Health Optimization - The Path Forward

It’s with sadness that I share my last day at Upgrade Labs came in March 2020. Global Pandemics with mass lockdowns are not kind to retail-based health optimization centers. It’s worth a second to reflect on the business and what it means about opportunities in the space.

Labs - The good things

I can say, unambiguously, that labs helped people. The joy of retail-based wellness facilities is seeing firsthand the changes in people’s lives. When someone loses 20 pounds, becomes mobile again, or suddenly has the energy to engage in their life in a way they didn’t before, you get to experience their joy with them.

I feel confident that this space is headed in the right direction both in exposure and impact. More and more often when I talk to people about what we were doing at Labs it resonated. Friends who initially thought it was crazy were interested in stopping by and trying it out. More so, the impact is real. We live in a world where our ability to treat disease has radically changed the amount of time and quality of life we experience after an adverse event (cancer, heart attack etc.) but we’re getting worse over time as a society in terms of causal co-morbidities for adverse events. Health optimization as an industry is our opportunity to address this, and as money continues to enter the space we will.

What were the challenges?

There are mistakes we made managing the business that I won’t go into. Every business makes mistakes, and it’s our dirty laundry. Instead, it’s worth discussing what we learned about the structural challenges in the space.

Unit economics are challenging due to the cost of labor

It’s easy enough to take a bunch of machines and IVs, put them in a space and offer access. To move from a space with some machines to providing data-backed guidance with data-backed feedback around wellness outcomes is much more challenging. Let’s play out the unit economics around this for a second.

Say you have a $100,000 machine you want to put in your health optimization facility. A loan for that machine amortized over five years will cost you roughly $2,000/mo. Assuming your pricing works out to $25 every time someone uses that machine, you need to have it booked about three times per day to make a profit. Then, to overcome the astronomical cost of rent in Los Angeles (say $14,000/mo for a facility with ten machines), we need to book the machine another two times per day for its contribution to rent. So your ten-machine facility needs 50 machine uses per day to bring you to break even on gross cash flow. You can probably get away with four staff there over the length of the day between the front desk and someone around to help out. If we’re paying on average $25 an hour, it’s another 32 machine uses to cover the cost of staff required to keep the doors open. For reference on this quick back of napkin math, keeping the doors open on this facility is about $58,000 per month.

If your average customer comes twice a week to use three machines, you need about 100 customers paying you $600.00 a month to break even on your cash flow. This works out quite well, and in an area like Santa Monica is reasonable to achieve. Labs did this on its original launch, and it cash flowed positively. However, a few machines sitting around in a room is not the business we set out to build. Instead, we wanted a health optimization facility that provided feedback, tracked goals, and walked customers through the steps they would need to take to achieve those goals.

This requires a whole extra layer of human involvement in customer journeys. We need trainers on staff to spend time with customers one-on-one when they’re in the space to go over their plans and coach them through their journey. Imagine a trainer can manage two clients in the lab at once. During peak utilization, if we use all the machines, we need five trainers in the lab. We’ll also need a few more to cover off hours, so say eight full-time trainers in the facility. This cost of labor is another $50,000 a month. If we want to add two nurses to cover blood draws and IVs, that’s another $20,000 per month. We’ve doubled our cost to turn Labs into a full-blown health optimization facility. We now need 215 people to pay us $600.00 monthly to break even. This is a much harder bar to reach in most places, even Santa Monica. Particularly challenging, because customers mostly want to visit near peak hours, as we add customers, we lose utilization on our trainers and end up scaling our costs faster than our revenue.

In any personalized health environment that requires skilled labor, the cost of labor becomes the underlying driver of the cost of revenue. To fix this and make health optimization more accessible, we must lower the amount we spend on labor per customer.

Retail facilities don’t support the scale required for systemic technology investments

Software is expensive. Really expensive. A minimal software team, even offshore, will cost a minimum of $40,000 a month. The only way to support the R&D costs of a concerted, ongoing software effort is to split the cost of that software effort across many customers. The most successful software organizations drive success by splitting this cost across hundreds of thousands of customers.

