ClassPass: Serving a Two-Sided Marketplace with Class(Pass)

ClassPass (‘CP’) is a two-sided marketplace that connects the end consumer, a fitness class attendee, with classes at boutique fitness studios.

ClassPass (‘CP’) is a two-sided marketplace that connects the end consumer, a fitness class attendee, with classes at boutique fitness studios. It’s also an example of a company that has effective alignment between its business and operating models.

Business Model

The company’s business model is based on rev inflows from its subscribers, and rev outflows to the studio partners.

For the end customer, the fitness consumer, the company’s main product is a monthly subscription providing unlimited access to boutique fitness studio classes in their area, served up on appealing cross-platform apps; consumers can book classes on either the ClassPass web app or its recently-launched mobile app. The service costs $79-$125/month, with prices set based on geography (high end included San Francisco at $119 and NYC at $125), which serves as a proxy for the number, variety, and quality of classes available in each market. Classes range from yoga to barre to cardio pole dancing to cycling to martial arts and typically cost $15 – $35 a la carte to the consumer (without ClassPass). Based on the a la carte prices, a customer can “make back” the value of their monthly subscription fee by taking 6 classes a month. The customer can take an unlimited absolute number of classes per month; however, they are limited to taking three classes a month at each studio.

UI for a user showing upcoming booked classes:

Screen Shot 2015-12-09 at 6.47.25 PM

 

For the fitness boutique studio partners, ClassPass provides paying customers to fill excess class inventory (at a discounted rate pre-negotiated between CP and the studio), as well as emerging “thought leadership” in boutique fitness studio management. Specifically, ClassPass pays each studio a fee for each class taken by the CP customers. The fee is a percentage of each class’s retail (‘a la carte’) price. Fee percentages are scaled (as opposed to being a flat fee or cost-plus or a flat percentage) based on demand for the specific class, using time of day as proxy for convenience and demand (i.e. a 6PM class on Thursday has a higher fee than a 5:30AM class on a Saturday). In all cases, the price that CP pays the studio per class is significantly lower than the studio’s ‘drop-in’ rate. CP mitigates the “sticker shock” of the steep discount based on both a volume purchase discount and the company’s value-add to the studios, which they define as helping studios maximize their business through webinars and other knowledge transfer and serving as a marketing engine for their business.

Operating Model & Alignment with Business Model

Just as the success of its business model is predicated on satisfying both sides of the marketplaces, ClassPass’s operating model is similarly focused on servicing and delivering value to both customers and studio partners. By aligning the two models around the same goal, they are able to create and sustain a competitive advantage on both sides.

Operationally, the company is comprised of 180 people across Account Management and Customer Service, Sales, Operations, Finance/Legal/HR, Marketing, and cross functional squads comprised of Product, Engineering, and Design.

The Account Management and Customer Service team services a studio network of over 7,000 studio partners. Similar to how other companies have the account management function, this team serves the same function at ClassPass, answering studios’ questions about people coming in, technical issues, questions about money, policies, and operational management questions such as “how do I grow my business”.

The squads are an example of the business model leveraging unique capabilities of its operating model. The teams created studio-facing tech tools to automate selling, studio on-boarding, and setting up accounts. The tools co-exist with existing class booking APIs (MindBody, zingFit, Front Desk) used by larger studios. For smaller studios who don’t use reservation software, ClassPass built a venue portal that allows studios to check on reservations. The success of these tools is seen in the fact that today, ClassPass launches 100 studio partners a week across 36 cities internationally without increasing headcount.

ClassPass also reinforces their positioning as a partner to the studios by dedicating resources to address studios’ customer cannibalization concerns. This includes analyzing customer usage pre/post CP to prove that CP provides net positive users to each studio and improves customer retention.

Culturally, the employee experience reflects the company mission to help people live active lives and get the most out of life. Employees enjoy schedule flexibility at work with the understanding that they will be efficient. Similar to the value provides to customers of experiencing the mental and emotional benefits of living an active life, employees embody an ethos of “being positive and grateful. [Not just] smiley, but also having positive intent – help people [at the company] do their best and be the best version of themselves,” as described by Rachel, ClassPass employee.

All of the above features and company operational structure scales studio partners, which in turn provides a better service and experience to its subscribers. In doing so, ClassPass creates and sustains a competitive advantage in line with its business model.

 

References:

https://help.classpass.com/hc/en-us/articles/204335629-What-is-ClassPass-

Interview with Rachel M., former Director of Strategy & Operations at ClassPass

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8 thoughts on “ClassPass: Serving a Two-Sided Marketplace with Class(Pass)

  1. Very interesting post, Jean. I’m a big believer in ClassPass and I think that it’s a great business model. I had many friends who used Classpass and were very passionate about the platform. I do see two concerns, one from each side of the marketplace. From the consumer side, I wonder if this platform will be as successful outside of densely populated cities, such as NY and SF. One of its main value propositions is the variety in classes and number of studios that you could take classes at (since you’re limited to three classes per studio per month). Once you leave NY/SF, I’m not sure if you can still find multiple studios of the same type in a close-by geography. For the studios, my concern is that as ClassPass becomes more popular, studios may start losing customers that used to purchase directly from the studios to ClassPass. At that point, I’m not sure how excited about the ClassPass partnership studios will be. But these are not major concerns – overall, I definitely believe in this business.

    1. Thanks for your thoughtful response, Vitali!

      Re: your first concern, you’re right that the model depends on having appropriate density and variety of class offerings per location. ClassPass considers having a pre-existing boutique fitness ecosphere to be a vital factor for a new market, which is why they haven’t expanded to a new city since March 2015. At the same time, the company is considering expanding the subscription booking model into adjacencies that make sense for their target user (concerts/music events, hair/beauty appointments, sports lessons, volunteer opportunities) to decouple their growth from being so 1:1 with growth of boutique fitness studios.

