How ClassPass Uses Price Discrimination to Maximize Revenue for Fitness Studios
Fritz Lanman is the CEO of ClassPass, one of the fastest growing online fitness startups. ClassPass recently joined the Unicorn Club after getting an valuation of one billion dollars.
Lanman is also an angel investor in various successful startups such as Pinterest, Wish, and Square. We talked to him about the creation story of ClassPass, how he became the CEO, and the secrets to investing in companies that end up extremely successful.
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What Made ClassPass Attract So Many Users?
ClassPass was founded in 2011 and quickly got a lot of traction, even though the market for online fitness was already quite saturated.
Fritz Lanman and Payal Kadakia (co-founder and chairman of ClassPass) like to joke that “ClassPass was an overnight success -five years in the making!”
Payal Kadakia and her co-founder Mary Biggins tried out several other ideas before ClassPass came to existence.
When Lanman first joined the company as an angel investor, it was called Classtivity. Payal had just launched a 30-Day-Pass that allowed users to try different studios and gyms for 30 days to find the best one to stick with. They quickly observed that there were users who kept buying this trial product every month instead of choosing one gym in the end.
Clearly, there were two kinds of fitness customers: those who wanted to find the perfect gym and those who preferred to mix things up. For the latter, ClassPass unintentionally provided the perfect service by taking all the friction out of discovering and booking workouts in variety.
Mixing It Up
“For many of us, like myself, the variety routine is the best routine to get us to stick with a workout plan,” Lanman says. “One day I can do boxing, the next day I can lift weights, the next day I can do some yoga. Not only is that physiologically better for you, but also it keeps things more fun and interesting psychologically.”
Through the ClassPass Trial package, users have been able to discover what kind of a gym-goer they are for themselves.
The Subscription Model
“The recurring subscription model really gets people to work out more,” Lanman says.
Attractive Pricing
ClassPass offers users the option to get great pricing and studio selection in exchange for giving up the ability to select a specific bike or access to popular classes that are selling out with direct members. This allows users to get 30% to 60% discounts on gym fees.
ClassPass will soon allow customers to buy passes and memberships to their partner gyms directly through them as well.
Payal Kadakia, ClassPass’s founder. Image credit: Fortune.com
How Does ClassPass Share Revenue with Studios?
ClassPass started its journey as a marketplace for gyms and studios, but today they also have partners that are spas or personal trainers. They share the revenue with all their partners using the same method: by selling a recurring subscription system in exchange for credits.
“Revenue alignment is best for us because it leads to customer retention. So few of our customers ever left the ClassPass ecosystem.”
ClassPass offers its partners a machine learning technology to set maximized prices, but if the partners do not trust the ClassPass technology, they can use static prices instead. These prices are converted to credits, and ClassPass gets a small revenue commission from the reservations they send to studios.
“Our marketplace commission is dramatically lower than most of the other marketplaces out there,” Lanman says. “We don’t share the specifics, but it is under 15%.”
"We’ve invented the friendliest business model out there.”
A Vice article that came out in February 2020 compared ClassPass to Groupon, claiming that they force studios to offer discounts that are too high for small businesses to make any money.
“That specific article is incredibly frustrating,” Lanman says. “We make a small revenue commission on the revenue that we send our partners. We have every incentive to send our partners as much revenue as we can because then we can make more ourselves.”
Lanman underlines how ClassPass gives its partners an opaque opportunity with no hidden marketing or customer service fees. Thanks to the technology developed by ClassPass, prices are constantly moving up and down to maximize revenue for studios. “We let them monetize an audience that they wouldn’t have access to otherwise,” he says, adding that "it is a form of the classical price discrimination from economics, that lets studios maximize revenue"
How to Keep the Business Growing
ClassPass does traditional performance marketing to gain new users through social media and search engines like Facebook and Google. To expand the list of spaces they offer their users, they do some in-person visits to new studios as well.
“But most of our growth tends to be viral, word-of-mouth, or social growth,” Lanman says. Studios usually hear about ClassPass from other studios and ask to sign up.
