a lot more emotional work cause he is a complete person who I would have to talk to in person and had like a life and a family and we would have to talk about it. And like, I mean he was a lovely guy, but he wasn’t particularly needy. But if he was texting me with the frequency Jeremy was, it would feel really intrusive.

Chris: 27:30 – That’s interesting. So you actually benefit from that balance of not knowing when Jeremy’s birthday is, right?

Allison: 27:36 – Yeah. Or like, you know, if Jeremy’s having a bad day, you know, I don’t spend an hour with him and we talk about it, you know, I mean as I said, like that the problem with in-person is that you get to know the complete person for good or for bad.

Chris: 27:50 – Oh, that’s really interesting,

Allison: 27:54 – But I dunno, I’m fascinated, as I said, then this might be a good way for even small gym owners, this new program where you have an in person and maybe only see them once a week. Maybe you only see them once every two weeks, but then they give you something to do the rest of the time. So therefore you feel like you’re getting trained every day and you feel that commitment to the gym. But now if you get training once every two weeks, isn’t that expensive?

Chris: 28:15 – No, not really.

Allison: 28:18 – So I mean, cause classes, I didn’t feel like, unless people get like militant about a particular class, you don’t have the same loyalty.

Chris: 28:28 – That’s true. We do find that people kind of latch onto the group at 12 o’clock or whatever class they choose to attend and that helps with their retention. But overall, long term, I think that they should be following the same process of ascension that you seem to be with Equinox and Jeremy. Are there examples in other industries where this is the case too where you know, the hedge against commoditization is really specialization of services? You mentioned the garment industry.

Allison: 28:52 – Well yeah, I mean I think this is how services are going. Cause you know, the first waves of industrialization were about commodities or goods, and technology is now just doing the same thing to services. So this is true of everything. I mean, in the book I interviewed Arnold Donald, the CEO of Carnival. And this is the way cruising is going. Like before you sort of had your Carnival Cruises and then you had the sort of super high-end cruises on a smaller yacht where everyone knew your name and like knew what drink you’re going to have. So now what the cruise companies are doing is trying to give you that level of service on a big cruise and they’re using that through technology there too.

Chris: 29:32 – How exactly are they doing that? This is a great story.

Allison: 29:34 – So you’re going to wear—I love this guy. So you know the magic band at Disney world? So this guy—and people like to talk about these tech entrepreneurs in Silicon Valley, but here’s this guy in like Orlando, Florida, who several years ago was reading a magazine on a plane and was reading about how this bracelet you could wear that would improve your golf swing. And this is before we had Fitbits or anything. And he’s like, that’s an interesting piece of technology. He was working at Disney and he had this idea that you could wear a bracelet that would sort of make all the annoying things about Disney less annoying. Like it could, it could know, you know, how much money you’re spending, you know, you could go through lines faster, all these things.

Allison: 30:21 – Or they know when you arrive so you can get picked up, like all this sort of pain points of going to Disney could be eliminated through this piece of technology. So then he created this, it was a big success. As he said it was the first wearable piece of technology after this gold bracelet. And it really paved the way for Fitbits and all these other things since. And so then Carnival hired him away to create, they call the Medallion, which is now on sort of their higher-end cruise, which also does the same thing. All the pain points, getting on the ship, you know, but it’s AI powered. So as you’re walking around, you know, all the crew’s staff like gets told in their ear, this is so and so, he likes a martini at five, so you just get this and then they can collect data on you.

Allison: 31:08 – And so they’re like, well, because you like a martini at five, you might also like snorkeling. So you learn about all these activities that normally you wouldn’t be aware of. So you end up with that sort of higher end, like, you know that service you would get on a yacht, but at scale. So I mean, you would think this would be bad for the small cruise ship. That’s yacht still. But no, that premium is still there because as nice as it is, like this is a better service to commoditize luxury and luxury services, still that sort of high-touch personalized service still has the premium, it still has the bigger premium on it.

Chris: 31:43 – So the technology is not replacing the real in-touch service as you said. It’s just eliminating the mediocre in the middle.

Allison: 31:50 – It eliminates the mediocre and the premium is on people who are really good at providing the services and have a lot of expertise. Like my mother would never use Jeremy because she’s older and has a bad back. So she really needs to feel like she’s seeing an in-person person.

Chris: 32:07 – That makes a lot of sense. Well I think this is amazing. And great insight for gym owners, too, because there is a lot of fear out there right now about the commoditization of what we do, and I think that, you know, the change let’s say between Gold’s and personal training are facing a lot of downward price pressure right now. And I think that if you’re small enough that you can specialize in a high-touch service or supplement with a high-frequency touch service like what Jeremy is doing, then that’s probably your best bet.

