Some Go to Church, Others Go to SoulCycle
Inside the business of a modern day cult brand.
Soon enough, investors will be clipping in and tapping back to one of the hottest and fastest growing retail concepts to hit the public markets. Over the last decade, SoulCycle (“SOUL”) has expanded to encompass 47 studios across seven states. Since 2012, the business has tripled in size, generating $112 million in revenue and $36 million in Adjusted EBITDA as of 2014 (see below).
Such staggering numbers make SoulCycle a unicorn in the fitness world and beg the question: in an industry littered with so many losers – Crunch, Bally’s and David Barton Gym to name a few – what’d SOUL get so right?
The Business: More than Just a Workout
When co-founders Elizabeth Cutler and Julie Rice opened their first studio on West 72nd Street in 2006, they set out to answer one simple question: why does exercise have to be such a chore?
The answer, it turns out, is that it doesn’t! SOUL delivers an efficient, full-body cardio + weights spin class in just 45 minutes. But SOUL enthusiasts would argue that the experience transcends just the physical. Some call it “therapeutic.” Others describe it as a “dance party.” Some even call it “strangely sexual.” Whatever it is, SOUL has created a truly unique fitness experience for its customers and, in the process, built a powerful lifestyle brand and cult-like following.
It’s the extraordinary loyalty this community has shown SOUL over the years that has propelled the business to such giddy levels of success. At $34 per class (plus $3 to rent shoes and $2 for water, natch) in Manhattan, SoulCycle can generate over $2,000 for a sold-out, 60-person class. And though not all classes are sold out, boxes are still handsomely profitable, generating on average a 53% studio contribution margin on ~$4M of annual sales.
Operating with Intent
From the grapefruit-scented candles to the free packs of gum, EVERY DETAIL about the SoulCycle experience is deliberate and intentional.
We’ll focus here on just two of the most important aspects of SOUL’s operational design that underscore the customer experience.
The Intangible: Instructors & Studio Personnel
As a service-oriented business, the success of SoulCycle begins and ends with its people, each of whom serve as brand ambassadors and play key roles in cultivating the company’s unique culture and community.
Most important are the instructors. They curate music playlists, dictate the rider experience and most importantly cultivate deep relationships with the customers. Becoming an instructor isn’t easy; less than 10% of those who audition ultimately make it through a rigorous eight-week training process. Once complete, instructors begin a full-time career at Soul (i.e., they’re barred from teaching at other studios), receiving benefits and ongoing training at SOUL University. They’re also paid $125-150 for a sold-out class. Veterans reportedly earn “significantly more,” with the very best NYC instructors rumored to make over $500K per year. It’s no wonder that Soul’s turnover rates are among the lowest in the industry.
A HUGE aspect of the SOUL experience is the personalized and consistent customer service one receives as a member of the community. The investment in employee training and compensation creates a culture of exceptional service and ensures a differentiated fitness experience, ultimately resulting in immense customer loyalty.
The Tangible: Studio Layout & Design
Boxes are designed to be small, squeezing onto the streets of metros such as NYC and LA, to minimize fixed rent / overhead in such high-cost locales. However, they’re also efficiently laid out to maximize productivity. SOUL packs up to 60 bikes into their ~3,700 square foot studios. It’s a tight squeeze, but one could argue that the close quarters enhance the feeling of community and belonging inside the classroom.
Lockers are located outside of the actual “locker rooms” and limited facilities encourage SoulCyclists to change and shower at home. Additionally, SoulCycle strips away many other non-essential “amenities” (e.g., steam rooms and stretching space) offered by full-service competitors such as Equinox, whose gyms can often be 10x as large.
Where SOUL doesn’t skimp is the quality of its studios. The company makes a significant initial capex investment of ~$2.3M for a high-end interior remodel, the purchase of proprietary bikes and the installation of a top-of-the-line sound system. With its studios, SOUL identified what its customers really care about (the quality and the details) and what they could live without (a big room with lots of extra amenities) and focused their money and efforts into creating a physical space that truly reinforced and enhanced the customer experience.
Turning what once was a bothersome task into an enjoyable time to connect with oneself and one’s community, SoulCycle has revolutionized the way many think about fitness. And though it’s proven to be successful – and quite profitable – thus far, the brand will have to grapple with many difficult questions regarding its value proposition and operating model as it continues to scale. Can it continue to find, train and retain instructor talent? What will box economics and profitability look like outside of core metro markets? And perhaps most fundamentally: can the loyal community SoulCycle has built thus far expand to include the masses?
Sources:
http://www.sec.gov/Archives/edgar/data/1644874/000119312515270469/d844646ds1.htm
http://www.nytimes.com/2015/08/09/upshot/soulcycle-you-say-cult-i-say-loyal-customer-base.html
http://www.nysun.com/real-estate/equinoxs-real-assets/27263/
http://nymag.com/thecut/2013/01/evolution-of-soulcycle.html
http://www.businessinsider.com/why-i-stopped-going-to-soulcycle-2015-7
Well written, and a very eye-catching title!
