Alberto Perlman walked out of the old warehouse that served as the offices of Zumba Fitness and
Question:
Alberto Perlman walked out of the old warehouse that served as the offices of Zumba Fitness and into the hot Miami sun.
He had just finished meeting with his two partners, and the company that they had started with such a bang four years earlier seemed on the ropes. The agreement they had with the marketing company that produced and promoted their exercise videos had broken down, and despite selling millions of dollars’ worth of videotapes featuring their unique Latinbased exercise routine called Zumba, the company had not been able to provide enough profitability for it to do more than scrape by. One of his partners, Alberto Aghion, was even looking at starting a medical billing company. With only about \($14,000\) left in the bank, they needed to figure out how to either make this business profitable or start looking for other opportunities.
Childhood Friends The Salesman: Alberto Perlman
Alberto Perlman was born and raised in Bogota, Colombia, where his family was very involved in business and entrepreneurship.
His great‐grandfather had immigrated to Bogota from Jerusalem in the pursuit of business opportunities. Starting out by selling textiles door‐to‐door, his grandfather gradually built the second largest retail store in the country. It was clear that growing up in this environment had a great influence on Alberto. From the beginning, Perlman seemed destined for business. When he was 6 years old, his father bought him a digital watch with a game on it. The enterprising young Perlman proceeded to loan it to a classmate on weekends in exchange for 750 pesos (approximately \($10).\) When his parents found out, they apologized to the boy’s mother and made Alberto return all the money, but a budding entrepreneur was born. In high school, Perlman noticed a vacant lot near the school that was being occupied by a number of homeless people. At his school, like many others, it was cool to have a car and drive to school.
However, Perlman realized that many of the students couldn’t drive their cars because they could not find a place to park. He approached the people living in the lot and offered a deal. He would pay them if they would let students park there and keep an eye on the cars. He then charged his classmates 90,000 pesos (about \($45\) at that time) each month to park. This venture, too, was short‐lived.
Unfortunately, the people found out what I was charging, and they started going direct. So, I figured out that being a middle man is not a good deal.
Despite these early setbacks, it was apparent to everyone that he was destined to be an entrepreneur.
I always knew I was going to do business, but I was a bit rebellious as a teenager and I told my mom I was going to study philosophy. My mom said, “I would never tell any of my kids this, but YOU … I’m telling you. You were born to do business. I would never force any of my kids to do anything, but I’m forcing you to do business. So go find a business school.”
After graduating from high school, Perlman went backpacking through Europe with his childhood friend, Alberto Aghion, who would figure prominently in a number of his subsequent business ventures. Following the trip, Perlman enrolled in Babson College, a business school located outside of Boston, MA, known for its Entrepreneurship program.
Although his official studies were in finance and MIS, Perlman continued his entrepreneurial ways in the United States.
He was fascinated with the Internet, and in 1995–1996, while studying at Babson, he got together with two other students and started a Web design company called Cyber Spider Designs.
We went up and down Newbury Street trying to sell Web sites at a time when nobody had Web sites. We did the Web site for Boston Proper Real Estate. We did a flower site. It was all right. It paid the bills, but nobody was paying good money for that at the time.
It was also at Babson that Perlman made an impression on Professor Prichett, who ended up indirectly playing a key role in the founding of Zumba Fitness. Professor Prichett was impressed with his calculus student and introduced Perlman to his son, who worked at a New York consulting firm called the Mitchell Madison Group and who subsequently offered Perlman a job with the firm.
One of the first projects Perlman was given was working on direct response television advertising2 for the First USA division of Bank One. While on this project, he spent considerable time analyzing the business model and operation of successful infomercial companies. Reflecting on his grandfather’s retail business and his own experience as a middleman in his short‐lived parking venture, he fell in love with the idea of direct marketing to consumers via television.
I always saw how difficult it was for suppliers to get their products into the stores. The infomercial industry was fascinating because you didn’t have to go through a store.
You didn’t have to go to a big supplier like Walmart. You did it on your own merit. You bought media, created the commercial and it’s your product.
By this time Alberto’s father was working at a nearby private equity firm, and he was meeting with a Chilean newspaper company that was interested in developing an Internet strategy.
Knowing his son’s knowledge of the latest technologies, he asked if Alberto would be willing to talk with them. After meeting with them and helping them with their strategy, he realized that his expertise in emerging Internet technologies coupled with his background and connections in Latin American markets provided a unique opportunity for him to once again set out on his own. So, after 10 months, he left his job with the Mitchell Madison Group to pursue Internet opportunities in Latin America.