Allison: 32:39 – Yeah. Cause you’re not going to be able to compete with someone who can charge $10 for membership. And to be honest, offers a fairly standard commoditized service. Cause, I mean, technology honestly is going to make all of that obsolete. Or like the Oranges where you get a fairly standard workout. But if you can really do something really specialized, then you know, that’s where the money still is and that’s a great hedge against what we call the systematic risk of a market changing.

Chris: 33:08 – That’s interesting. And actually a lot more of fitness delivery is going online with online programs and personal trainers and equipment that syncs to AI engine somewhere and programs your workouts for you.

Allison: 33:18 – Yeah, but it can enhance your service. It doesn’t need to replace it. You just have to work with it.

Chris: 33:22 – Very interesting. OK. Well, these are fantastic examples. I would love to know why you called your book “An Economist Walks Into a Brothel.”

Allison: 33:34 – Well the publisher came up with it. I did come up with it initially, it was the subhead of a chapter. My first chapter was about my time in the Bunny Ranch and how they manage risk there. So I think I at one point just sort of wrote down an economist walks into a brothel because as I said, it was such a weird experience, especially the first time I went there. It’s such a surreal environment.

Chris: 33:59 – You know, I was asking myself that question as I read the first chapter of the book. Like what is it like to walk in the first time for research? You know, what do you say, how do you introduce yourself?

Allison: 34:12 – Well, the first time you go in it’s super awkward, because, so when you go into a brothel, you ring a bell. They have really good security. So they ring a bell to let you in. But you ring a bell once, it sets off a bell throughout the brothel, so all the women come running because when a customer comes in and the women in the brothel all line up and he picks out the one he wants to go with. So when I rang a bell, they don’t know I’m not a customer. So it’s like you show up and they’re all excited that they might have a customer, then they’re like, oh, it’s a journalist. So, that was kind of awkward. I later learned that you ring twice if you’re staff, so they know they don’t have to come out.

Chris: 34:51 – Staff always rings twice. That’s your second book.

Allison: 34:54 – Yeah, that actually would have been a good title. It’s funny, I went back, I’ve been back a couple of times for various research trips and now I always show up and I ring twice, even if it’s sort of like fairly new staff that don’t know me. So then they’re surprised that I know.

Chris: 35:09 – So you walk in, you’re kind of sitting in the corner, it sounds like, and customers are coming in and you’re kind of chronicling what’s happening there. How was that? Just sitting there for a couple of days.

Allison: 35:22 – Weird. I mean it’s a, you know what’s fascinating about a brothel is in some ways it’s like any other business. There’s so many things about it that are so normal, but then it’s just so weird. I mean it is, it is weird. As I said, even watching the line-ups where they pick out, you know, the woman that they want to go with and have sex with. As I said, it’s sorta, I wouldn’t—it’s fascinating in a lot of ways. It’s horrifying. It’s just fascinating. I think what I found interesting about even watching the line-ups is you get this sense from media that there’s one very narrow standard of beauty or what people find attractive. But when you watch men pick women out of a line-up to have sex with, you realize, wow. Like, you know, there’s what people are attracted to really varies a lot.

Allison: 36:10 – Like I asked the women, do you feel bad when you’re not picked in a lineup? They’re like, no, never. Because everyone gets picked. Cause there’s someone for everyone.

Chris: 36:16 – Wow. That is really interesting. You know, maybe we should just back up a little bit and explain to listeners, you know, why you were in this brothel in the first place and like what exactly you were studying there?

Allison: 36:27 – Yeah. So I first went there to do a story on negotiation skills because the brothel contacted me. They had wanted to pitch some story. They don’t advertise, so media attention is the only way they can get their name out there. So they pitched me some idea I wasn’t really that interested in, but they did mention that the women negotiate every single price. So I was like, oh, that’s interesting that you have women who are 20 negotiating for tens of thousands of dollars with men in their sixties who are quite rich.

Allison: 36:53 – And they’re like, yeah, yeah. And it’s interesting they come here not really knowing their values so we have a negotiation training program. So I initially went for that and that was fascinating. But then when I was there, I learned that the women charged this huge markup over the illegal market. And that surprised me because first of all, it’s huge. It’s like 300%. And second of all, it’s like it’s a hard place to get to. The illegal market is everywhere. So it’s interesting that you pay more to go somewhere so remote. But it turns out it’s a risk premium because you know, going to an illegal sex worker has a lot of risk to it. You know, you could get arrested or face public humiliation and you know, there’s all sorts of risks. So there was that and on the other end the women gave up 50% of their earnings to the house, which seemed like a lot of money. But they could work, just keep it all working illegally. But they all that also exposes them to a lot of risk. And I just thought this was kind of cool because usually in illegal markets, you know, you end up with this really sort of weird risk distribution. Like, you know, a market isn’t working if the person who takes the most risk isn’t getting the biggest reward. Like that’s how you know a market is functioning correctly. And usually when I think of a pimp, I think of a poorly functioning market because there’s a lot of transparency in illegal markets. So the pimp gets all the money and the woman takes all the risk. So, but this was interesting because what’s happening in the brothels, the pimp provides risks for both the buyers and the sellers, the transaction. And that’s, he takes the spread.