You well articulated what sets SOUL apart from other gyms, and how they deliberately made investments in operations to support their core advantages. My question is besides first mover advantage, how does SOUL differentiate itself from other spinning companies in the core metro markets? Besides loyalty to certain instructors, I’ll guess convenience (i.e. proximity to home/workplace) and price will be important factors. If that’s the case, should SoulCycle think about really rapidly expanding and covering the major locations in NYC or LA to prevent competitors from taking up the most strategic locations? How did they decide where to open a studio, and how do they think about their pricing strategy?
This is a great article. I’m not an avid Soul Cyclists but I did find myself going a decent amount before coming to HBS. The cost can become prohibitive but the culture and community around Soul Cycle have made it a core part of people’s fitness. The questions you raised at the end of your article are very important when thinking about the business and I’d like to raise a few others. Will this business remain sustainable as more Soul Cycle replicas enter the market? Is this a fad (e.g Tae Bo) or is this a sustainable fitness trend? Is there a way for Soul Cycle to differentiate itself via its operating and/or business model to increase its competitive advantage?
Lucy,
Very interesting analysis. Having been to SoulCycle a few times, I do wonder about how sustainable these box economics really are as there is really not much to SoulCycle other than a studio, music and the instructor – all of which are somewhat able to be replicated in other venues relatively easily. I understand that the brand equity of SoulCycle is pretty high, but how much of that is just a “fashion trend” vs. a sustainable brand with real product differentiation. There’s still considerable white space to go, so I think the growth prospects in the near-term future are fine and certainly judging by the Back Bay location, the current boxes are doing fine. Just have to think when there is such great economics in terms of both payback and margin but such low barriers to entry, you really have to be worried a little bit about how much the brand equity can protect the franchise.
Really interesting to read more about the financial metrics and operating model behind the pervasive trend that is SoulCycle. You’ve highlighted some important questions about future growth, and I wonder what the future growth strategy is for the company and how they are thinking about it. As competitors continue to enter their core urban markets, do you think they will give (or hold) on pricing? Do you think they will seek expansion to tier2 type cities? Do you think they will ever become “SOUL” and deploy their operating model to new fitness-related activities? I’m in agreement with some of the posts above in that I worry this might be a fad/trend, and I’ll be curious how they aim to sustain and drive growth in such a competitive space going forward.
I would echo many of the above comments. I do agree that Soul Cycle still has a fantastic growth trajectory with many markets still ripe for a high-end spin experience (including many parts of Boston!). However, having come from the highly saturated spin market of New York City myself, I have seen an erosion of many of their competitive advantages. For one, price is a good $5-$10 per class above many competing studios, without a notably better instructor or course quality. The same goes for facilities. Anecdotally, most people I knew switched from SoulCycle to more affordable options as soon as they came on the scene. I think it would be very interesting to get your hands on some data on how SoulCycle has been performing in different markets based on how long it has been there and what the competitive landscape looks like in each market. My hypothesis is that margins and growth erodes once the market starts to look more like New York’s.
One additional thought–do you think SoulCycle would ever have to modify its pricing as the environment becomes increasingly competitive?
Lucy – great analysis and really interesting read! I especially liked your closing questions – while I think SoulCycle has done an incredible job building their brand equity, I am worried about the sustainability of their immense growth as their core markets become saturated. I am also curious if you considered how the introduction of ClassPass (unlimited classes for ~$100 per month) is affecting their business model and pricing scheme. I know many other spin studios (including Flywheel and Swerve) and other class concepts (like Barrys) participate in ClassPass. While I believe SoulCycle brand loyalty is strong enough to create a loyal following when their classes are only a few dollars more than competitors, I do wonder if it will be enough to retain people when the economics are so drastically different. I would be curious to know what thought, if any, SoulCycle has given to its pricing model in light of this new disruption to the market.
Hi Daniella! Great question – wanted to respond to this one directly. I actually think these new a-la-carte models such as Classpass are more of a potential threat to SOUL long-term than a new studio cropping up here and there. To the extent the success of Classpass represents a new revealed preference in consumer attitudes – that studios are more or less interchangeable and price / convenience / variety are what really matter – then I think SOUL may have to long-term change its model to accommodate this behavioral shift. Personally, I’m more of the belief that consumers (at least some segment of them) really care about specific brands, the communities they engender and the experiences they offer. As a result, I think that as long as SOUL continues to invest and really deliver on that value prop, they’ll continue to maintain the loyalty of their core customers.
