Before discussing how we can design a new dive industry business model for today’s consumers, let’s define what a business model is, and what are the issues with the current dive industry business model.
1. Current State Of the Dive Industry
We’ve already discussed how the local dive shop owner is facing the impossible challenge of managing six businesses in one with barely enough resources to operate one. Of course, dive shop owners are currently doing it. Yes. But there is no consistency in the quality of the experience from one dive center to the next, even under the same training agency brand or scuba gear brand.
To start with, selling dive gear and providing scuba courses are two different types of businesses. If we want to satisfy consumers’ expectations, these two businesses shouldn’t be set up the way they are now. They should be set up to fulfill the consumer. Currently, they are set up to meet the outdated rules of the training agencies and dive gear brands.
The lack of consistency in the quality in the experience feeds a high drop out rate. Meanwhile, a lousy experience in a scuba tryout or entry-level scuba diving certification course puts a brake on efforts to grow this dive industry.
Meanwhile, the scuba diving industry continues to rely on baby boomers for gear sales. We are not well adapted to satisfying the younger generations expectations. We’re trying to reach the younger generations by merely putting a new label on an old product of no interest to them.
Training agencies are extracting excessive profits from the scuba diving value chain.
And most importantly, local dive stores are still being used as the primary (if not unique) distribution channel to sell dive gear and courses to consumers while they are in an awful position for profitability – leading to price wars and irregular quality.
No matter how we analyze the dive industry, what we find is an old business model that hasn’t changed in decades and is not adapted to today’s world.
Every year, we do the same thing as the year before. And every year, the industry is shrinking in North America.
If we’re constantly competing but not growing, it’s time we make a move!
Making a move means we need to change the way we do business. It means we need a new business model to create more value for the end-user, at a lower cost.
2. What is a Business Model?
There are as many definitions of a business model as there are university professors writing books.
At its core, it could be summarized as the way a business makes money. But such a definition is quite simplistic. A more exciting description is the way a company brings value to end-users. And a more challenging definition would be how a company produces value at a low-cost — boosting both the top line and the bottom line.
Assumptions on which you built the business model are a crucial, yet often overlooked, part of that business model.
Sooner or later, some (or all) of the assumptions on which you developed your business model may not be true anymore. For instance, look at IBM. They made the shift from being a tabulating machine company to a vendor and hardware leaser for mainframes and minicomputers. But IBM found itself adrift at one point. They were continuing to assume that they were a hardware business in a world where the rising IT stars were service providers. They eventually made the shift.
What this example means is that you can’t sit on a business model year after year. You need to frequently review the assumptions under which your company operates – all premises at any level. For instance, you may continue to target the same end-users when these are no longer constitute a profitable market – or not the most lucrative market. Think of Le Cirque du Soleil. While circus companies all assumed that the target market was kids, Le Cirque targeted adults and corporate clients. The rest is history!
So, back to finding a definition for a dive industry business model.
So far we have a few elements: It’s how your company makes money by providing value to end-users, at low cost. Before working on the business model, you need to review the assumptions carefully. And a business model needs to be reviewed regularly because the assumptions change periodically. Of course, it’s even worse if you didn’t write down explicitly what these assumptions are.
Is that enough? We believe it’s missing one other factor: Art! Or we may call it vision.
“In The New, New Thing, Michael Lewis refers to the phrase business model as ‘a term of art.’ And like art itself, it’s one of those things many people feel they can recognize when they see it (especially a particularly clever or terrible one) but can’t quite define.” Source: Harvard Business Review.
3. What is the Current Dive Industry Business Model?
In theory, a business model is particular to a specific company or division of a company. For instance, Amazon’s business model to sell online is different than Walmart’s. However, in our industry, it makes sense to talk about a “dive industry business model” because everybody is pretty much doing the same thing.
So, how do we more money in the dive industry? And how do we provide value to the end-user?
Let’s look at scuba gear, first.
The process to bring scuba gear to divers is long and expensive.
- First, a real manufacturer is producing the goods – often located in Asia. In many cases, it’s the same manufacturer producing products for all dive gear brands.
- Second, the dive gear brand (who is, in most cases, a wholesaler) stocks the products in its warehouse and resell it to dive centers.
- Finally, a dive center sells the gear to the end-users. They usually carry very little inventory and rely on their suppliers (dive gear brands) having it readily available in their warehouse.
It sounds like a good distribution process. And in the good old days, it was. But in today’s world, we have to question each player in this chain seriously. Today, everybody must provide significant value to the end-user to remain in the value chain.
The retailer pockets about 50% in margins (100% markup). The wholesaler/brand takes about 40% of its wholesale prices. And the real manufacturer also makes its profit margins. With that chain, we end up selling products to end-users at $100 when they cost about $10 to produce. The players are pocketing 90% of the final sale price. For that, they must provide value to the end-user.
We must ask ourselves: What value does the retailer bring?
Most dive centers do not have enough inventory in stock to satisfy today’s clients. Consumers expect to be able to shop for any brand and any model, in any color and any size – and get it in their hands today or tomorrow. By not being able to satisfy today’s clients, local dive shops do not bring much value to scuba divers. Clarification: We’re only talking about the value provided to scuba divers in the process of selling scuba gear.