Chris: 38:20 – And really that’s why the buyers are coming to Bunny Ranch too, right? Because risk is being mitigated for them also.

Allison: 38:28 – Yeah. As I said, they pay the 300% markup. The women give up 50% of their earnings and this is all to reduce their risk. And this is where a brothel owner makes their money. It makes its money by reducing all this risk for everyone.

Chris: 38:42 – Yeah. Like the buyer is less risk of STDs. I think the women are tested, you said. Also less risk that they’re going to be like robbed or whatever by a pimp. And then on the women’s side, there’s far less risk and you know, they’re not giving up all their money to a pimp either. Really interesting. Do you see, I mean, maybe the market is too small to know, but like is there a disappearance of this mediocre middle in that market too?

Allison: 39:12 – I don’t know. I mean that’s a harder market to disrupt with technology obviously. I mean, I think what you see is, you know, people talk about sex dolls and things like that. But really I think one of the reasons the sex market is booming is I think people are craving more human interaction and aren’t sort of connecting with people in the same way.

Chris: 39:34 – There’s implication for fitness too. And it’s interesting that you already mentioned the balance like that you don’t have to have this personal relationship with a personal trainer and you don’t have to remember his birthday or buy him a Christmas present.

Allison: 39:47 – Well you need some level of it. Like it’s interesting the way Equinox rolled this out. Like my relationship with Jeremy started with a FaceTime call. And when I reach special fitness goals, we do a FaceTime.

Chris: 39:58 – OK. So you’ve seen him?

Allison: 40:00 – Oh yeah. And as I said, he texts me every day. But it’s interesting, if I had an in-person trainer who texted me with the frequency Jeremy did, I’d find it a little overwhelming. But because this is our entire relationship, it feels like welcoming.

Chris: 40:17 – You know, on the other side of that, having been a personal trainer for about 25 years, there are certainly times when you don’t want to be as close to a client as you are. Like you don’t really want to be invited to their kids’ weddings, but you think compelled to go when you are. So yeah, it’s really interesting that, and I think that that balance would exist in different places for different people. Right?

Allison: 40:38 – Yeah. Well, I mean, here’s the thing, like Jeremy and I don’t do small talk while I’m working out. I work out and then we discuss the workout afterward over text. So if we did small talk while I was working out and then we texted about it, that would just be like way more than I really care to talk about it.

Chris: 40:53 – There are some clients trust me who are there for the small talk. So, I guess, yeah, the key is really, you know, having the option available for whatever the person wants, right?

Allison: 41:02 – Yeah. Of course, you know, I sort of admire Jeremy. I’m like, he clearly does not take a day off. He texts me every day.

Chris: 41:10 – Wow. Great. OK, awesome. Well, you know, as a consumer of our service and also, as a brilliant economist, thanks for writing this awesome book, we’re going to have a link to it in the show notes and it really made economics like accessible to me because the stories are very sticky. I mean, I can name probably six stories out of the book right now, and you’re not going to get that with a standard textbook. Is there anything you’d like our audience to think about or do after they listen to this?

Allison: 41:44 – No, I mean, I hope they buy the book and I hope they enjoy it. The whole idea was to as I said, take these sort of very sort of esoteric financial concepts that I spent so many years learning and help more people understand them cause I believe everyone can.

Chris: 41:56 – Well, yeah, I think a lot of the readers, you can get a lot of benefit out of it. Even if you’re just thinking about buying life insurance or planning for your retirement. Like understanding risk means that you can plan better. You can have a clear goal. So Allison, thanks so much for coming on and I know people are going to get a lot out of this.

Allison: 42:13 – I hope so. Thank you.

Andrew: 42:17 – Thank you for listening to this special edition of Two-Brain Radio. Don’t forget to subscribe, leave us a rating or write a review. We’d love to hear your thoughts. And if you’re inspired to take action today but need some guidance, head over to twobrainbusiness.com to book a free call with a mentor.

 

Chris Cooper delivers the best of the business world on Two-Brain Radio every Thursday.

On Monday, Two-Brain Radio presents marketing tips and success stories, and Sean Woodland has great stories from the community on Wednesdays.

Thanks for listening!

To share your thoughts:

 

To help out the show:

  • Leave an honest review on iTunes. Your ratings and reviews really help, and we read each one.
  • Subscribe on iTunes.