{"id":6818,"date":"2018-03-04T20:44:18","date_gmt":"2018-03-05T01:44:18","guid":{"rendered":"https:\/\/digital.hbs.edu\/platform-digit\/submission\/classpass-navigating-the-challenges-of-building-a-sustainable-marketplace-model\/"},"modified":"2018-03-04T20:44:18","modified_gmt":"2018-03-05T01:44:18","slug":"classpass-navigating-the-challenges-of-building-a-sustainable-marketplace-model","status":"publish","type":"hck-submission","link":"https:\/\/d3.harvard.edu\/platform-digit\/submission\/classpass-navigating-the-challenges-of-building-a-sustainable-marketplace-model\/","title":{"rendered":"ClassPass: Navigating the Challenges of Building a Sustainable Marketplace Model"},"content":{"rendered":"

Among the wave of consumer subscription startups that have been founded in the last 5 years, ClassPass is one of the most well-funded and well-known. Founded in 2013, ClassPass offers fitness subscription packages, allowing consumers to take a number of classes at a variety of studios for a monthly fee. For every class taken, ClassPass pays the studio a pre-negotiated amount (undisclosed, but reports suggest $7-$20+ depending on how popular the class is).<\/p>\n

In late 2015, ClassPass seemed to be flying high \u2013 it had just raised a fresh round of capital and had been widely praised for nailing the consumer subscription model. However, in April 2016, in a tacit acknowledgement that its model was unsustainable, ClassPass raised prices on its unlimited plans to nearly $200 per month (a year prior, prices had been $99 per month) \u2013 in the process, it lost 10% of its customers. Just half a year later in November 2016, ClassPass eliminated unlimited plans altogether. And in July 2017, ClassPass raised a \u201cdown round\u201d. ClassPass\u2019s challenges highlight several difficulties related to growing and scaling marketplace business models, some generalizable and others specific to ClassPass.<\/p>\n

Building a marketplace takes significant upfront investment to attract participants.<\/strong> Almost all platform businesses incur significant costs initially to build scale. For example, in its first two years, ClassPass raised over $80m of funding just to get to 15 million cumulative reservations (i.e., $5 of capital investment per reservation, with low single digit or negative gross margins). Even today, ClassPass offers a variety of high cost promotions. For example, a 6-class trial in Boston is $19 for new users \u2013 at an assumed cost of $10 per class (could be far higher), ClassPass would lose over $40 per trial user \u2013 if the user never returns, the transaction would yield -200% gross<\/strong> margin, not including the marketing costs to bring the user to trial. Many marketplace businesses fail because they can\u2019t convince VCs that the near-term cash outlay will be compensated by the long-term economics of the business model.<\/p>\n

\"\"<\/a>
Source: ClassPass website.<\/figcaption><\/figure>\n

Unit economics are crucial \u2013 beware of the \u201cnegative\u201d network effect.<\/strong> In order to convince VCs to invest in such costly upfront spend, marketplace platforms need to demonstrate a path to positive unit economics (e.g., LTV \/ CAC). In ClassPass\u2019s case, though the unlimited plan was an effective marketing tool, it yielded unsustainable unit economics. For example, a \u201csuper-user\u201d could pay $100 per month and attend 30 classes a month \u2013 at $10 per class (again, could be much higher), ClassPass loses $200 per month on that customer. This created a perverse \u201cnegative\u201d network effect, where ClassPass\u2019s most loyal, most supportive members actually were the least economical. Unsurprisingly, ClassPass eventually eliminate unlimited plans altogether, moving to fixed-class plans (e.g., 5 classes per month).<\/p>\n

Disintermediation is a significant risk.<\/strong> For ClassPass, disintermediation risk originates from the supply side, where the most popular studios can threaten to move off the platform to capture better economics for themselves. In order to entice these popular studios to stay, ClassPass needs to pay higher rates per class. A revenue model that doesn\u2019t differentiate between high-cost and low-cost studios (e.g., ClassPass\u2019s old unlimited or fixed-class plans) compounds this risk as it erodes unit economics. For ClassPass, unlike for many other platforms, supplier bargaining power is more significant because they can actually move off-platform and become competitors \u2013 studios like SoulCycle are big enough to not need ClassPass, and actually competes for customers.<\/p>\n

ClassPass\u2019s business model through 2017 occupied an uncomfortable position \u2013 it needed consumers who liked the platform, but not too much, and studios that were popular enough to attract customers, but not too popular. This was an unsustainable spot to be in. As a result, in late 2017, ClassPass dropped its fixed-class model and moved to a credit-based model where consumers purchase monthly credits and apply those toward classes that cost different numbers of credits. In doing so, ClassPass can better match their revenues with the cost of servicing customers and improve unit economics. Though this shift puts ClassPass toward a more sustainable future, it may limit consumer adoption and result in near-term churn as the platform becomes a less good deal for certain users. Ultimately, ClassPass\u2019s long-term success will depend on its capacity to create value as an intermediary and its ability to respond to competition from companies like MindBody (entrenched in many studios as their software management system). But at least for now, it seems to have found a more sustainable way to capture value from its offering.<\/p>\n

