How ClassPass changed the fitness industryWed Aug 15 2018. 6 min read
ClassPass is a fitness-class booking company that provides a new kind of gym membership allowing you to access thousands of different classes at studios and gyms in your city. The case of how Payal Kadakia, a long term dancer who wanted to turn her hobby and passion for dance into a career, built a company with a multi million pound valuation that is changing the way in which people exercise and taking the health and fitness market by storm. Founders Story Since the age of 3 dancing has always been a passion for Payal Kadakia, so much so that is has been a constant driver throughout Kadakia’s path to founding ClassPass. After graduating from MIT, like so many others Kadakia moved to New York City and entered the corporate world by starting her career as a graduate at Bain & Company. However after 3 years at Bain Kadakia broke from the mould and decided to take a different path to the majority of her peers who were going to business school. Instead Kadakia joined Warner Music Group due to the flexibility and their willingness to allow her more time to pursue her passion for dance. Kadakia was spending every minute outside of work focusing on her dancing until the point that her dance troupe landed on the cover of New York Times art section. Torn between her current career and the momentum she was gaining in dance, following a trip to visit friend in Silicon Valley, Kadakia took the decision to leave her position at Warner in 2011 to pursue her own entrepreneurial venture. The idea arose from Kadakia’s personal problem that one night wanting to go to a dance class in NYC she couldn’t find anything appropriate but instead spent hours searching online to find one. Therefore the idea for Kadakia first startup Classitivity was born, an open table platform for finding classes ranging from fitness to creative arts. As part of TechStars incubator program Kadakia and cofounder Sanghavi spent 2 years cataloguing classes and building a website for the booking platform, however following its launch, the startup failed as people were browsing the site but no one went to the classes. Realising that the issue wasn’t providing the information but changing peoples motivation and behaviours for them to actually attend classes the startup pivoted and changed their offerings through incorporating a passport feature. The passport would allow gym-goers to buy a pack of 10 classes in advance, however this also failed with people returning to classes only 15% of the time, which wasn’t a sustainable long-term growth strategy as customers were only using the service for 1 month. Recognising the need to pivot again in 2013 the startup implemented a subscription model with users paying $99 for access to 10 classes at a number of different studios which were normally $30 a session. The move to the subscription model resulted in constant growth from 35 users in month 1 to the point where the company rebranded itself as ClassPass in 2014 when the 1,000 users mark was hit. Since which the company has continued to experience success with the company expanding globally due to user and reservation rates growing at a rapid rate to where the platform is now operating in 39 cities worldwide and has over 1 million bookings per month through their platform. Business Model ClassPass uses a platform business model to disrupt the health and fitness market. Being the middleman between the service providers and customers, ClassPass makes its money from subscription model and customers paying a fee for a membership on the platform. ClassPass pays its partnered studios a discounted rate for every customer who books at class at a partner studio through the ClassPass platform, which is also at a cheaper price for users compared to the classes’ original price. Therefore ClassPass has been able to create value in the market through side stepping the limitations of belonging to one gym whilst providing a platform that offers a variety unknown boutique studios and classes in your local area; with it being easy to sample and try new workout options through an easy booking process at a viable price. Even though the ability to offer a discount price is an important aspect for the platform onboarding users and a reason why ClassPass has been able to grow at such a rapid rate queries and issues have been raised around the longevity and sustainability of the startups business model. With comparisons of the business model being made to another startup Group-on, which also is a platform marketplace that provides discounted pricing for products and services yet was unable to sustain long term popularity after its initial boom. Being a marketplace it is clear that ClassPass business model is complicated at source due to the requirement of identifying a pricing structure that keeps both customers and service providers happy whilst being able to take a cut as the middleman. However with Kadakia motivations behind forming this startup being to get more people active and doing what they love, ClassPass positions itself as offering discounted price to encourage the behaviour change in users whilst negotiating with partner studios that ClassPass bookings fill their excess capacity and act as an advertising and customer acquisition function. Another issue that ClassPass has overcome due to its marketplace business model is the emergence of copycats in a variety of geographical markets. In 2015 with competitors rapidly appearing ClassPass underwent a stage of hyper-growth where the platform was pushed out to 36 markets in 3 different countries in order to win the battle for the fitness-subscription market. This is an issue that start ups such as Airbnb experienced during their early years, as a marketplace platform is easy to replicate. However understanding the reasoning as why ClassPass was able to fight off competition and grow at such a rapid rate is due to the intangible assets of the company, the brand and the underlying processes that the company had in place that form the foundations of the business, for example the programming and scheduling that had been developed during the pivot periods of the startups history. Following the rapid expansion of the company obviously operating costs will have raised substantially, however Kadakia states the company is on track to be profitable. Questions have the be raised about the reality of ClassPass becoming a profitable business, with the company changing its pricing strategy and losing customers as a result it is still unclear whether ClassPass can gain the income revenue from subscriptions to outpace the operational costs and cost of paying class providers such as partner studios. Therefore only time will tell what the future holds for ClassPass and whether through their all-you-can-use subscription service to startup will be able to materialise into a long-term profitable business. Key Takeaways 1) Don’t be afraid to pivot ClassPass rise to success hasn’t come overnight, highlighting the founders story the venture began with two failed attempts and the need pivot before arriving at a successful business that gained the market traction the founders desired. A key learning point from this is as a startup founder don’t be afraid to make the hard decisions and pivot if your current venture isn’t working as what is the point of continuing with a venture that slowly draining all your funding and getting no return. However an aspect to recognise from the ClassPass case is that having to pivot should not be seen as a failure but a learning opportunity. As every time Kadakia pivoted she recognised the successful aspects that had been put into place and continued them even though there was a slight change in direction. For example even though Classivity wasn’t getting the behavioural change that the founders desired and therefore their reasoning for pivoting, during that period they had developed their programming and class scheduling processes that know forms the foundations of their successful business. 2) Understanding your customers Throughout ClassPass journey a clear strength of the company is their ability to understand their customers needs and wants and the importance they place on data in being able to determine such behaviours. As when you consider the reasoning why ClassPass decided to pivot, there data showed first that customers where browsing the platform but not attending classes, then that users where only using the platform for a 1 month period. Therefore through the use of data ClassPass have been able to gain key insight into understanding their customers and therefore tailoring their offerings to meet those demands. 3) Building a profitable business Even though ClassPass has been able to rapidly scale their startup, an issue that arises from the ClassPass case and is a common theme in the startup world is their ability to be profitable. As startups are regularly disrupting markets such as ClassPass successfully has, however they are making losses and being held afloat by VC funding which is not a long-term sustainable model. Obviously it is unclear what the future holds for ClassPass on their quest to becoming profitable, but the case highlights that developing a profitable business model is the key to building a company that is going to be successful long term. Furthermore gaining venture capital funding is extremely difficult to obtain therefore the importance of being profitable in a start-up that doesn’t have the financial backing is even more crucial otherwise the venture will be over before it has even begun.