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Zumba Fitness

Teaching Note

Synopsis

In 2001 Alberto Perlman is introduced to Alberto (Beto) Perez who has created a new exercise routine

based on latin music and dance moves. Together with Perlman’s childhood friend Alberto Aghion, they

found Zumba Fitness.

After initially bootstrapping their business, they negotiate a deal with a large producer of infomercials to

sell their DVDs. The exercise program is a great success, selling hundreds of thousands of videos in their

first six months. Despite this success, Zumba Fitness is not making much money. To make matters

worse, a problem with music licensing on one of the videos leads to legal problems and eventually an end

to their relationship with the infomercial firm in 2003.

Over the next couple of years the firm struggles to continue to promote and sell their videos on their own.

A marketing deal with Kellogg’s provides them with sufficient funds through 2006, but at that point they

are trying to figure out how to move forward. They know that they have an extremely popular product,

but to date they have been unable to turn that popularity into profits.

Students reading this case are placed in the role of Alberto Perlman and asked to examine the alternatives

available and decide what business model they should use in order to capitalize on the popularity of the

program, keeping in mind that the firm currently has only $14,000 left in the bank.

Location: Miami, Florida

Date: 2001 – 2006

Business: Fitness

Topics: Business Models

Video/DVD/Excel files: None

Case Goals and Objectives

The case is intended for an introductory graduate or undergraduate entrepreneurship course to illustrate

how a business can choose between multiple revenue models. I usually assign the case coupled with the

following reading:

Hamermesh, R. G. Marshall, P.W. and Pirmohamed, T. (2002). Note on business model analysis for the

entrepreneur. Harvard Business School Cases, 1.

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Using the fishbone diagrams for breaking down revenue and cost models as illustrated in the article,

students are asked to consider what options exist for Zumba Fitness and what the key aspects of these

options are for the firm. The idea is to get students to understand that there are multiple business model

choices and that each have pros and cons.

The case can also be used to discuss aspects of founding team characteristics and bootstrapping.

Assignment Questions

Question 1

What business models could Zumba Fitness use going forward?

Question 2

Develop a revenue and cost model diagram for each of the options you have identified. What are the key

revenue and cost drivers for each option?

Question 3

Which of these models would you recommend they implement and why? What are the key aspects for

implementing this model?

Recommended Solutions

It should be noted that there is not a particular solution to this case. The intent of the case is to realize that

multiple options are available and each of their strengths and weaknesses. It is usually important to

remind the students of the financial constraints on the firm. Many students may suggest starting a gym or

expanding into clothing lines – solutions that are not feasible with only $14,000 available.

Teaching Plan

I usually begin the case by asking the students how many of them are familiar with Zumba. Because of

the popularity worldwide, I usually find that there are a number of students that are familiar with it or

have taken a class. Oftentimes I will have a certified Zumba instructor come in and have all of the

students participate in a 5-minute Zumba routine so that they get a feel for what Zumba is. Alternatively,

there are several videos available online on Youtube. However, you want to be careful that you are using

a video posted by Zumba Fitness. Many Zumba instructors post their own videos and many of these are

in violation of copyright laws.

Opening

One effective way of opening the case discussion is to ask students to pretend that they are a reporter and

they are writing a story on the case. Ask the students what headline they would use for their story.

Capture a few of these on the board. This can be a good way of gauging both the level of preparedness as

well as giving you an idea of what the students think is important in the case.

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Opportunity and Initial Business Model

Next, it is good to talk about the initial opportunity and how Alberto P. initially recognized it. I usually

ask students to describe the opportunity that Perlman saw. Often students will start bringing up the idea

of creating a new type of workout. You should push back on them here as this is what Beto had already

done. What does Perlman see as the opportunity?

For Perlman, he sees this as an opportunity to get into the infomercial and direct sales business. To him,

Zumba is a product and Beto is a pitchman that he feels would do well as an infomercial. This is

important and can be tied back to later. Because he was looking for an infomercial business, he was

really fitting the product to the business model rather than finding the right business model for the

product.

This is also an area where you can expand the discussion if you wish to talk about how Perlman’s

personal and professional background influenced his opportunity search and his initial business model

decision (his experience being cut out as the middle man in his “parking” venture and his work with the

Mitchell Madison Group on direct response television advertising).

Students are then asked to describe the initial revenue model. Using the associated reading as a guide,

they should easily identify this as a unit sales revenue model. It is good to capture the key elements of

both the revenue model and the cost model on the board. The model below is one example of how you

might break down the revenue model. One thing I like to point out that you can increase the number of

videos sold by increasing the number of customers OR by getting each customer to buy more videos (by

producing multiple videos, for example).

Revenue model:

For the cost model I generally focus on simply capturing the main categories as this can be very

complicated. The main objective here is to highlight the fact that the majority of the costs in this model

are fixed costs. Some of these would include:

Revenue

# Videos sold

# Customers

Videos

sold/customer

$ / Video

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• Video Production (this is the making of the video that will be sold – it will include equipment,

labor, film, etc). Since you will incur this cost regardless of whether you sell any videos, this is

primarily a fixed cost.

