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(COURTESY OF UGI FITNESS)
(COURTESY OF UGI FITNESS)

John Warrillow

Cut losses to make gains Add to ...

Like a lot of startups, the co-founders of Ugi Fitness Inc. are trying to figure out their business model.

They have a thriving business of selling 700 to 850 Ugi at Home Systems each month to customers directly through their website. As long as they sell at least 770 units a month, they’ll have the cash flow they need to pay themselves and their suppliers, and have a little money left over to expand their team.

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But having worked with the Ugi team now for more than a month for this column, my sense is that the Ugi founders want more than to just eke out a living.

So, along with selling directly through their site, they’re also forging relationships with other direct sellers, like Amazon.com, and they have an upcoming segment on the home shopping channel, QVC.

They also dream of one day creating an infomercial that would be a seven-figure investment.

Ultimately they want to evolve Ugi into a fitness and lifestyle brand with DVDs and a thriving online community.

As if all that wasn’t enough to stretch the resources of this startup, in September, they opened a studio.

The studio offers classes and personal training sessions using the Ugi ball, under the guidance of a group of trainers led by Ugi co-founder Sara Shears.

Ms. Shears estimates the studio generated sales of $2,000 in October, but that does not come close to covering its costs, which include $2,400 in rent, utilities, and trainers. All in, Ms. Shears estimates they need $6,000 to $7,000 a month to cover the costs of a fully operational studio.

And that’s just to break even.

When I challenged the Ugi team about their decision to open a studio, they admitted they could see both sides to keeping the gym.

On the positive, it gives them a gathering place for their Vancouver-based enthusiasts, a place for Ms. Shears to experiment with new workouts, and a place to shoot new training videos.

But at just $2,000 in a month’s revenue, they’re not even covering the cost of rent, let alone all of the other expenses.

It’s now decision time: Their short-term lease on the studio is up at the end of January.

In my opinion, they should close the studio and focus on the high-margin core of their business, which is selling the Ugi at Home System directly to consumers.

For a few hundred dollars, they could rent a studio on an hourly basis to shoot a video, and Ms. Shears could pick up a class at a local gym if she really needs a testing ground for new workouts.

In a startup, the single most important resource is cash. And the team simply cannot afford to have an ongoing $6,000 to $7,000 a month liability when they are months, or even years, from building the studio up to cover their costs – let alone make a profit.

My opinion is tainted by a mistake I made more than 10 years ago. In one of my former companies, we outgrew our $5,000 a month office space and I promptly signed a five-year lease at $20,000 a month. Our new office was way more space than we needed and – as I look back now – more about satisfying my ego than anything else. I lived to regret that decision almost every day of our five years at that location.

The Ugi team is off to an amazing start and they have a part of their business that is making money, with the potential to grow. In my opinion, they need to close the studio at the end of January and take the cash they were spending to build the online business.

I’ll let you know what they decide.

In the meantime, what would you do in Ugi’s shoes?

Special to The Globe and Mail

John Warrillow is a writer, speaker and angel investor in a number of start-up companies. You can download a free chapter of his new book, Built to Sell: Creating a Business That Can Thrive Without You.

Join The Globe’s Small Business LinkedIn group to network with other entrepreneurs and to discuss topical issues: http://linkd.in/jWWdzT

Follow on Twitter: @JohnWarrillow

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