Initially, Perlman, together with his brother and another friend, focused on building an Internet events company in which they would put on conferences for companies, entrepreneurs, and investors who were interested in Internet businesses in Latin America. This provided a way for him to both make money and make connections for future business opportunities.
We started calling companies like IBM and said, “Hey! Do you want to sponsor an event? It’s called Latin Venture. We’ll have all the entrepreneurs from Latin America there.” And they said, of course … how much? Twenty‐five thousand dollars. Done. So we sold, and that’s when things were going like crazy and we made a couple hundred thousand dollars at our first event.
After the success of the Latin Venture event, Perlman used the money he had made to start an Internet incubator in which he raised money to invest in launching technology companies in Latin America. He was able to raise about \($8\) million, which they used to eventually fund nine different companies. It was also at this time that he convinced his long‐time friend Alberto Aghion to turn down a job offer with Merrill Lynch and join him in one of the incubator’s companies.
The Problem Solver: Alberto Aghion Alberto Aghion grew up with Perlman in Bogota. They attended the same schools, had the same group of friends, and started becoming close friends in their early teens. When Perlman left for Babson following their European adventure together, Aghion decided to continue travelling and eventually ended up at the Hebrew University in Jerusalem, where he took courses in history, studying the Arab–Israeli conflict, and working odd jobs to make ends meet.
I had some crazy experiences. I went hiking in Africa. I hiked Kilimanjaro. I mean, I had a really interesting year.
When you’re 18 years old, you have no real responsibilities and it was an adventure in life. I’m really glad I took that year to do that because if I hadn’t done that at that age, at that stage in my life, I couldn’t have done that.
After spending a little more than a year abroad, Aghion returned to Colombia ready for a new challenge. He was always interested in looking at ways to solve problems of all kinds. He excelled in math and physics in high school, so as soon as he returned, he applied to study Industrial Engineering at the Universidad Javeriana in Bogota with the belief that an engineering education would give him a good foundation in problem‐solving techniques that he could apply to a number of different situations. However, he soon found out that he did not enjoy the teaching philosophy at the school. As with many engineering programs, there seemed to be a focus on filtering out students early in the program. In addition, it was difficult adjusting to life back at home after more than a year on his own. He felt out of place and restless in Bogota, so he talked to his friend Perlman, who was in his second year at Babson. Perlman seemed to be happy in Boston, so Aghion decided to visit him and look into opportunities in the United States.
I went to a few colleges. I mean I checked out Northwestern. Boston College. A few interesting schools.
And on the way back, I stopped in Miami and I saw the palm trees, the ocean. So, I also went to UM and FIU and I checked out those schools and actually I decided, you know what, I think I like Miami better. I’m not a cold weather fan.
He was accepted at both the University of Miami and Florida International University (FIU), but FIU was less expensive and they agreed to transfer his credits both from Bogota and from Israel, allowing him to graduate a year sooner, so he chose FIU where he majored in finance and international business.
I wanted to be an entrepreneur. I wanted to do different things. But I had no idea what I wanted to study. Also, I guess I got a little burned out at the university in Colombia. I mean, I like problem solving. I guess maybe if I would have gone to a different school and had a different experience with engineering, I might have stayed with that career. But, because I didn’t enjoy that methodology in Colombia, I said, you know what, this is not for me. And at the end of the day, I just wanted to do business. I had picked engineering because I was good at physics and calculus and problem solving, not necessarily because I wanted to be an engineer.
Aghion excelled in the new environment, getting straight As for the first two years and graduating with a job offer from Merrill Lynch. He was considering this offer when he got a phone call from Perlman.
I spoke with Perlman, he was launching this whole incubator.
Really exciting. Internet boom. All this interesting stuff. And he tells me, “Why the hell are you going to go work for a boring bank? Come work with me.”
So I said OK.
One of the first ventures Perlman and his partners invested in was FonBox, which was a service for providing a virtual office anywhere in Latin America. Aghion was asked to help develop FonBox, and he did a significant amount of work helping them develop the infrastructure for the business. They eventually sold it to J2 Communications for a loss.
By March 2001, they were working on nine different businesses when the Internet bubble burst. Most of their companies were early‐stage companies in their first or second round of funding, and the capital for additional investments in Internet firms quickly dried up. With no funding available, a lack of new businesses to invest in, and \($4M\) of the original investor’s money remaining, they decided to continue to work with the firms they had invested in on the chance that one of them would be successful. They could then return what was left of the money to their investors rather than risk the remaining funds and the relationships with the investors they had worked so hard to establish.