From a business perspective, I have to wonder how happy these studios are to be part of the Classpass network. Sure, they’ll fill the seats in the room near-term but I wonder what potential long-term damage that does to their brand long-term? I’m sure the national brands such as Flywheel and Barry’s receive more favorable pricing from Classpass vs. the small independent studios out there, but I worry about the long-term viability of their brands by diluting it in this way…
Thanks everyone for your thoughts on SOUL! I see a few general themes in the comments above so to avoid repetition, I’ll try to answer them to the best of my ability in one comprehensive post…
Issue #1: SoulCycle differentiation and sustainability
I personally think SOUL’s differentiation comes back to the value that it creates for its customers: a fun, interactive workout built around a community. Given its scale / first mover advantage, price premium and high utilization, I’d venture a bet that SOUL is a lot more profitable than its competitors. As a result, it can afford to offer (much) higher instructor pay, invest in more ongoing training programs, higher quality equipment and real estate in order to continue to differentiate is fitness experience and maintain its competitive edge.
Sure, at its most basic, SOUL’s just a bunch of bikes in a dark room and loud instructor…but Snapple too is “just” sugar water and Starbucks is “just” caffeine. But again, by really honing in what matters in delivering the high-end, unique experience its customers are looking for, I think SOUL has managed to create something really special and difficult-to-replicate in fitness.
Issue #2: Evolution of competitive landscape
Lots of people touched on this above but SOUL’s success has spawned lots of competitors, not just in spinning but boutique fitness more broadly. I’d argue that these models have grown the pie more than anything (i.e., making exercise more palatable to more Americans) and taken more share away from gyms vs. each other (so far…). Inevitably, SOUL’s going to have to worry about potential models that crop up that’ll eat away at their customer base. But besides Flywheel – founded in 2010 by former SoulCycle co-founder Ruth Zuckerman to appeal to a more athletic (and male) clientele – no formidable challengers of scale have emerged. I think this is likely because it’s really hard to make it in the high-fixed cost world of fitness unless you have a brand or a really differentiated angle (e.g., Flywheel with its technology play). I’d bet that your local spin studio doesn’t have the utilization or profitability of a SOUL or Fly, ultimately making it really hard for them to scale.
Issue #3: Pricing pressure
SOUL has held firm in terms of prices so far. They don’t offer discounts of any kind (except pricing your first class at $20) and the only way one can save a couple of dollars per class is by buying packages of 10-, 20- or 30-classes. To my knowledge, no other studio in the Boston market has such a strict pricing policy.
It’s hard to say how this will evolve going forward. They still manage to achieve high utilization despite their ultra-premium price point, the coexistence of a Flywheel / other local competitors and without being a part of the Classpass network. So my bet is that because they view themselves as THE premium fitness experience, they’ll continue to price above their competitors in each of their markets and reinvest the profits back into the company.
From a customer perspective, I think it’s also really interesting how people rationalize the high prices that SOUL charges. Because it’s perceived as a total mind / body experience, some customers don’t benchmark SOUL prices to those of other gyms or boutique studios. Says SOUL co-founder Julie Rice, “It’s cheaper than personal training. It’s way cheaper than therapy. A class is the same as what’d you spend on two cocktails.”
I haven’t read the others comments yet, so excuse me if this is redundant. Being from Nashville I had never heard of SoulCycle. Once arriving at HBS I saw the cult-like love that people have for SoulCycle that I frankly found irrational. I struggled to see the value proposition, as it’s $34 for what I assume is like a one-hour fitness class. That’s about $100 a week if you want to exercise for 3 hours, or about $5000 in a year. That’s well over 10x most annual gym memberships, even in cities like NYC and LA. After reading this article, I still find the love or this to be an irrational one. However, I think it’s found success in high density markets such as NYC and LA since it doesn’t take much market penetration in order to gain a significant amount of volume. For that reason, I’m concerned about their ability to scale outside of major metropolitan markets.
I doubt I’ll be able to convince you otherwise with just words, but I’ll do my best! I agree, $34 per class is expensive by any standard. But whether or not you can justify paying that number depends on whether or not you value the FULL EXPERIENCE that SOUL offers. Why do people pay $3 for a bottle of Fiji water when tap is free? Why do people pay $5,000+ for an Hermes bag when they can go to Macy’s and find dozens of options for under $50? As we talked about in marketing, companies can find a way to (successfully) to price their products / services at a premium if they can convince their customers that they’re selling more than just water / a handbag / a workout. In this case, someone who’s looking to sweat isn’t going to be a SOUL customer. But for someone who doesn’t normally enjoy working out and enjoys a high-touch, personalized experience, paying up for SOUL may make some sense…
Separately, I generally agree with your second comment regarding SOUL’s ability to scale outside major metros. You definitely need to be located in a pretty high-end demographic to make the box economics attractive. SOUL’s S-1 states that they believe they have enough runway to grow to 250 domestic locations (up from 47 today). While I’m not sure I’d peg it at such a high number, at their current pace of opening ~10 stores / year, that’s still MANY years of new store growth left just in the U.S.