For fitness customers, ClassPass has a successful bounty system that encourages users to invite friends to a free class with them and gain points if they also sign up.
Thanks to ClassPass, many people met their friends in yoga classes instead of going out for drinks in recent years.
The Main Challenges ClassPass Has Had to Face So Far
“Running a fitness business during a global pandemic has been pretty challenging,” Lanman says. Thankfully, ClassPass had raised 285 million dollars in their last financing round, so they will endure this tough period.
ClassPass’s business partners, most of which are small gyms and studios, are still struggling with the challenges posed by the pandemic. Lanman says that people have stayed active through at home workouts, but it will take time for gyms to rebuild to pre-Covid reservation levels.
After Covid, Studios Started Offering Online Classes Through ClassPass, but Are People Taking Them?
Many fitness instructors and students turned to Zoom, Instagram, and YouTube to find new ways to work out.
After most gyms were shut down, it took the ClassPass team ten to fifteen days to build a live-streaming platform for studios and users to meet virtually.
ClassPass waived commission on this feature and did donation matching campaigns to help their smaller business partners stay in business.
Some of the classes offered on ClassPass. Image credit: ClassPass.com
How to Consistently Pick Winners as an Angel Investor
According to Lanman, these three things are extremely important when it comes to investing:
Luck
Three of Lanman’s first investments were Pinterest, Wish, and Square, which made him overconfident early in his angel-investing career.
Success
“Success begets success,” Lanman says. When people know you as a person whose investments always pay off, that success follows you to your new projects.
Lanman explains how a lot of investors are thesis-driven. They come up with a model that works for them and keep investing in similar ways. But every time Lanman came up with a model, he had to make exceptions to it for his next investment. Now, his only formula for success is to be as open-minded as possible.
Experience
According to Lanman, after luck, the ten years he spent working at Microsoft helped him the most. He worked in Product Management and Corporate Strategy at Microsoft.
“I know what it takes to build a successful internet business,” Lanman says. “Not everybody has the hustle, the determination, the grit, the resilience it takes to keep failing.”
“Building a company is way more fun, interesting, and challenging than investing in companies.”
ClassPass is Lanman’s fourth startup after his ten years at Microsoft, and he admits that he is addicted to it already.
ClassPass founder Payal Kadakia first convinced Lanman to step up from being an angel investor into an active role as the chairman of the board. It didn’t take Lanman long to fall in love with the business and accept the CEO title.
Walking the Talk: How Lanman Lost 70 Pounds by Using ClassPass
Image credit: Fritz Lanman via MensHealth.com
Lanman is a former athlete, but it had been a long time since he had managed to stick to any workout routine. The variety routine that ClassPass unlocked allowed Lanman to start taking care of his health again.
In 2018, Men’s Health magazine wrote an article about how Lanman lost 70 pounds using ClassPass.
Three Entrepreneurs from the E-Commerce Age That Fritz Lanman Admires the Most:
John Warnock
“Today in Silicon Valley, there is a big celebrity founder culture. Warnock and his co-founder invented math and algorithms which they then used to quietly build this mega software company (Adobe Systems). They did not care about not being known. They just wanted to build a great company.”
Bill Gates
“What I appreciate about him is how he is not just a technology genius but also a business model genius. He built some of the biggest companies of Western civilization. Walking away from that to become a humanitarian is pretty special.”
Elon Musk
“He is a controversial figure, but no one can take it away from him that he is working on the most ambitious projects in the world.
Fritz Lanman’s Best E-Commerce Advice for Mid-Size and Small Entrepreneurs: “Be Honest with Yourself.”
“Be people-centric. Hiring decisions are the most important decisions. Especially in the earlier stages, the people you bring on will determine the success and failure of your company,” Lanman says. “But most importantly, be honest with yourself about what is working and not working. So many of us entrepreneurs are dreamers.”
While having big dreams will give you resilience, honesty will save you a lot of trouble down the road.
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