The Third Alberto
Alberto “Beto” Perez grew up in Cali, Colombia, as the son of a young, single, working mother. Always an energetic child, he loved to perform. He would take his mother’s hairbrush and use it like a microphone as he would sing and dance. In the same way that Perlman seemed destined for a career as an entrepreneur, Beto seemed born to dance. As his mother recalls, When he was seven, I took Beto to see the movie Grease.
The next day, he was out on the street teaching John Travolta’s dance moves to kids who were much bigger than he was.
Growing up in Cali in the 1980s was difficult. Drugs and violence were common on the streets. Beto saw this firsthand when his mother got into an abusive relationship with a drug addict. When he was 14, his mother was hit by a stray bullet, and he had to work multiple jobs to help support the two of them. Despite these hardships, dance was a constant presence in his life.
As a teenager in the 1980s, I was always sneaking out to nightclubs to dance, and my mom was trying to keep me at home, safe.
When Beto was 16, his mother took a job in Miami, but he wanted to stay in Cali to pursue a career in dance. They would keep in touch via telephone and letters, but it would be a long, hard 10 years before they would see each other again. During this time, Beto continued to try to make it as a dancer. When he was 17, he couldn’t afford rent so he slept in the ice cream shop where he worked. He thought he finally had his big breakthrough when he was chosen to represent Colombia at a Latin dance competition in Miami. However, after spending his entire savings on costumes, his U.S. visa request was denied and he was unable to compete.
Because he couldn’t afford to attend a dance academy, he worked as a courier in the morning and taught private dance lessons in the evening. The owner of the gym where Beto prepared his dance routines offered him an opportunity to teach a children’s class in the summer. Because he was so popular, he was invited to teach more classes. A modeling agent gave him his first job as a choreographer and he gained national attention after winning a lambada competition at the age of 19. Eventually, he saved enough money to attend and graduate from the Maria Sanford Brazilian Dance Academy with a degree in choreography.
Although dance was his passion, it was a series of fortuitous events that led to the creation of what is now known as Zumba.
One evening a local gym owner telephoned Beto and asked if he could substitute for one of her aerobics instructors who had been injured. Although Beto had never taught aerobics, he needed the money so he accepted the job. He immediately went to a book store and bought a copy of Jane Fonda’s Workout Book and tried to copy the moves in the book coupled with some of his own dance steps. The class went well, and soon Beto was regularly teaching aerobics classes as well as dance. Then fortune struck again. As Beto recalls, At one of those sessions, I forgot to bring the music, and all I had were salsa and merengue tapes in my backpack.
So I improvised, and that was the beginning of Zumba.
Beto called his new style of aerobics “Rumbacize” as a tribute to the Latin influences behind many of the moves. As Beto’s popularity increased, he found himself traveling to Bogota to do television commercials. Eventually, he moved there and began teaching at one of the top gyms in the city where one of his early students was Alberto Perlman’s mother.
In 1994 Mrs. Perlman was taking my class in Bogota and announced, “This is the best class in the world!” I’ll never forget that.
In addition to his Rumbacize classes, he was gaining attention for his dancing and choreography. He was hired by Sony Music to work with some of their singers, and he helped with the choreography for singer‐songwriter Shakira’s breakthrough album, “Pies Descalzos.” During this time, he began traveling more outside of Colombia and fell in love with the idea of moving to Miami, so he decided to sell everything and move to the United States. However, his lack of English skills made the transition difficult, and he had a hard time finding work.
I love Miami, and I knew this is where I wanted to live.
At first it was not easy. No one knew who I was, I did not speak English and I ran out money. I even slept on the street one time.
His big break came one afternoon when one of the gym managers decided to see what Beto could do, so she gave him an impromptu audition. It was the middle of the afternoon and she told Beto to teach a class to one student. Herself.
It was 3 p.m., and the gym was empty. Soon a passerby wandered in to watch, then two, three, four. After 20 minutes I had about 15 people. They thought it was a new class and wanted to sign up.
The manager was impressed and offered Beto a job teaching Saturday mornings. Beto’s passion, energy, charisma, and lively exercise programs became increasingly popular, and he soon found himself teaching classes of up to 160 students at gyms throughout the Miami area. Investors were approaching him about opening up his own gym.
