Friday, July 17, 2015

ClassPass Model

One of the things I missed as a consultant was having a gym membership. One tough part about being on the road four days a week (apart from never seeing your family) was that the economics of a gym membership could never add up if you only had three days a week where you could actually visit it.

Even after leaving consulting, it still doesn't make economic sense - because I have a free substitute - a fitness center in our apartment building. It offers maybe 65% of the benefits of the gym, but while being as convenient as possible and free (or to get technical, baked into our rent costs).

But when I read about ClassPass - a new gym class startup, I was a little intrigued.

Their offer is a flat monthly fee, and you can book classes at any participating gyms/studios. They sign up dozens of studios (and fill their excess capacity) and you can take classes at them without formal signups or subscriptions. Customers pay a reduced fee than if they were to pay for individual classes (typically the gym gets around 50% of their typical rate)

I thought it might be interesting to use and sample different places in the area - until I realized that it's pretty much just for women. By that I mean, if you want to take yoga and barre classes - then its great. But there aren't a whole lot of dude-friendly workouts on there.

So it wasn't going to work for me...but I've continued to wonder if their model is going to work for their member gyms either...

I'm not so sure it will, and to me its because the challenge for gym owners is often at-odds with ClassPass' goal.

Gyms want to make money - and the best way for a gym to do that is through enlisting and maintaining subscribers. Subscribers provide a consistent revenue stream and they're relatively sticky (as opposed to transaction-based per-class customers).

But I'm not sure ClassPass exists to drive subscribers. ClassPass serves as a way to fill excess capacity in existing gym classes - but I'm 100% sure their primary goal is to enlist and maintain subscribers too. And that's where I think it may break down (or limit its upside).

The most immediate comparisons I can think of for ClassPass are Groupon, TKTS booths in NYC, and booking sites like Hotwire. All of those provide cheaper prices for excess capacity in restaurants, broadway shows, and hotels/cars.

But all of those companies supply base are transaction-oriented revenue, not subscription-oriented revenue.

For all those Groupon, TKTS, hotel transactions, the consumer gets a cheaper price, the end-supplier gets revenue that exceeds its extremely low marginal cost, and the middle-man gets a cut for connecting the two.

But now when you use ClassPass - the consumer gets to take a class at a reduced rate (good for consumer), the end-supplier gets some revenue that also exceeds its marginal cost, and the middle-man gets its cut. So what's the problem.

The end-supplier isn't in the business of selling every class out. They are in the business of finding and signing up subscribers.

Now, filling every class is, in a vacuum, good for a gym. But what's better is having a full class of subscribers that often don't show up. The ideal utilization rate for a gym is NOT 100%.

This would be OK is ClassPass was a good vehicle to drive subscribers. And this is certainly how ClassPass would pitch itself to any gym. But I'm curious to know the stats on it. Because ClassPass certainly doesn't want to lose subscribers, and I have a hard time believing most ClassPass subscribers want TWO different gym subscriptions.

There's also something of a risk to using ClassPass if you're a gym owner. Because you charge more on a per-class basis to your subscribers than you do to ClassPass users - you might end up taking some of your best customers (the ones that pay and never show up) and making them realize they'd save money using ClassPass. ClassPass limits you to taking 4 classes at any one gym in a given month - but I'll bet there are some regular gym members who pay normal fees for exactly that much usage.

To it's credit - ClassPass tries to manage this problem. The gyms can place a limit on how much space they allocate to ClassPassers, so it doesn't have to be a big number, but I still would have doubts that the service is the easiest way to boost subscribers. I do think it would do a great job of attracting the cheapest customers (ClassPass users who would never sign up for expensive memberships and are content to pick and choose across ClassPass gyms) - but these folks would never pay full fare.

I do think ClassPass would be a big benefit to new gyms, ones that are trying to get people in the door and build awareness. But I'm skeptical that the model is a long-term win for gyms - because I think when push comes to shove, ClassPass and their suppliers both want the same thing.

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