• Video Duplication. This is the variable cost of making each DVD.

• Shipping Costs

• Infomercial Production. This is the making of the infomercial for selling the videos. As with

video production, this cost will be incurred regardless of sales.

• Infomercial Delivery. This is the cost for actually airing the infomercial.

• Operating Expenses. This might include offices, an order management system, computers,

phones, salaries. Again, it is worth pointing out that these are primarily fixed costs.

• Music Licensing. This contains both fixed and variable costs. Students are often unaware of the

potential expenses here (not to mention the potential legal issues as Zumba discovered). A

mechanical license is paid per DVD and usually runs from 2–9 cents per song. The master license

and the synchronization license are paid per song (and are hence, a fixed cost). These can run

from $1,000 to tens of thousands of dollars depending on the popularity of the song.

Once these are captured on the board, it can be good to discuss how to enter this business. The students

should now see that the majority of the costs in this business model are fixed, which means that a

significant amount of capital is required in order to execute using this model. At this point, you can have

a discussion about what options may be available. Some students might mention trying to get investors,

but at this point you have no proven business and no expertise in any of the key issues on the cost side

(production, sales, etc). In addition, the fitness business has a reputation as being very fickle and driven

by the latest craze – you can push on students to discuss whether or not an investor would see this

situation as attractive. What would the exit strategy be for them to recoup their investment? Ultimately

you can talk about what Zumba did, which is to partner with a firm that had expertise in these areas and

had the capital necessary to fund the production, sales and marketing aspects. However, this means that

the only revenue that Zumba gets is a small royalty.

Business Model Options

The students have been asked to examine alternative business models and decide which one they would

recommend for Zumba going forward. If you are using the case in a 1.5 hour class, there is not enough

time to break down all of the alternative models. In this case, it is best to ask students what options they

came up with and try to capture the key aspects of each model. For each option, ask the students to

explain the pros and cons of that particular model. It is also helpful to ask for the end customer and what

their value proposition would be for that model.

The case gives examples of the unit sales model for videos (Zumba), instructor training (Pilates) and

franchising (Jazzercise). Students usually also come up with some sort of membership model, usually a

Zumba gym. In this case, it is good to focus on the capital issues and remind them that Zumba does not

have much money at this point. For other types of membership models, remind the students that you need

to have something of recurring value for anyone to agree to a membership or subscription.

Many students that are familiar with Zumba will suggest expanding into clothing since this is a part of

their business now. In this case, it is worth pushing back on how they would do this. What makes

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clothing popular? How will they build brand recognition in order to get people to buy their clothing with

only $14,000? While this may be a longer term growth strategy, it is unlikely to be very effective at this

point.

As you go through the various options they have come up with, create a matrix on the board that looks

something like the example below (you can add value proposition as well):

Rev Model

Pros

Cons

Customer

Unit sales –

video

• Relatively easy to

execute

• Low capital

requirements if selling

via internet

• High cost for marketing

• Uneven revenue stream

End User

Franchise

• Low capital

requirements

• Ongoing revenue stream

• Quality control

• Avoid market saturation

(control locations)

• How to control territory

(instructors are already out

there)

• Less control over revenue

• Cost of monitoring

• Have to develop support

materials/guides for franchise

• Need proven business model

Franchisee

Membership

• Ongoing revenue stream

• Need something of recurring

value

• Capital costs (if suggest gym)

• Limited to physical location

(if gym)

Member

Instructor

training (Unit

Sales –

Instructor)

• Demonstrated interest

• Already developed

program/ choreography

• Non-recurring revenue (only

at time of training)

• Limited to number of classes

you can hold

Instructor

Students may come up with other options besides those listed. Again, if they are familiar with Zumba,

they may suggest a membership model for the instructors (which is what they actually did). If they do

this, push them on how they would execute this. What would they offer? Why would instructors want it?

Make sure they are thinking through the issues rather than simply stating what they know the company

did.

Once you have captured the different options, take a vote on which option they would pursue if they were

Perlman and why. You will usually find a range of choices among the students, which is good. In fact, it

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can be fun to take a vote before you do the pros and cons to see if peoples choices have changed

following the discussion.

Having gone through the various business model options, it is good to close the discussion by explaining

how this illustrates that there are usually multiple business model options available for new ventures, but

that none of them are perfect. Some key things to point out are the importance of considering these

options early on as certain decision may prevent you from pursuing other options later. In the case of

Zumba, because they already had trained some instructors, it was difficult, if not impossible for them to

begin trying to establish territories for franchises. Without exclusive territory rights, the value of a

franchise will be lower, so this earlier decision affected their ability to pursue this option.

Another thing to point out is that different business models will often have different target customers and

different value propositions. Remind the students that it is important to ensure you are consistent between

your value proposition, customer and business model.