      Your second concern is also spot-on in pointing out one of their greatest issues with assuring partner incentives. It’s something the company deals with on an ongoing basis. They are constantly working with studios to ensure that the partnership is net positive for the studios. As I mentioned above, they dedicate resources to providing analytics around customer retention and LTV for the studios. So far, they’ve found that over the course of a year, a person goes to a studio more with CP than on their own. They are also working on a more longitudinal study to affirm their belief that LTV per customer with CP is higher than LTV per customer without CP for a studio.

  2. Thought this was a great write up! And thanks to responding for Vitali’s point about population density, because I was wondering the same thing.

    Was also wondering what you thought about potential risks of the business model from the view of fitness studios. As particular classes become more popular, my guess is that they’d “need” Classpass less and therefore be able to fill most of their classes through their individual interfaces. That said, users of Classpass see it as a way to get access to lucrative classes that they’d prefer to not pay the full price for, so if those studios drop, Classpass may be less appealing. While I agree it totally works for now, do you think CP has made itself relevant enough to avoid that outcome? In particular, it seems like they’ve come under a bit of scrutiny because CP users detract from the full payer experience (where studios make their money): http://www.nytimes.com/2015/04/02/fashion/classpassdeep-discounts-but-some-discontent.html

    Would love to hear your thoughts!

    1. Great points, B.

      I read your article linked in the comment, very informative – thanks. I think this line in the article is particularly telling: “As ClassPass has gotten so much bigger, I’ve basically stopped using it because it’s so hard to get into the classes,” Ms. Buckley said.

      I agree that the balance between supply, demand, and convenience across both sides of the marketplace is a balance that CP will have to continue to optimize over time (I believe the dynamic pricing of classes on the partner side is one way to address this), with the continued risk of losing subscribers and studio partners.

      Re: customers, they’ve built policies aimed at high month-to-month retention such as charging a reactivation fee for canceling and then re-activating a subscription.

      Re: studios, notably, as of May, studio retention rate was 95% (http://www.businessinsider.com/how-classpass-wants-to-help-studio-owners-2015-5), which is incredibly high and is a very positive indicator of CP doing an excellent job of studio retention so far.

  3. Really loved the post, Jean – especially with the added insights from ClassPass’s former Director of Operations! The challenges ClassPass faces as it scales its two-sided marketplace reminded me of my experiences working at HotelTonight (in addition to having the same naming convention!) – on the hotel/supplier side, very similar concerns to the fitness studios about cannibalization and customer value, and on the customer side, questions about the value and variety of options on the platform, especially outside of major metro areas.

    Since studios manage the inventory they make available to ClassPass users, Bridget and Vitali have pointed out the risk of not enough quality studios offering classes or only offering their least popular classes. This could put a lot of pressure on ClassPass’s current operating model, which seems to rely on direct one-on-one relationships with studio partners. How do you think this sales/customer service structure might change as ClassPass continues to expand? For example, might there be larger-scale or channel partnership opportunities in the works that ClassPass could pursue in order to grow (perhaps partnerships with reservation system companies themselves)?

    Alternatively, you mentioned that ClassPass has created value as a “thought leader” in fitness management. When thinking about the company’s core competencies, I think that this could be very powerful. How have they been a thought leader so far? If the company and the brand gain enough strength, perhaps ClassPass could simply develop its own fitness brand with special ClassPass classes and brick and mortar studios. Do you think this would be a viable strategy or would that destroy the value it has created with an online fitness marketplace?

    1. Very extensive comment and great questions, Raffa!

      Re: how the company scales their sales/customer service of studio partners as ClassPass grows, I believe the company scales relationships with studio growth by applying a “Good-Better-Best” segmenting model to its partners, offering its Best-level partners very extensive customer service (quarterly business reviews, in-person attention), with commensurate account servicing for its Better and Good-level partners (e-mail responses to questions).

      Re: ClassPass’s performance as a thought leader in the space, the 95% studio retention metric referenced above indicates that overall, studio partners are quite satisfied with the value proposition CP provides them, including the thought leadership. Take a look at this content they created on how to retain first time customers, posted on the ClassPass blog by “a member of the Studio Happiness team at ClassPass in New York City.” http://afterclass.classpass.com/10-steps-to-retaining-first-time-clients/

      Re: your suggestion to enter into the brick and mortar studios business by building new ClassPass brand studios, it’s an intriguing thought but I believe Clicks-to-Bricks will not work in this situation for two reasons, combined: 1.) It is not in the company’s core competency 2.) It (unnecessarily) threatens their relationship with partners studios (i.e. one entire half of their two-sided marketplace) by competing directly against them, which is a HUGE risk with unknown reward.

      Rather, a more de-risked growth strategy that is also more aligned with their company mission to encourage women to take more risks, try more new things, and live more active lives, is extending their existing booking platform & tech stack to adjacent offerings, as I mentioned above, which they are currently experimenting with.

  4. Interesting post, Jean. I found the model very clever with the real-time studio partners pricing based on convenience and demand and the resell of excess inventory. Seems to me that Class Pass is insulated from consumer trends in exercise by diversifying across 7,000 studios, but faces a trade-off with this diversification (and the 3 classes/month limit) in its ability to capture the customer that follows a particular studio or instructor.

    1. Nice job pinpointing a user pain point, Rachel.

      The 3 classes/month limit definitely limits the usefulness of the subscription for the user who usually follows a particular studio or instructor. To address this, I believe CP will experiment with a feature on its product roadmap that allows them to upsell additional classes above the 3-max limit, for prices closer to the studio’s own drop-in price.

      What do you think about that?

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