The cost of Shopify’s software team is carried by the customers who make purchases from any store running on Shopify as a backend. By contrast the cost of an e-comm company that builds it’s own software is born exclusively by it’s own customers. Unless that e-comm company is at an extremely large scale or derives tremendous competitive advantage from it’s own software, Shopify has better unit economics. Now imagine building a software team to support a single or a few retail facilities. The cost of that software must be born by a very small number of customers making the economics extremely challenging.

Looking at successful retail-based companies in the wellness space, a common thread is a minimal investment in technology. Three examples are Barry’s Bootcamp, OrangeTheory, and F45. All three of these companies range from low to medium technology investment. Orange Theory, for example, built its dashboard, but that’s it. Barry’s and F45 bought any of the minimum levels of technology investment they made.

The problem is that the ecosystem does not currently have strong enough software to support the customer experience we need to create effective health optimization outcomes. Even the basics like scheduling kind of suck. (Think Mindbody) More advanced pieces like customer program management coupled with biomarker tracking don’t even exist. Driving an advanced health optimization outcome in retail is hard to achieve without the basics or the economics to build the software needed.

Customer retention is hard once the customer achieves goals

Customers usually came into labs with something they wanted to fix. Maybe they didn’t have the energy they used to at work and with their family, or maybe they wanted to lose a few pounds. As an industry, wellness struggles with getting customers to adhere to regimens. This is why we’re still overweight despite the US being covered in gyms. This is why we have terrible cholesterol despite plentiful, cheap access to effective cholesterol drugs.

At least when customers are dealing with acute and visible problems, they are motivated to deal with them. If I’m overweight, I see that in the mirror every morning. If I have pain, that manifests in my day-to-day life. If I have brain fog and struggle to be present with my family, I want to fix that. Keeping customers engaged and involved during these acute phases of wellness journeys is easier. Once the acute problem ends, it becomes harder to drive ongoing compliance. Think of your last trip to a physical therapist. You probably did the prescribed exercises initially while in pain. Still, once the pain went away, the exercises probably lapsed. You likely never fully corrected the underlying cause, leaving you vulnerable to reinjury.

This played out time after time with our customers at Labs. They’d come in with an acute issue, engage strongly in a plan, and once their acute issue was resolved they would disengage. We would point them at a new goal, but often new goals didn’t align with any acute issues in the customer’s life. Once you fix your pain, your mediocre insulin response is not the same motivator. Customers would begin using the facility less and eventually have to consider if they needed to spend $900 a month on a facility rarely used. Compliance and motivation will remain core challenges as we move health from reactive to proactive.

How we address the challenges

Understanding what’s challenging about the industry helps us think about how we can begin to address the core challenges.

Lower cost of labor via technological intervention

The dollar cost of delivering personalized health optimization must come down to achieve mainstream penetration. Cost is primarily driven by expensive labor, so this is the piece we need to resolve. There are two ways technology has traditionally lowered the cost of labor in industries.

  1. Making employees more efficient - Excel is a simple example. Your finance team today is probably 10x as efficient as they would have been in 1970 in building business models because of the existence of advanced spreadsheet tools. Things that are hard right now like tracking customer outcomes, setting goals, tracking biomarkers, designing programs, and creating customer communications need software to drive efficiency. For example, suppose we have a physician’s Assistant in the loop. In that case, the difference between that PA being able to review ten customers an hour and two might be $100 per customer per month.
  1. Replacing intelligent employee interactions with software - This is more like Expedia. Rather than calling a travel agent and having a human plan my trip, I do it on my own online. All human interaction has been dropped from the loop reducing the cost of that booking. Many interactions at Labs needed a human in the loop, but you could imagine technology taking over. For example, if someone was trying to lose weight and their hsCRP was high, the customer’s regimen was always the same. If software suggested a regimen based on customer goals and biomarkers, we could just have a trainer greenlight it. One step further would be removing the trainer entirely from the loop.

Create technology backbone companies

In e-commerce, Shopify created a revolution. It was a “backbone company.” An entire ecosystem of other backbone companies grew around Shopify. Companies like Shippo, Shipstation, and Klayviyo made launching an e-commerce an order of magnitude easier. The backbone infrastructure launched companies like Kylie Cosmetics, Fashion Nova, and All Birds on hundreds of thousands vs. millions of dollars of initial investment.