The Birth of Zumba Fitness
Following the end of Perlman’s incubator venture, Perlman and Aghion found themselves trying to decide what to do with their lives. Reflecting back on his brief time with the Mitchell Madison Group, Perlman was drawn back to the idea of an infomercial‐based company. Perlman approached Aghion, who was considering going back into the finance world. Aghion was interested so they began brainstorming potential ideas. As Aghion recalls, I still don’t have a family. I still don’t have anything. I want to take a risk. Things are happening and I was really interested in the infomercial industry. I thought that it was a good opportunity. And I remember talking to Perlman and saying, why don’t we do an infomercial or something? If we make it, we could make a lot of money. And then we can figure something else out.
During this time, Perlman’s family had moved to Miami, and his mother was once again taking Beto’s classes. One day his mother suggested that he meet Beto. “Beto has something special,”
she told him. So Perlman arranged to meet Beto at a Starbucks to learn more. Beto’s energy and passion were contagious and Perlman could envision his aerobics routines and personality as a great combination for his infomercial concept. Following their meeting, he immediately called his friend Aghion to see what he thought about the idea.
I remember my stomach saying, I LOVE IT. Ricky Martin was singing “Living La Vida Loca” at the Grammy’s.
Latin music is crossing over in the U.S. Tae Bo. Fitness.
Beto. It clicked in my head immediately.
As Perlman recalls:
It was a gut decision. We were two out‐of‐work businessmen with no contacts in the fitness industry and a dancer who couldn’t speak a word of English, and here we were deciding to launch a fitness business together. But we knew if we could capture the excitement of his class on video, people would go crazy for the music and the moves.
With little money between them, they decided to create their own video, which they would then use to as a marketing vehicle for launching the business. They spent the night laying down boards on the beach and the next morning made a video of Beto teaching a class. They then renamed the program “Zumba,”
which rhymed with “rumba,” meaning “party” and Zumba Fitness was born.
Fitness Industry Business Models3
The fitness industry consists of a wide range of activities that people engage in for exercise. In general, most forms of exercise have experienced a decline in participation in recent years in the United States (Table C5.1). Notable exceptions are Pilates and yoga, which have seen dramatic increases in participation.
Aerobics, although popular in the 1980s and 1990s, has seen a decline in participation since 1998, whereas other forms of exercising to music have remained relatively steady.
Companies in this industry have used a variety of approaches to enter and compete in this industry. Due to the fact that many of these forms of exercise can be done individually or in groups, companies can target instructors or participants as their primary customers. Revenue models can range from unit sales models to franchising models, each with their own implications. Following are some of the approaches firms in this industry have used.
Franchise Model Developed in 1969 by Judi Sheppard Missett, Jazzercise, Inc. is the world’s leading franchiser of dance and fitness classes with over 5,000 franchises worldwide.4 After creating the program, demand for her classes eventually exceeded her ability to singlehandedly teach all her students, and she began training some of her early students to become teachers. These instructors agreed to pay a start‐up fee and 30% of their gross revenues to Missett in exchange for the permission to use the Jazzercise brand.
In 1979, Jazzercise formally incorporated and in 1983 it formalized its franchise relationship with its certified instructors.
Jazzercise instructors would pay a \($500\) franchise fee and, as with the early instructors, a royalty fee of 30% of gross revenues.
In 1988, the company reduced the royalty fee to 20%
paid monthly. In exchange for this, the company would provide corporate support to the franchisees in the form of marketing materials, national advertising on radio and TV, choreography, choreography notes, and business advice. The company maintains strict control over the brand and the routines, with instructors agreeing to only use corporate‐developed choreography.
Instructor Training Model First developed by circus performer and boxer Joseph Pilates while in an English internment camp in World War I, Pilates has become an increasingly popular form of exercise. Joseph was said to be inspired by the ancient Greek ideal of man perfected in development of body, mind, and spirit and incorporated elements of Eastern philosophies into his exercise routines, which he called “contrology.”5 He expresses this holistic approach in his book, Return to Life Through Contrology, when he writes, Contrology develops the body uniformly, corrects wrong postures, restores physical vitality, invigorates the mind, and elevates the spirit.
After moving to New York City in 1925, Pilates established a studio where he continued to teach his form of exercise until his death in 1967. During and after this time, a number of his students opened their own studios (with Joseph’s permission), teaching classical Pilates. Eventually, some of his original students developed their own unique methods, such as the Fletcher Method (Richard Fletcher) and the Gentry Method (Eve Gentry). Today there are a number of different businesses focused on Pilates in various forms, but each uses essentially the same business model.
