ClassPass: Gym Trial, Business Error?
Will ClassPass ever be profitable?
ClassPass is a new type of “gym membership” that gives millennial gym-goers unlimited access to boutique gyms and studios across major metropolitan areas. For those of us that bore easily and need to get our yoga, barre, spin, and kickboxing fix all in one week, ClassPass is a gift of the technology start-up craze. But we better take advantage of it now, as the misalignment of its business and operating model calls into question how long we will enjoy its benefits.
Value Proposition and Business Model
The idea behind ClassPass is that subscribers will enjoy value from the variety of classes in the ClassPass network studios. The number of times a subscriber can visit a specific gym is limited to three times a month to encourage trials of new gyms. The price of the membership (currently $119) is cheaper than some luxury studios that may cost up to $200 per month. Subscribers can also try a few classes before committing to a full-time gym membership.
Sample of User Interface
In terms of the value proposition to gyms, ClassPass convinces studios to participate in the ClassPass network with the promise of new customers who would then pay full-price for a class after initial trials. ClassPass members also fill spots in classes that would have otherwise been empty. As an incentive to participate in the ClassPass network, ClassPass compensates the studio per class per participant (at a wholesale rate lower than what the customer would have paid directly to the studio).
Operating Model
In terms of operating assets, ClassPass does not own gym infrastructure. Its main asset is the technology behind the online and app platforms.
The technology platform coordinates with studios to list their classes and the number of open slots, connecting subscribers to the studio class schedules. In addition, the platform has a feedback system for studio partners, as subscribers are required to rate their satisfaction of each class that they attend.
Areas of Misalignment
As ClassPass does not own gym infrastructure, it relies heavily on existing studios to provide services and value to its subscribers. This requires ClassPass to convince gyms that customers will convert to loyal customers who will eventually buy higher-margin packages directly.
However, once studios realize the ultimate value of gaining loyal customers, the value chain is disrupted. Firstly, ClassPass loses their monthly subscribers, as members have replaced their ClassPass membership for membership to the studio. Secondly, ClassPass loses a studio partner, as the studio has succeeded in converting customers, and can now rely on in-house marketing and word-of-mouth to expand membership.
ClassPass also faces challenges in providing value to its subscribers in a financially sustainable way. Since ClassPass compensates gyms on a per-visit basis, ClassPass loses money on high-users (if ClassPass pays a gym approximately $20 dollars per visit, ClassPass loses money on those who visit studios more than 6 times a month). In order to be profitable, ClassPass must rely on the unenthusiastic (or lazy) gym-goer, who pays the monthly membership but never actually goes to the gym. This is hardly the type of customer that ClassPass should target. The unenthusiastic gym-goer is less likely to provide feedback to the gyms, and is less likely to promote a gym that they enjoyed to their friends.
Implications of Misalignment
Because of high subscriber-churn and high payments to gym studios, ClassPass has raised the price of membership. Two years ago, a monthly membership cost approximately $79 dollars (with certain promotions). The membership price has since increased 50% to $119. With each increase in price, two possible death spirals happen:
Death Spiral #1:
Customer value is eroded, causing existing subscribers to cancel their ClassPass memberships for their local gym. ClassPass’s membership base shrinks, making it less appealing to gym studios who are attracted by ClassPass’s exposure and reach amongst millennials. Studios then leave the ClassPass network. High price also deters potential new customers from joining.
Death Spiral #2:
Subscribers are more intent on “getting their money’s worth,” and will attend more classes, increasing ClassPass’s payments to studios, worsening ClassPass’s profitability, causing ClassPass to further increase its membership price.
Areas for Improvement
ClassPass needs to change its compensation model and its value proposition to studios.
Instead of paying studios per visit per member, ClassPass should give partner studios a fixed monthly payment. Currently, ClassPass bears all of the risk of the high-users. By shifting some of the risk onto the studios, the studios would be more strategic about which slots they open to ClassPass members. Perhaps they only open one class a day only to ClassPass members. This can be an opportunity to train a new instructor, who charges a lower amount per class.
ClassPass should also monetize the vast amounts of data they can provide to studios on their subscribers. ClassPass has a variety of valuable data, such as the ratings of specific instructors, daily/monthly demand patterns, or workout preferences. Given that ClassPass is available in 36 different geographic locations, for a nation-wide studio such as FlyBarre or Barry’s Bootcamp, this information is valuable for improving studio service.
Sources:
http://money.cnn.com/2015/04/29/smallbusiness/classpass-small-business/index.html
https://www.linkedin.com/pulse/classpass-what-means-leading-millennials-bradley-c-lawrence
Images:
http://about.mapmyfitness.com/wp-content/uploads/sites/4/2015/04/classpass.jpg
http://static1.businessinsider.com/image/5447f45ceab8eae8638ac6c0-642-495/screen%20shot%202014-10-22%20at%202.14.41%20pm.png
I completely agree with the analysis above. One additional point that I saw from a company that uses the same business and operating models as ClassPass in Southeast Asia was the differences in interests from established fitness studios and new fitness studios. Existing studios that have loyal customers were unwilling to join because they did not want to dilute their value to their loyal customers and were also afraid of losing their existing customers to other fitness studios. On the other hand, new fitness studios would jump at the opportunity; however, many would end up leaving after establishing their own base of loyal customers.
For me, the value proposition to customers from ClassPass is clear, however with their existing operating model, their business model is unsustainable.
Thanks for your comment, Napat! Something I didn’t mention was the effect of ClassPass on the brand of their partner studios, so thank you for bringing it up. It is in fact a delicate balance.