Sources:<\/strong><\/p>\n

\n
    \n
  1. Chernova, Yuliya. \u201cClassPass Taps $70 Million in \u2018Down\u2019 Round.\u201d Wall Street Journal<\/i>, June 16, 2017, sec. Pro Private Markets. https:\/\/www.wsj.com\/articles\/classpass-taps-70-million-in-down-round-1497639263<\/a>.<\/li>\n
  2. \u201cClassPass.\u201d Crunchbase. Accessed March 5, 2018. https:\/\/www.crunchbase.com\/organization\/classpass<\/a>.<\/li>\n
  3. Crook, Jordan. \u201cClassPass Sacrifices 10% of Customers in Pursuit of Healthier Margins.\u201d TechCrunch<\/i> (blog). Accessed March 5, 2018. http:\/\/social.techcrunch.com\/2016\/09\/27\/classpass-sacrifices-10-of-customers-in-pursuit-of-healthier-margins\/<\/a>.<\/li>\n
  4. Kaufman, Hayley. \u201cClassPass Raises Prices and Local Fitness Buffs Fume – The Boston Globe.\u201d BostonGlobe.com. Accessed March 4, 2018. https:\/\/www.bostonglobe.com\/lifestyle\/health-wellness\/2016\/04\/14\/passclass-raises-prices-and-local-fitness-buffs-fume\/DyytoAkysVE5iqMVnuznRJ\/story.html<\/a>.<\/li>\n
  5. Kosoff, Maya. \u201cClassPass Raises Its Prices Again, and Its Loyal Fans Aren\u2019t Handling It Well.\u201d The Hive. Accessed March 5, 2018. https:\/\/www.vanityfair.com\/news\/2016\/04\/classpass-raises-prices-again-in-new-york-city<\/a>.<\/li>\n
  6. \u2014\u2014\u2014. \u201cLeaked Documents Reveal ClassPass\u2019s Plan for World Domination.\u201d The Hive. Accessed March 5, 2018. https:\/\/www.vanityfair.com\/news\/2016\/06\/leaked-documents-reveal-classpass-surprising-next-move<\/a>.<\/li>\n
  7. O\u2019Brien, Sara Ashley. \u201cClassPass Kills Beloved Unlimited Plan.\u201d CNNMoney, November 2, 2016. http:\/\/money.cnn.com\/2016\/11\/02\/technology\/classpass-eliminates-unlimited-plan\/index.html<\/a>.<\/li>\n
  8. \u2014\u2014\u2014. \u201cClassPass Once Again Changes Its Business Model.\u201d CNNMoney, March 1, 2018. http:\/\/money.cnn.com\/2018\/03\/01\/technology\/classpass-credit-model\/index.html<\/a>.<\/li>\n
  9. Reader, Ruth. \u201cIs The ClassPass Model Sustainable?\u201d Fast Company, October 19, 2016. https:\/\/www.fastcompany.com\/3061728\/is-the-classpass-model-sustainable<\/a>.<\/li>\n<\/ol>\n<\/div>\n","protected":false},"excerpt":{"rendered":"

    The up-and-down story of this consumer subscription startup illustrates the difficulty and importance of getting the platform business model right.<\/p>\n","protected":false},"author":2459,"featured_media":6819,"comment_status":"open","ping_status":"closed","template":"","categories":[510,1254,1347,382,62],"class_list":["post-6818","hck-submission","type-hck-submission","status-publish","has-post-thumbnail","hentry","category-marketplace","category-pricing-strategy","category-subscription-based-business-models","category-two-sided-marketplace","category-value-capture","hck-taxonomy-organization-classpass","hck-taxonomy-industry-technology"],"connected_submission_link":"https:\/\/d3.harvard.edu\/platform-digit\/assignment\/growing-businesses-in-the-age-of-platforms-2018\/","yoast_head":"\nClassPass: Navigating the Challenges of Building a Sustainable Marketplace Model - Digital Innovation and Transformation<\/title>\n<meta name=\"robots\" content=\"index, follow, max-snippet:-1, max-image-preview:large, max-video-preview:-1\" \/>\n<link rel=\"canonical\" href=\"https:\/\/d3.harvard.edu\/platform-digit\/submission\/classpass-navigating-the-challenges-of-building-a-sustainable-marketplace-model\/\" \/>\n<meta property=\"og:locale\" content=\"en_US\" \/>\n<meta property=\"og:type\" content=\"article\" \/>\n<meta property=\"og:title\" content=\"ClassPass: Navigating the Challenges of Building a Sustainable Marketplace Model - 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