Health optimization needs a set of backbone companies like e-commerce needed Shopify.

Give customers ways to re-engage outside of memberships/subscriptions

One of the more surprising outcomes at Labs is that our members spent ~40% of their LTV outside of their memberships. Customers would cancel their memberships, but they would continue to use labs ad hoc for interventions not specifically on their plans. Most companies in the space are looking for committed memberships to interact with their customers. An issue with memberships and subscriptions is that they are, by nature, on/off. Providing customers who see memberships as onerous other options to interact with a health optimization ecosystem can engage customers with only one foot in the water.

Drive normalization and fast feedback loops in wellness

Feedback loops and cycle time are key in any endeavor to get a sense of momentum, and it’s not different in this industry. It takes time to create health outcomes, but it can be shorter than we think. Driving fast feedback loops around changes and outcomes can make customers feel more momentum in their engagement and retain them longer.

Leverage exceptional marketing

Health optimization has lacked a company with exceptional marketing. The space has made inroads via persistent and hard work by folks like Dave Asprey and Peter Attia, but great branding and strong marketing are still lacking. I’m sad to say we never got to this high bar at labs. Better marketing will create better health outcomes by driving more household penetration for pro-active health.

Opportunities in the space going forward

Given all this, what are the opportunities in the ecosystem now?

Build a best-in-breed piece of the ecosystem

Don’t try and be the swiss army knife of health optimization. There are many areas to address in the space. However, addressing them all rather than focusing means egregious capital investments and likely not doing a great job of any piece of the ecosystem.

A great example is Levels Health. Levels is a pre-seed funded company that recently launched an early beta program. They use Freestyle Libre CGMs to pull your glucose in real time and help you optimize your eating and other habits for more stable glucose levels. Another example is Zero an app that helps track fasting and drive weight loss.

Build an operating system for retail-based facilities

In the last two years we’ve seen an explosion in retail health optimization facilities. When I started at Labs we were one of the only options in Los Angeles. Now it feels like there is a project on every corner. There is going to be a slowdown in Covid. Long term as old retailers don’t survive this lockdown there should be cheap retail space available. The trend will continue with people more conscious than ever of their health. These facilities will encounter the same problems labs discovered. Building an operating system to power these facilities will empower the next generation of health optimization facilities to build more engaging experiences, drive better outcomes, and do it at a more attainable price.

Peter Attia In Your Pocket

Peter Attia is a podcaster and clinician who acts as a concierge health optimization doctor. He doesn’t behave as your PDP, instead helping you select and monitor a set of lifestyle interventions you might use to optimize your health and reach health-related goals.

An example he gave on his PodCast is a customer who came to him looking to lose weight. The customer successfully lost weight using a ketogenic diet, but his cholesterol went crazy. It was irresponsible to continue the client on the diet given the cholesterol implications so Peter suggested a series of changes that involved swapping saturated fats for lots of olive oil. Following the change the client’s cholesterol returned to normal.

The above interaction shows the value of having a knowledgeable guide on your health optimization journey. Without Peter, the client would have delivered a superficial win in his weight loss, but an underlying problem in more atherogenic outcomes caused by a worse lipid profile. This interaction did not need an in-person visit between the client and Peter Attia. It could have been managed entirely asynchronously through an app.

The unit economics of the business would depend on most interactions being technology-driven and not human-driven. “Replace intelligent employee interactions with software” Taking a high cost of labor business and putting it on the internet doesn’t fix the economics. It does add millions in marketing and software engineering costs. The key would be to drive decision-making about customer plans algorithmically. 90% of customers should fall into standard buckets, and the extra 10% should be interacting with specialists you don’t have on staff anyway. Over time integrating advanced AI will continue to drive better plans and cheaper interactions.

An app like this could win by integrating all the best-in-breed pieces of the ecosystem like Levels, ChiliPad, Oura and WalkInLab to collect data and make smart plans. Being the connective tissue that ties together the whole ecosystem could make it a lifelong companion in driving health-related decisions.

Published 19 May 2020

On building software, living a healthy life and the world around us.
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