An example who does this well–Barry’s Bootcamp (provider of the burn of the workout we are all too familiar with) in the New York marketplace. They open a very limited number of slots that fill up within seconds. This has enabled them to preserve their brand (and even create buzz from people not being able to sign up in time and hearing about how Barry’s is the highest-demand class).
But this is hard to balance for studios that are just getting off the ground. In a highly competitive space, ClassPass would be a hard sell for start-ups that are aiming for a higher-end brand.
Very interesting post! I was a Class Pass user pre-business school. I did not realize that they raised the price and agree that the value proposition gets a little lost when the price is increased. Another drawback to their business model that I found is that once I attended a class, the studio would ask for my email address and send promotions directly (i.e., Flywheel sent a promotion for 5 classes for $100 (in NYC) after using Class Pass at their studio for the first time). Not only do the studios have a chance to gain loyal customers, but they are clearly focused on doing so.
While I agree with some of the gaps you’ve identified between ClassPass’ business and operating model, I think you have may have underestimated its value creation to members and to studios.
Driving profit through member value creation: Founder, Payal Kadakia said that “on average its members exercise about once a week, even though their membership allows an unlimited number of classes.” This would suggest that at a $20 price point per your post (I believe this actually should be lower given estimates that ClassPass pays half, and at times, far less than half than retail class prices), the company would make at least ~$40 in profit per member per month. (http://blogs.wsj.com/venturecapital/2015/03/12/classpass-valued-at-more-than-200m-taps-into-gym-craze/)
Furthermore, given the price differential in what ClassPass pays vs. retail studio prices (assuming retail price of $40/class given ClassPass pays half of the retail price), ClassPass can pass along some of that value to the customer. ClassPass members attend an average of 4 classes per month for a ClassPass membership fee of $120. This translates to $30 per class, a 25% discount on the retail class price—a bargain for customers with the added benefit of variety and optionality!
Targeting large studio partners for long term growth: The key to ClassPass’ future success will be its ability to identify, partner with and retain the ‘right’ studios. In particular, studios that are looking less to convert ClassPass members, but instead, that are looking to sustain a consistent flow of ClassPass members. Specifically, these are larger studios with more spaces to fill. In fact, as smaller studios who are misaligned with ClassPass’ operating model churn, the refined set of remaining gyms will create even greater value, allowing more discounted, bulk purchasing by ClassPass to drive higher margins. With a studio retention rate of 95% (http://www.businessinsider.com/how-classpass-wants-to-help-studio-owners-2015-5), ClassPass has opportunity to refine its studio partners to continue to create value.
With investors valuing ClassPass at more than $400 million (May, 2015), there must be opportunity to continue to evolve its business and operating models for greater alignment and value creation in the future.
Thanks for your comment and the link to the Business Insider article, Trang! It was really interesting.
You do bring up an interesting point about the average visit per-user (I am in the opposite of this camp. The one month I had ClassPass, I averaged one class a day haha). I am concerned about ClassPass depending on these low-users for profitability, however. Word-of-mouth advertising is important for creating buzz around partner studios, which is more likely to be generated by those who go to the gym more often.
I definitely agree that the ability to fill classes is a large source of value for studios. As you said, ClassPass should definitely focus on attaining these gyms, and not get lost in the goal of just trying to recruit the most number of gyms. This temptation of recruiting for the volume of studios will be hard for ClassPass to avoid however, especially as they are trying to attract investors. (And yes, we cannot overlook their $400 million valuation.)
A very refreshing view on ClassPass, as it was being seen last year as a disrupter of subscription based business models. I think they should pitch the gyms they would mitigate their dead-weight losses by increasing the capacity utilization of the gym facility and as suggested they should pay monthly fee lower than the normal subscription of the gym, as the gym is earning something instead of nothing. Also, they should have tiered pricing to attract more customers and extract more economical value from them.
Thanks for the comment, Yuvnesh!
Your idea about tiered pricing is interesting–I hadn’t thought about it before. However, I think some of the appeal is the “unlimited” part of the subscription. I think once you start moving into tiered pricing for the subscribers, there will be little price difference between the “pay-as-you-go” model of some of the current studios.
And yes, the utilization of the gym capacity is a huge draw for partner studios. However, you also may upset some current subscribers, who purposely chose classes at odd times because there are fewer people that attend (for example, those who chose class during a weekday at 10:30am.) In addition, studios have power over how their costs are incurred over these low-utilization periods. They can not offer time slots during that time (and therefore would save costs on the instructor wages).
Alison – thanks so much for highlighting this!
I’m curious about how ClassPass is thinking about expansion over the next few years. It seems like a fantastic subscription service for individuals in highly-concentrated geographic cities (e.g., NYC, Chicago). As a pre-business school ClassPass user, I can attest to the convenience and ease of being able to select new and accessible fitness classes easily through the site with minimal financial commitment. With that said, I’m struggling with whether individuals in other cities will be as receptive to this model, given that in order to try out these classes, they will need to travel further distances to do so. Since working out is often a scheduled task, I wonder if these disruptions (e.g., needing to go to gyms further away) will have an impact on how customers perceive the program.
Given this, once geographic saturation within major cities has occurred, I wonder how ClassPass will be able to grow without offering new products entirely. Outside of their current subscription model, perhaps they will move to different ‘tiered’ offerings of classes? It will be interesting to see how they will need to shift their operating model to do so – and more importantly, how their consumers will respond to this change.
Hello. In our country we build same as classpass but we used different approach. We made app and you buy fitcoins. You can spend your fitcoins in different facilites like gym, swimming pool, yoga, tennis or anything. And also you can share points with your friends. Fitness centers and others sell us only their empty space – for example if between 18 and 19 each day, they can receive more 100 clients , only 100 can check in . It is really nice and i hope we will move it to other markets too 🙂