So, if dive centers are too small to maintain an inventory that would provide excellent value to the client, why wouldn’t the dive gear brands sell directly to consumers? Why would the local dive shop keep on taking 50% of the final price if the dive brand/wholesaler is footing the bill to maintain the inventory?
You will tell me that the local dive shop brings another kind of value. You can’t get a fill online. That’s true. But when consumers go shopping for dive gear, they are shopping for dive gear. Operating a fill station is a different business within your dive store. As we’ve discussed before, each one of the six businesses run by a dive center must be profitable in itself – and must bring top value to the customer.
That’s another part of our current business model. Local dive shops sell courses at a loss, to bring clients in and make profits on selling them dive gear. That doesn’t make sense anymore. We have fewer clients coming in (certifications are down). We sell less dive gear per client. And clients shop online for stuff you do not have in stock. Therefore, your training department is actually where your profit margins should be the highest.
Note: We don’t believe that dive gear manufacturers selling direct-to-consumer is the best solution. We’ll discuss this under the title “Redefining The Way We Sell Dive Gear.”
So, let’s look at dive training now.
We have training agencies hiring people to write training programs. These training agencies maintain online training systems used by the end-user. And they hire suppliers to print or produce the physical training material that they resell to dive centers and independent instructors, with a considerable profit. Good for them! They currently have the big end of the stick in their relations with their clients, and they work with significant profit margins.
Then, we have dive centers and independent instructors reselling this material to their student-divers (whether it is included in the price of the course or sold separately). These dive centers make minimal profits on teaching courses.
Some of you may disagree because it may look like you are making profits. But once you’ve calculated all costs, I doubt you are making a significant profit margin.
This imbalance between dive training agencies and their clients, dive centers and instructors, is not sustainable.
It’s abnormal for a supplier (the training agency) to extract so many profits while its clients barely survive. Both the laws of business and the laws of physics tell us that it cannot last. By being greedy without offering real innovation, new value, and reliable quality assurance, training agencies are putting themselves at risk.
That being said, as far as the value creation is concerned, we also have to question the role of the dive center and independent instructor. For instance, why is the local dive shop getting 40% of the price of an online scuba course when the training agency is covering all costs and managing the system? In terms of the long-term viability of the local dive center, it is a very valid question.
Is it “business normal” that a dive center in Miami gets 40% of the fee paid to the training agency by a Memphis client who just clicked on the wrong dive store? Even more so when this guy doesn’t intend to dive with anybody in the USA. He wants to complete the theory part of the course before heading to Roatan.
These are important questions. If we don’t have reliable answers to what a player is bringing to value-creation chain, that player is at risk.
Note: We are not suggesting that training agencies grab more profits with their online training systems. On the contrary, we question the value created by training agencies compared to the profits they take out of the value chain. And we also examine the value provided by local dive shops. To progress, we need to ask all the tough questions. And we will discuss this again when looking at redefining the way we teach and redefining the dive center.
We could spend a fair amount of time defining business models for training agencies, dive gear brands, dive resorts, local dive shops, dive travel agencies, and independent instructors. It’s a valid exercise.
However, ultimately, it always comes down to the same. We haven’t changed in decades while consumers have changed. We need to question how we do everything we do. We have to ask the value our own company brings to the clients. The toughest questions are the best.
4) How can we redefine the dive industry business model?
This exercise should be done for a specific company willing to invest in a new business model that will provide either a competitive advantage (short-term) or a blue ocean market space (medium-term).
To create a business model that provides value to the clients and profit growth to our company, we should start with a Blue Ocean clean slate. And we should make sure to include redefining the local dive shop as well as the way we provide scuba diving training and how we distribute and sell dive gear.
It’s about putting the customer first.
Instead of doing things the way we are comfortable doing them, we need to look at how we can bring more value to the customer, at lower cost.
Take the example of airlines. For them, it’s much better to operate under a “hub & spokes” model. But customers want direct non-stop flights! You can’t ignore customers forever. For instance, I like Delta airlines, but they always force me to transfer in Atlanta. Well, I don’t book with them, especially in Winter. I use direct non-stop flights with other airlines.
Similarly, in the dive industry, we’re making the process of learning and doing scuba diving ridiculously too complicated for the client. It’s good for us, maybe. It’s not good for them, for sure. We need to deconstruct and reconstruct.
An excellent way of doing it is by using the Blue Ocean‘s Four Actions Framework. Each of the 4 actions is about reconstructing what value we provide to the client-buyer, and how.
- Raise: Which parts of our processes should be raised well above the industry’s standards?
- Create: Which elements or factors should be created that the industry has never offered?
- Eliminate: Which elements or parts of our processes should be eliminated even if the industry has long competed on?
- Reduce: Which elements or factors should be reduced well below the industry’s standards?
This framework helps eliminate the mud that accumulated over the years in the model while creating new value for the client.
To entirely eliminate the mud while increasing value for the client at a lower cost, and producing consistency in the quality of the experience, the process of creating a new dive industry business model would probably include consolidating a training agency with a dive gear manufacturer and a chain of local dive shops & dive resorts. The proof of concept can’t be too small. For instance, we need both an origin and a destination dive center.
Let’s continue this discussion under the topic of a Blue Ocean strategy.