Unlike Jazzercise, companies such as Balanced Body Pilates and Pilates Institute of America do not offer franchises, but rather generate revenue from individual instructor training and certification. This is similar to a unit sales revenue model, with the “unit” being the instructor. Certification costs generally run between \($3,000\) and \($7,000,\) with specialty certifications adding additional costs for the instructor. Once an instructor is certified, he or she is not required to pay any additional amounts to the company. Instructors can then teach individual or group classes once certified. Some of these firms generate additional revenue through the sales of equipment that is used in special forms of Pilates.
Due to the various forms of Pilates certification available, a major cost for these firms is brand management and differentiation. The company provides the instructors with training materials and runs training classes that result in certification, so other costs typically include facilities for training, instructors, and training materials.
Exercise Video Model
Another popular business model in this industry is a unit sales model through the production and sales of exercise videos and DVDs. Although the revenue model is fairly straightforward, the cost structure can be more complicated. In this type of model, consumer awareness and distribution are critical. Distribution can be accomplished through direct sales via the Internet, sales through retail channels, and/or direct sales through infomercials.
In each of these cases, creating brand awareness through marketing is a critical success factor. If infomercials are used, then the costs of producing and airing the infomercial need to be considered. In the case of retail sales, potential slotting fees and gaining access to retail outlets can constitute a significant cost.
For exercise programs that utilize music, companies also need to consider music licensing costs.6
Zumba Fitness—The Early Years
Following their initial idea to establish an infomercial‐based business, Perlman and Aghion built a website, and Perlman began going to the gyms in Miami marketing the video. Beto was teaching classes at Crunch South Beach at the time, and his boss, Donna Cyrus, introduced them to the founder of Crunch gyms. The founder was interested in their new fitness program and subsequently introduced them to a representative from a large firm that produced infomercials for various fitness products.
Perlman flew out to meet with them and show them the video. The company was impressed, and they entered into an agreement where the company would produce and air the infomercials and pay Zumba Fitness a royalty for each of the videos they sold. Within six months, they had sold hundreds of thousands of copies of the videos. Despite its popularity, the videos were barely making enough to cover the production costs for the infomercials, so Zumba Fitness was asked to forgo its royalty so that they could spend the money on marketing the videos via retail outlets. They agreed, but as a result of some miscommunication, the firm failed to get all of the necessary licenses for one of the songs. As a result, the company had to discontinue selling the videos. Following lengthy legal discussions, Zumba Fitness eventually bought back the rights to its fitness program in 2003 and started over on its own, this time using its own music.
After remaking the videos, Perlman, Aghion, and Beto continued selling a handful of videos online each day, packaging them themselves and driving them to the post office.
Eventually, they partnered with a Colombian firm to produce an infomercial for the Latin American market. This went well for a while, but piracy became a big issue and sales dropped off.
From there they tried to expand into the U.S. Hispanic market and met with some success. It was also during this time that they got another important break.
So we were in Aghion’s garage, which was our office, and we get a call from this lady saying she was from Kellogg’s.
We thought it was a scam, of course. She says that she wants to meet with us. She is from the ad agency for Kellogg’s in Miami. She tells us that the CEO’s wife bought the tapes off our infomercial and she loves them.
And he had an idea that he could use Zumba as part of a health and fitness campaign. So we started talking and it ended up being a great deal over four years. That was totally the amount of money that we needed to survive from 2003 to 2006.
The company had also begun receiving calls from fitness instructors who had purchased the Zumba tapes and wanted to teach classes. So in 2003, Zumba Fitness held its first instructor training session. To their surprise, more than 150 people flew to Miami to learn firsthand from Beto. They continued to hold the training sessions every few months and this, coupled with the money from Kellogg’s and the video sales, kept them afloat.
Despite this, they still felt like they were not tapping the full potential of the business and money was getting tight.
At the Crossroads Perlman thought about their predicament. On the one hand, there was no doubt about the passion of the Zumba enthusiasts.
Once people tried it, they fell in love with it. When they began offering the instructor training, they were amazed to see the same instructors come back again and again, even though they had already been trained. They even began setting up their own cameras and recorders at Beto’s classes to capture the new moves and the music. On the other hand, they weren’t making much money with their current model and their cash flow was unpredictable.
Perlman’s thoughts strayed back to the medical billing company Aghion had mentioned. This is ridiculous, he thought. We’re not going to let this go. We have to do something. All these instructors keep coming back to Miami, and they are just in love with Zumba.
We have to be able to come up with something to make this work.
Discussion Questions
1. What business models could Zumba use?
2. Develop a revenue and cost model diagram for each of the options.
3. Which of these models would you recommend that they implement and why?
4. What are the key revenue and cost drivers for your recommended model?
5. What do you feel are the key aspects to implementing this model?
Step by Step Answer:
