March 17, 2020

ClassPass CEO on the Dos and Don’ts of Changing Business Models

ClassPass CEO on the Dos and Don’ts of Changing Business Models

Back before the stock market was breaking all the wrong kinds of records and the global economy was teetering on the edge, Morning Brew’s Business Casual podcast learned a well-timed lesson in resilience.

Back before the stock market was breaking all the wrong kinds of records and the global economy was teetering on the edge, Morning Brew’s Business Casual podcast learned a well-timed lesson in resilience.

Our teacher? ClassPass CEO Fritz Lanman. The fitness subscription startup he leads became 2020’s first unicorn before 2020 was even a week old. But getting to that point— and building the kind of business that can survive today’s uncertainty-riddled economic environment — took time. And several different business models.

This week on Business Casual, Fritz goes deep on the importance of owning your mistakes and keeping yourself honest, even when it’s hard. Because reversing the way you make money? Not easy. Plus, Fritz explains…

  • Why some marketplace businesses fail (looking at you, MoviePass)
  • When it makes sense to lose customers on purpose
  • How sustainability matters more than virality

Transcript

 

Note: Business Casual transcripts are generated using speech recognition software and human transcription. They may contain errors, although we do our best to avoid them. Please check the corresponding audio before quoting a transcript in print. Questions? Errors found in a transcript? Email businesscasual@morningbrew.com

 

[00:00:01] [sound of coffee being poured]

 

[00:00:04] [intro music plays]

 

Kinsey Grant, Morning Brew business editor and podcast host [00:00:07] Hey, everybody, and welcome to Business Casual, the weekly podcast from Morning Brew answering the biggest questions in business. I'm your host and Brew business editor, Kinsey Grant. 

 

Kinsey [00:00:17] And now, let's get into it! If you weren't mapped last year in business [chuckles], I promise you, you'd see more than just coronavirus, supply chains, and Saudi oil, I'd be willing to bet the words subscription-based model and marketplace are featured pretty prominently. That's because subscription business models today are like all [indistinct] in 2015. Everyone in tech wants one, but the pathway to a successful subscription or marketplace-based business model, or any successful business model, for that matter, isn't always linear. Some businesses, including the one whose CEO I'm about to speak to, have to completely change their models to achieve lofty startup goals like profitability or long-term sustainability and a whole lot others. But how do you sell customers on a business model that they maybe didn't sign up for? And what about investors and your corporate clients? How do you decide whose interests come first when you're completely upending the way you do business? To answer that question, Fritz Lanman, CEO of ClassPass. Fritz, thank you so much for joining me on Business Casual. 

 

Fritz Lanman, CEO of ClassPass [00:01:17] Good morning. Thanks for having me. 

 

Kinsey [00:01:19] Yeah. You're calling in from Montana, where you guys have a giant office, which is very cool. 

 

Fritz [00:01:25] Yeah, yeah. It's actually become our largest office. One of our big ones. 

 

Kinsey [00:01:30] You have offices in, like, the real startup cities, like New York and out West and London. 

 

Fritz [00:01:36] Correct. Yeah. Once we actually did this business model iteration and fixed the model, and started thinking longer-term around where you could build a profitable business—it's gotten harder to do that in San Francisco and New York—so our board encouraged us to open offices in more affordable locations. We ended up choosing Montana. It's grown into now our biggest office across all functions. We have people across all functions here. And ultimately, I started spending enough time here that convinced my wife to move and try something different. 

 

Kinsey [00:02:08] That’s awesome. I'm sure it's nice to get out of the hustle and bustle of some of these other startup cities. [chuckles] Okay. 

 

Fritz [00:02:13] Also a good place to be during the global pandemic.

 

Kinsey [00:02:16] Yeah. [laughs] I’ll just say, if there were ever a city to be in during a pandemic, I think that Missoula might be up there for me. You mentioned changing your business model and we'll talk about that in just a second. But just for the people listening, if you don't know about ClassPass, it's a monthly subscription service that basically gives you fitness and wellness users, exercise classes and other services at gyms and studios that you guys partner with. It was the first new unicorn of this decade, which I'm sure [chuckles] is exciting for you guys. That was a fun story to write. We wrote about it in Morning Brew, and you are more than just a ClassPass kind of guy. You led funding a ClassPass before you joined the team. You're involved in Microsoft's investment in Facebook, which is one of the ones that we write about still to this day. So you've had a lot of really interesting experience and I'm excited to talk to you about it. 

 

Fritz [00:03:03] Yes. Great. Excited? Yeah. Love it when people bring up the Facebook investment that we did at Microsoft. I like to say that was the best corporate venture investment in history and the worst VC remuneration in history. 

 

Kinsey [00:03:17] [Kinsey laughs] OK. All right. We'll get into that eventually. So let's get started and dive right in with this episode about changing business models. Let's go through exactly what ClassPass’ changes have been—just sort of running through the lifecycle of your business from the beginning. It was, what, $99 per month, I believe, for ten classes early on in ClassPass’ life. You expanded that to unlimited classes for the same price, then upped that pricing from $99 to $125 a month, later to $190 a month. And then came this big change that we're gonna be talking about today, changing to a credit-based system so users pay a flat fee per month for a certain number of credits, and then those credits get them into different classes, fitness and wellness classes. And from what I understand, desirable classes at desirable times cost more credits than, say, something in the middle of the day that a lot of people might not be trying to get into. 

 

Fritz [00:04:10] That's exactly right. Yeah, we have a virtual currency we call credits. It's just a points-based system. And so it's a recurring subscription. The customer chooses what their fitness and wellness budget is. What do they want to spend on ClassPass each month, whether that's $50, $100, $150, and during their cycle, they can always buy more points if they want, and the credits expire at the end of the month, although we let you roll over some of them, and during the month, you can spend your credit bank against different experiences that our supplier partners put in front of you. And so you do tend to see the more popular brands at peak times. Those spots cost more than unpopular or less popular brand and off-peak time, kind of how airline pricing, or hotel brand pricing works. 

 

Kinsey [00:05:01] Right. So who determines how many credits it takes to get into a class? Is that something that dynamic pricing—is that something that you guys set up or is that something that the studio works with you on? 

 

Fritz [00:05:10] Great question. So it's sort of a hybrid, but in the vast majority of cases, we use machine learning to do the revenue management and price setting for our partner, because it turns out machine learning can more effectively figure out the revenue maximizing price for every piece of access capacity than, of course, a human could manually do on their own. 

 

Kinsey [00:05:34] Is that revenue maximizing for you guys or for the studio? 

 

Fritz [00:05:37] For the studio or the gym partner for the massage place. However, the legacy business model, and you talked about the quote unquote beginning of the company and you went back to actually, which is good—you went back to 10 classes a month even before we launched an unlimited promotion, which became the model. We could talk more about that. So you're going further back than most journalists [Kinsey chuckles] consider the beginning, which is great, but it actually even started three years before that. So my partner Payal Kadakia Pujji and her partners actually had started the company as called Dabble Now, which was the listing side. It was sort of an open marketplace for a bunch of different experiences, not just fitness, but cooking class and stuff like that. Then it became [indistinct] when they focused and zeroed in on more of the health and wellness category, thinking that they needed to sort of brand the experience around a vertical. 

 

Fritz [00:06:28] And it was then that they started this thing called the Passport, which was a 30-day pass, and you'd buy it for 100 bucks. And it was just in New York City. And the idea was you you'd get 10 visits in 30 days to come check out group fitness. And at the end of that period, you would find one place that you fell in love with. You'd go convert to being a direct customer of that brand, and we would get a referral marketing fee from the studio. What happened, ultimately, was during that experiment, they went to raise money because the Passport started to sell a lot. And we figured out—and that's where I met the founders, and they sort of adopted me as a partner and allowed me to lead the seed round of the company as it pivoted into ClassPass as an investor and subsequently lead the series A. 

 

Fritz [00:07:15] I've become the executive chairman. Just because Payal and I developed a really good partnership but had very sort of different skills and backgrounds. You mentioned my Microsoft experience. Also built three startups prior, you know, from scratch that I started where we brought machine learning to industries that didn't, you know, were traditionally technical in nature, and we had this kind of shared vision. And so we pivoted to a recurring subscription because we saw that there was actually just a different audience who wanted to habituate to a variety of fitness opportunities instead of becoming a single location brand loyalist.

 

Kinsey [00:07:51] We’re all commitment phobes these days. [laughs]

 

Fritz [00:07:53] Yeah, and not everyone is right. A lot of people actually still—about half of our customers—use us as a supplement. So they will have one gym membership or one studio that they go all-in on, and then they use us, maybe with a smaller amount of their budget, to kind of rotate between their spin and yoga and bar, but they maybe have a direct membership at Equinox. About half actually use us for their sole primary fitness and wellness care routine. And those people, the behavior is very similar to food delivery, like DoorDash or GrubHub, where once you find your sushi restaurant, you don't keep looking for different sushi places. But if you don't want to eat sushi every night, you want to mix it up with pizza and Korean barbecue and burgers and hopefully some salads or something in there as well. [Kinsey and Fritz chuckle] And that's the behavior. So our customers tend to spend kind of the first two to three cycles in sort of a shopping period where they're trying a lot of different places. But then, by the third month, over 85% of their bookings tends to be back to their favorite couple of gyms, studios or wellness venues. 

 

Kinsey [00:09:00] Yeah, that's a really interesting comparison. I think that paints the picture really well. But I also—it's kind of interesting to hear the background. That was a referral marketing tool before it became what it is today. I imagine the lifetime value of a customer is much better as ClassPass exists now than it was in the early days when you would have someone for a month and then lose them maybe forever. 

 

Fritz [00:09:23] Well, you know, I think actually they're just different models. So certainly the lifetime value of a ClassPass subscriber in the model we have today, which we've had now for close to 2½ years, is higher than just getting a marketing referral fee. 

 

Fritz [00:09:42] But, I think there still is a business to actually send referrals out to our partner studios and gyms and wellness providers in exchange for a smaller fee because of the people that actually come through ClassPass. We mostly use a trial to incentivize them to come try this category. But yes, you're right. Traditionally speaking, we optimize for finding those folks who want that kind of habituated variety routine. And that's a better business for us. 

 

Kinsey [00:10:14] Okay. So let's talk about the decision to switch to the model that you guys have now, that you said you had for 2+ plus years. Who decided that this was the time to make those changes? And how did you land on this sort of dynamic pricing model instead of the unlimited model? 

 

Fritz [00:10:32] So, separate dynamic pricing from static price spots. From the decision to move the credits from the unlimited world. So let me just talk about the transition a little bit more to give everyone context. So it was 10 classes for a 90-, 30-day trial. We saw that people were actually coming back and trying to cheat the system to buy multiple trials. That's when we pivoted to ClassPass. It was just in New York. Hundred bucks, recurring ten classes. We then launched unlimited workouts for $99 as a summer promotion in, I believe, it was summer of 2014. And we did that to just accelerate our growth, build out our brand. And it was Payal’s idea and it was phenomenal. I mean, it just—it was such a great deal. And beyond just the economic value, the feeling of being able to access to the group fitness category in an unlimited way to sort of reach your unlimited potential. It just it really resonated. 

 

Fritz [00:11:29] And so, it was a great promotion. But what happened was, we then had a bunch of press. We had a lot of customer virality, and that inspired other entrepreneurs to copy our model. And so we had clone copycat businesses in every city in America, just as we were starting. We raised the series [indistinct] for me and then we raised series B from General Catalyst and Thrive. And we had these clones emerging everywhere during that summer period. And they were then offering unlimited workouts, but they were offering it not as a promotion, but as their business model. And so it kind of forced us to keep the unlimited thing on. And so we kind of were, you know, just because of a price war with other venture-backed competitors, we sort of were forced to keep the unlimited bottle on. 

 

Kinsey [00:12:22] Do you think that the business would have gone under if you had not kept that model? 

 

Fritz [00:12:26] I don't think it would have. I know with certainty that it [indistinct] the really dangerous part of the unlimited model in addition to sort of devaluing the industry. So the studio and gyms didn't like the model. I mean, originally they liked it because of a surge in volume, it was a great way for them to get publicity. But many of them had been sold that we were going to be a lead gen channel and we're not—we weren't even by this time in 2015, we had evolved to more being just we feel your excess capacity for you. More of just an aggregator-type revenue proposition. But they felt we were devaluing the industry because it was so cheap. 

 

Fritz [00:13:01] And ultimately, the bigger we were getting, the more—the faster we were losing money because we were actually losing money on a unit economics basis, which was originally a conscious decision because we thought, hey, we don't really have a choice. We have to do this to compete with all of these VC-backed clones. But it became quite apparent, after six to 12 months, that it was going to be really challenging to do so. And we were going to have to do something fast, or we were going to run out of cash. 

 

Kinsey [00:13:29] I imagine that it was useful in the early days to kind of be in that sort of land-grab situation that we've talked about on the show before. You have all these clones, like you're saying, venture-backed clones coming into the market trying to compete with you, extending that deal, even though it doesn't seem sustainable or that it's proven to not be sustainable long term, feels like a smart business move just to get people in the door and build that brand affinity with them. 

 

Fritz [00:13:56] Well, it's smart if you can find a path to eventually evolving into profitability. And that's where I think the vast majority of startups, whether they've been subscription startups or other types of consumer internet companies—whenever you're selling dollars for 80 cents or 90 cents, it's a very—it's a high-stakes poker. And even Uber and Lyft, they’re still trying to prove as public companies where tens of billions of dollars—well, I haven’t looked at the markets this morning—global pandemic impact going on. But even then, they’re still kind of trying to prove it. Whereas we decided, hey, we're gonna do this. We're going to see if we can make it work. OK, we can't. Well, Payal, luckily, had been through three to four model iterations already. I've had so many failures in my career that I figured, hey, this is an awesome—this space needs us, right? 

 

Fritz [00:14:50] There's so much excess capacity in fitness. Studios tend to fill 35% of the spots they have. Plus, it's a hyper, hyper-fragmented space, and most of us don't want to do the same fitness routine every day. So, we just so believed in our core proposition of unlocking variety, helping them discover a variety of places, making it seamless to go and have relationships with multiple types of fitness communities, that we believed we would find a way to make it work, and that our customers would ultimately pay for it, even if we had to revert back to what the model had originally been when it saw product market fit. So perhaps, we were luckier than other startups in the respect that we had—just when we had pivoted to ClassPass and it originally was ten classes a month for a $100, we knew that we could make that model work, or at least we were confident that we still could. 

 

Kinsey [00:15:44] Okay. Is ClassPass profitable right now? 

 

Fritz [00:15:46] As an overall business, we are not generating operating profit or cash flow, but our unit economics are strong—like every dollar we spend on marketing, we make back several times over. But we continue to hire more engineers and turn on more international countries, and it takes time for those geographies to get cash flow positive. 

 

Kinsey [00:16:10] Okay. I want to hear more about the reaction from customers who were already in the ClassPass ecosystem when you did have this unlimited model and when you switched. What was that reaction like? 

 

Fritz [00:16:21] Super, super, super scary. An interesting day, right? But I will never forget how scared we were. We had to send that email and say, hey, this unlimited thing is not working, and our brand partners don't like it. And it's not sustainable for us ultimately. And so we're gonna make a change. Now, there is a couple of interesting things. One was many of the customers that we'd had actually knew that unlimited was just a promotion originally, because they had been with us before we've launched it. So, they were kind of fine. They got it. It was really—but it did upset some of the customers. 

 

Fritz [00:16:53] We didn't really know about that history, who didn't think of a limit as a promotion, and who felt like we were just doing a massive price hike, though even then, while there was some vitriol on social media, there's always, you know, these vocal minorities who get a disproportionate share of voice. I think most customers were actually rooting for us to succeed because they wanted the service to continue and to persist. It's kind of like using MoviePass. It’s just too good to be true. How is this sustainable? Well, turns out it wasn't. 

 

Fritz [00:17:21] Most of our customers were like, hey, these guys were honest, right? We didn't write some BS thing about why we were doing this. We said, hey, we need to get to a sustainable model. And at the same time, by moving to a more sustainable model, we started to be able to also eliminate some of these constraints, like forcing you to only go to your studio or gym three times. So, I think what happened was that while there was some negative reaction, the day of, the week of, we actually saw, if I remember correctly, low single digits churn as a result of it. 

 

Kinsey [00:17:58] How did that compare to a regular churn rate for you guys? 

 

Fritz [00:18:00] I meant that low single digits of incremental churn. So we have some amount of regular churn, obviously, at this company. But there was a small spike and it went away. And we thought we were prepared to lose 20% of our of our subscribers, and we lost barely any of them, because even in a world where we move them from a limited workouts to 10 a month or five a month, depending on what budget they wanted to allocate to us, it was still a good deal. And it was still a valuable service in terms of unlocking that variety. So that transition was super scary. But it worked. But that was not the only transition. That only lasted for a year. And then we moved over to the credits [indistinct]. 

 

Kinsey [00:18:40] OK. So I feel like we've covered the customer reaction pretty well. I want to talk in a second about the relationship with the studios and how those relationships changed when you guys switched business models. But really quickly, let's take a short break to hear from our partner. — 

 

Kinsey [00:18:54] And now back to the conversation with ClassPass CEO Fritz Lanman. So, Fritz, we just talked about the people's reaction to this big change, and I'm sure [laughs] it was very scary email to hit send on. But I want to hear more about what the studios thought, what was their reaction to changing the business model? I imagine that there was a broad swath of people on both sides, both positive and negative, kind of probably coming at you guys a little bit [laughs]. Explain to me more what that experience was like for you. 

 

Fritz [00:19:25] So that's a really interesting question. The studios and gyms, for the most part, were really happy when we got rid of the unlimited model, because they felt like the limited model was devaluing their direct pricing and making it hard to sort of compete with the aggregators. So I think they were happy that we were going to change the model to not be as cheap. But, they still were sort of viewing us in a competitive lens in the world where we moved to cut plans to limit migration over the credits, which was a year later—that was a much better transition, actually for both. So that continued to be positive for the studios because now we had a lever for them to charge more for their most popular spots. Or to charge less to actually incentivize our customers to go to off-peak times. We didn't have that lever before them. So now we have that lever. And so I think they're excited about that. Customers actually were excited about the credits transition, which was going to be a big surprise. 

 

Fritz [00:20:24] So what that did was it made our catalog better. We went from the pre-credits world being like a Spotify that only had songs that people occasionally wanted to listen to, remnant songs, to being a Spotify that had the vast majority of music in the catalog. And so our brands that we had, like Barry's Bootcamp or Flywheel, opened up more spots because they could list some spots at the throwaway price and some spots at a more premium price, but also brands that never would have joined us when we were just a super-Grouponey kind of discount proposition, now could join the platform. So SLT or Rumball, the great boxing brand, which is part of Equinox Holdings family, or Solidcore. These great brands suddenly joined the network. 

 

Kinsey [00:21:08] Interesting. So Spotify got Taylor Swift. You guys got Rumball. And then that's why everybody started paying premium, at least in my experience. [laughs]

 

Fritz [00:21:18] Yeah, exactly. Yeah. But again, it wasn't just Rumball. It was also brands like Barry’s Bootcamp that now opened up high-end spots that were in more demand, that they weren't giving our customers the optionality to get before. So parties made more money. Customers had more choice and flexibility. Our product market fit strengthened with more different types of customers. It went from being only people who had a lot of flexibility in their schedule to now people who, if they were willing to pay a premium, they could habituated to these premium brands at peak times. And so we grew the industry faster. 

 

Kinsey [00:21:49] Do you ever worry that you're essentially feeding people into the buy directly through Barry’s or through Rumball or through SLT? Because you can only get in. You're not willing to pay the premium if you already have another gym membership, you would rather just buy classes directly through them because on ClassPass you can only get in at these off peak times. 

 

Fritz [00:22:09] Brilliant question. We see that as a feature of our model instead of a bug, in that we do lose some customers who don't want to sacrifice the unpredictability of access that you get coming your ClassPass. You come to ClassPass. You can't necessarily get into that most popular studio with the most popular instructor, the most popular times, seven days in advance. But that's the whole model we've given to a partner, which is price discrimination. Our customers come in and they deal with that uncertainty. Sometimes they get in. Sometimes they can't. They can't necessarily choose the spin bike or the treadmill that they get to be on. They aren't even guaranteed a discount because now we're dynamically pricing the partner’s inventory. So, the ClassPass customer is one, interested in habituated variety routine, but two, is willing—has to be willing—to kind of get second dibs sometimes on these spots. 

 

Fritz [00:23:03] And that is why our aggregator model is so incredibly friendly to the partners and why the vast majority of studios are agents who join ClassPass are able to see massive incremental revenue, which is mostly incremental EBITDA, because marginal cost to serve is very low in most cases, unless they're paying the instructor a variable fee, you know, just electricity for another treadmill. Or towels or whatever. 

 

Fritz [00:23:26] So, we send basically pure EBITDA to these partners on their excess capacity in an opaque way to their direct customer. So it's less risk of cannibalization with real trade-offs. If you are getting discounts coming to ClassPass, and ad revenue maximizing prices, using machine learning-based revenue management. 

 

Kinsey [00:23:46] Okay. So that sounds really good. I do want to point out a couple of things here. I put on my Instagram, asking for questions about ClassPass—things that people wanted to know more about or what they thought about the company. And I got a lot that were—I'll just read some. It's dope. I love it. Perfect for the gym, nomad. Excellent customer service. A lot of really positive ones. But there are also some negative ones. 

 

Kinsey [00:24:08] And most of them had to do with the relationship with studios that we've kind of been talking about. Saying that you're squeezing boutique studios. One said: Fun fact. It actually helped put the spin studio I used to work at out of business. Is that something that you guys are still thinking about or working on in the executive level here? I mean, how do you approach this relationship even though now things have changed and maybe now these studios are making more money and things seem great, but at the end of the day, there are people who lost part of their livelihood because of your business. Maybe.

 

Fritz [00:24:44] Yeah, that's great. It's a great question. So it absolutely is a top focus for us. And to be honest, you know, just being candid. I talked a lot about the business model changes we made. 

 

Fritz [00:24:56] Well, those got us to ultimately a better place in terms of being more aligned with studio gym partners, because now we make money on the revenue commission we send them to the credit system. We actually take margin on the revenue we send. We don't just make money by jamming down the rates, making money on people not using it. We want people to use it now. And there's a recent article that was negative. It's sort of a hit piece about us. And it was funny because the headline was ClassPass is squeezing studios. But in the article, it said, we make a 5% commission on the revenue we send them. And so I said to the journalist, How? Why? What incentive would we have to squeeze them if we make more money by sending partners more money? 

 

Kinsey [00:25:33] Them being in business is good for your business. 

 

Fritz [00:25:36] Absolutely. So now, ironically, we are aligned with our partners and we have a much friendlier model that has proven to be much more creative to them. And we're releasing a case study, with Rumball, who's been on the platform for a few months and is actually generating 20% of incremental revenue without seeing very much noticeable cannibalization whatsoever. So all the partners who have joined us in the past couple of years since we've been in the credit system, our site, they're like this is the best possible aggregator outcome I could have hoped for versus a transparent, open marketplace, like an Expedia with hotels or something. 

 

Fritz [00:26:11] So most of our partners, internationally and domestically, who we've added since we moved are fired up, and our partner retention rate is like 95% since we moved to the credit system. If we can send you money, it tends to be purely incremental and you're happy and you stay. But, the cost of these business model transitions was some misunderstanding about partners, right? Some of those partners, the partners who you tend to hear those negative sentiments from, tend to be in our oldest markets, and they tend to be folks that we had incorrectly sold on lead generation. We had told them, hey, you join the ClassPass platform. We're going to send you—we're going to expose you to a new audience, which we do, and you're going to see all these conversions, which is absolutely not true. So since the last 2½ years, we now say: We will sell your excess capacity in an opaque way at revenue-maximizing prices. Great. 

 

Fritz [00:27:04] Once we pitch that, they're fired up about that. So I think half the problem we have with partner sentiment is attributable to our historical transgressions on business model. The unlimited model was a disaster for these partners. And, you know, it was ultimately bad for the brands, it was bad for their business, it was competing with them; we made more money by spending less money. But we fixed those things. We heard the feedback. We fixed those things. I think to some extent this also sort of an unwinnable pursuit to be loved as an aggregator by your supplier partners. If you went and polled Uber drivers, how many of them would saythat they are in love with Uber? Now, if they could, they would rather have somebody come through the front doors directly and have that direct relationship, just like the St. Regis Hotel would rather not a customer book or Expedia, but through the St. Regis website. 

 

Fritz [00:27:56] So I think that there's some degree of unwinnability as an aggregator in terms of partner sentiment, where they're always going to prefer that the customer comes direct. But I think what we messed up on was we had a bad original model for partners, and I think we could have done better and I could've personally done better on explaining why we made the business model evolution changes we did in a clearer way—on explaining and ensuring that they understand that we are not revenue-aligned. The more money we send them, the more money we make. 

 

Fritz [00:28:25] That's ultimately why we were able to build surge pricing. In a world where we made our money on breakage, if we surge prices spot, we would've made less. But now, we do it because we get the revenue maximizing price for each of their extra spots because we can send them more money. Our revenue commission is bigger. 

 

Kinsey [00:28:40] We've talked a lot here about how the messaging matters and how maybe if you could go back, you would do different messaging to these studio partners or explain things in different terms and do it in person. And now it's kind of covering your tracks and going back in and talking to them now changes a lot more minds. If you could pick one thing to change about the process or pick one thing that you wish you'd known before you guys switched to this new business model, what would you pick? 

 

Fritz [00:29:07] I underestimated—I thought every single studio and gym would sort of be not just excited, but would intuitively understand that us moving to a world where we're revenue-aligned with them would mean that that by aligning our incentives, we're now working in their best interests. And I underestimated how much historical brand image they had from us having a misaligned model where we were incented to drive the rate down, more money we sent them, the more money we made. So I was sort of more focused on, would customers continue to pay us? Would customers allow us to introduce a system that's more complex because we have variable pricing, dynamic pricing, a different prices for different spots. 

 

Fritz [00:29:45] So we were very, very focused on will customers understand this and get it. Because partners seem psyched when we said, hey, you can know list spots at a higher price, they were psyched, but they didn't—we didn't do a good enough job, I don't think, on articulating the revenue alignment, and if you understand the revenue alignment, then that sort of handles 20 different kinds of objections that come up, which are really just questions about are you actually working in my best interest. Like you even asked, are these smart tools? Is dynamic pricing revenue maximizing for us or for them? Well, that's one and the same. 

 

Kinsey [00:30:17] OK. Interesting. So you're basically just trying to get, like, I keep thinking of Andrew Yang saying, I'm just literally trying to give you free money. [chuckles] You're literally just trying to convince people that this works for both of you. 

 

Fritz [00:30:29] Correct. I'm literally trying to give studios and gyms free EBITDA, with no marketing costs, and no customer support costs in a way that protects our direct business because the opacity and trade-offs [indistinct]. 

 

Kinsey [00:30:40] So, we've talked about a lot of these changes that ClassPass has made that have essentially been monumental changes to the way that your business operates and the process it's been like for you. I'm interested to know if you think that these kind of changes are still—and not necessarily the specific changes that you made, but just sort of changing your business model in general—are possible if you're not a private company. So you guys are still a private company, but you've talked a lot about IPOs, just raised a bunch more money. Do you think that you would be able to make these changes if you were a public company or what would the process be like to you and how would it differ? 

 

Fritz [00:31:20] I think you have two serious disadvantages as a public company. So I think you have one: It's a bigger ship to turn on a dime. Two: You have shareholders who can actually start to influence or second-guess the strategic decisions of management or the board of directors by buying positions. Or becoming activists or by taking large short positions. 

 

Kinsey [00:31:45] OK. So this would have been essentially almost impossible if you guys are public. 

 

Fritz [00:31:50] Really difficult. 

 

Kinsey [00:31:51] Maybe Elon Musk was on to something [laughs]

 

Fritz [00:31:55] There's not that many examples of private internet companies that have done turnarounds. Or business model fixes. So it's probably single—well, you know, one hand and a couple of fingers. I can't think of one that's done it as a public company with the exception of Netflix. 

 

Kinsey [00:32:10] OK. Really quickly, let's take a brief break to hear from our partner. — And now back to the conversation with ClassPass CEO Fritz Lanman. Fritz. This idea of corporate partnerships is something I find particularly interesting. It's become a more important part of your business lately. Explain to me as briefly as possible what those partnerships entail. 

 

Fritz [00:32:35] So we're really trying to disrupt the traditional corporate fitness vendor model. Traditionally, corporate fitness vendors would go and strike, basically be an intermediary between an HR department at a company and gyms. That's OK. We've got 24-Hour Fitness and Gold's Gym in our program. And what you're going to do, Mr. or Mrs. HR Department, is pay us, per eligible employee, a monthly fee just for the privilege of your employees being able to buy one of these corporate subscriptions, and you can decide if you want to subsidize it. We said that doesn't make sense. Let's, like we did with the studios and gyms, align our interests with the HR teams so we don't do that per eligible fee. 

 

Fritz [00:33:21] Our proposition is really simple. We go to Google's HR team and say, hey, if you want to give your employees access to the world's biggest and richest network of gyms and studios and wellness experiences and spas and pools and climbing walls and hotel resorts, bars and stuff—we've rolled that all up. We have these consumer subscriptions. You decide how much you want to subsidize those same exact subscriptions for the employees who actually adopt a ClassPass membership. So it's really quite simple. The HR team gets to decide how much they want to subsidize the subscription for their employees. 

 

Fritz [00:33:57] We do marketing and activations on site at Google or Facebook or Morgan Stanley or Goldman Sachs or Southwest Airlines—we have a whole bunch of different customers now. Well over a thousand. And those employees adopt. And we show the HR team: Here's who's adopted it, who's using it. Here's the analytics. And they can create even incentives like, hey, bring your coworkers, we'll give you extra ClassPass credits. So it's pretty cool. 

 

Kinsey [00:34:19] OK. So they're not paying for—they're just paying for the people who opt in to ClassPass.

 

Fritz [00:34:23] Yes, exactly. Whatever subsidy level they want.

 

Kinsey [00:34:26] OK. Where does the bulk of your revenue come from today? Is that those corporate partnerships or is it the everyday, non-corporate ClassPass member consumer? 

 

Fritz [00:34:35] Yeah. Yeah. The consumer business is still significantly larger. The corporate business is growing faster than the consumer business. But, it's still not a huge share because our consumer business continues to grow at a really, really high velocity. 

 

Kinsey [00:34:50] OK. So at the risk of leading the witness a little bit here, I think that one of the reasons why ClassPass has continued to succeed and still attract investor money, and the reason we're still talking about it today in your podcast is that you guys have been willing to change, you've been willing to adapt to the environment that you're in at any given moment. And I think that that is not always easy, but it seems to be working right now. But when we think about you, you brought it up before as well. We think about other subscription-based or marketplace-type businesses that have failed, like MoviePass. What do you think the biggest learning should be for someone listening to this show? Why do those kind of marketplace businesses sometimes fail so spectacularly? 

 

Fritz [00:35:38] Gosh, that's a great question. I can't really speak as an investor. I'm an angel investor and about 100 different companies. And, you know, the majority have failed. 

 

Fritz [00:35:47] But a couple of winners have helped me subsidize the rest of those. I think it's easy to kind of fall in love with your own bullshit and listen to, you know, if you're getting a lot of traction or press, which you can do, if you’re selling dollar bills for 80 cents, to think, hey, that's really working. And so I think it takes a certain level of honesty and a certain level of bravery to take a look. And when the whole world thinks you're successful, but you're actually losing money on every customer, and, you've also, by the way, had a track record of being able to raise money despite the model, because you've always been able to sell well, will eventually be able to make it work. At some point, you've got to call and say, hey, this isn't working. Let's just live our full life and see if we can make this happen. 

 

Kinsey [00:36:33] The idea of honesty is very interesting because I think it's a) honesty to the people who you count as customers, b) to the people who are putting money into your company. But I think, most importantly, honesty with yourself that this might not work, even though it's something I feel so passionately about. 

 

Fritz [00:36:50] Exactly. Payal and I, again, we've had the benefit of being wrong so many times historically. I mean, she was in cockroach mode, and I said that in the most favorable possible way, [Kinsey laughs] living on couches, scrounging money together to keep taking shots, trying to get product market fit with this business. So we just—I've failed so many times that we're just not precious about doing what's right in pursuit of the mission and being willing to sort of earn the right to take that next swing. And again, the business model ultimate didn't work. I don't know that I would have done it differently in retrospect. Like I said, a limited was a great way to put to build a big brand. 

 

Fritz [00:37:30] But instead of putting money into TV ads or whatever, we put that money into the pockets of our partners and our customers. And ultimately we were able to pull it off. I can't speak to why MoviePass didn't work out or other particular places didn't work. But I do think that sometimes companies, especially those that appear from the outside, like they're doing really well. It gets even scarier, gets even more pressure on the founder to make that tough call. 

 

Kinsey [00:37:55] Yeah, I think that there are two different ways of being in something we read about and hear about in [indistinct]. Are you down for the cause? [indistinct] It's everywhere. It's something that a lot of tech companies are very proud of. They only hire people if they think they're gonna be down for the cause. But, there is a good way of being down for the cause and believing in the product and being honest with yourself. But I also think that there are a lot of drawbacks to believing so much in that single way of doing business that it blinds you from the drawbacks of that model itself. 

 

Fritz [00:38:27] I think that's very fair. The same unique attribute that makes entrepreneurs successful can also be a blind spot. It's really hard to sort of walk that line. I mean, I'd probably say, as an investor, if you had to choose between somebody who is gonna be really cautious and considerate and considerate of each of their decisions, most of the times they don't they don't break through. 

 

Fritz [00:38:51] So you really need the people who really do believe, are really willing to take big risks, are really committed to that mission, will work the hours necessary to figure this stuff out, push through things like unexpected global pandemics that come up. [Kinsey laughs] Whatever challenge is gonna come up, you want someone who's going to break those walls down and make it happen, and you just get lucky if they happen to also have enough awareness. To make tough decisions about when to when to iterate, when to change. When does admit that it's not working. 

 

Kinsey [00:39:21] Yeah. And be willing to walk away from something. 

 

Fritz [00:39:24] That's right. 

 

Kinsey [00:39:25] All right. All right, Fritz. So that was a great spot to end with. [laughs] A little bit of introspection is always healthy. But now we are going to bring out the wheel. Since we are remote, you are not in New York in this booth with me right now. I'm going to spin our wheel for you and then it'll let you know what question you get. And we'll see what we can find out. [indistinct] 

 

Kinsey [00:39:48] And now you might hear it, right? Let’s go. All right. Day in the life. We landed on, day in life. So explain to me what a day in your life is like in the simplest terms possible. 

 

Fritz [00:40:04] Wow. Well, I think I'm an exception because I'm a techie, but I live an incredibly active lifestyle town in Montana. So, day in the life for me typically starts with a visit to one of our partner gyms or studios. 

 

Kinsey [00:40:18 ]What’s your favorite class?

 

Fritz [00:40:20] We have a bootcamp class called the Sweat Shop, and I tend to get my best workouts and have the most fun doing these full-body bootcamp classes. It's a tough call. We've got high-powered energy spin studio and then just the traditional gym. You know, if you get weightlifting. So I need the variety. Otherwise, it is fall off the wagon. So I start with the workout. Then I come home. I get my daughter—my four-and-a-half-year-old—off to school. If my wife will let me get in the way there at all. And then I head over the bridge. I walk to work. Check out what flies are coming off the river, so that if I happen to be able to leave work early enough, I can go do some fly fishing. And then I get home to my family. And typically grill a healthy meal in our backyard. Or if it's the winter, I’ll maybe try to sneak in a quick ski trip. [indistinct] 

 

Kinsey [00:41:09] Interesting. I feel like you're getting a lot of the best of both worlds. You have this sort of like corporate life. But also you're talking about if I get off work, I can go fly fishing [laughs]. OK. Take another spin around the wheel. [sound of wheel spinning]

 

Kinsey [00:41:23] All right. The one thing. What is the one thing in your life it could be a quote, a class, a person, a mentor, something that you feel has had the most outsized impact on your professional career? 

 

Fritz [00:41:36] That's really tough call. [Kinsey laughs] I think—I mean, there's been so many people who inspired me. I mean, I went to work for Microsoft out of college because Bill Gates sort of being a hero both as a techie, but also creating some of the best businesses in the history of Western Civ. 

 

Fritz [00:41:50] But I think the best—I think the career advice that has really given me the most success to [indistinct] so far, you know, limited success, but promising in my career, has been my parents, who have told me just to—that they didn't care—I have four little brothers. And they said to us, hey, boys, we don't care what you do, but whatever you do, you better be excited about it and you better give it your best effort. And so, I am a techie. I love what I do for a living. And I wake up every day, fired up to go to work. I used to have the Sunday [indistinct] when I didn't like my job. Now, I actually look forward to Monday. 

 

Fritz [00:42:28] So I'd say that is really served me well. On the other hand, my brother is a full-time professional musician who is touring America, living out of a [indistinct] van. So I think that's the key. I think if you can make work not feel like work. I think you're on the right path. 

 

Kinsey [00:42:43] OK. One last spin around the wheel [sound of wheel spinning]. All right. Call me crazy. What's one hot take or one opinion you think you might be in the minority on—that you can either have been right about it or wrong about it. You feel like someone either will or has called you crazy. 

 

Fritz [00:43:02] I think that the idea of building a megatech company in Missoula, Montana, is probably the craziest thing [Kinsey laughs] I've ever tried to do. And I think in the new world, you can build companies in a distributed way. And I think this is just the tip of the iceberg where great entrepreneurs—I'm from the Bay Area. I love San Cisco. I love the Bay Area, but not everyone does. And, you know, I used to have to be there for access to capital and talent. And I think in the new world, you're going to see lots of great companies get built, an ultra-high quality of life, lower cost of living places. 

 

Kinsey [00:43:39] Interesting. Yeah. And we're all working remotely and video conferencing, everything in any way right now. [laughs]

 

Fritz [00:43:43] That's right. 

 

Kinsey [00:43:44] You might even be a step ahead of us. [laughs] 

 

Fritz [00:43:47] Might accelerate that trend. [Kinsey laughs]

 

Kinsey [00:43:48] All right. Well, Fritz, thank you so much for coming on Business Casual. I really enjoyed that conversation. And I am glad to have learned something. 

 

Fritz [00:39:55] Thanks for having me. 

 

[00:39:55] [sound of coffee being poured]

 

[00:39:57] [outro music starts]


Kinsey [00:44:00] Thank you so much for listening to this episode of Business Casual. All about changing your business model with CEO of ClassPass, Fritz Lanman. I want to know more about what you think of both ClassPass and the whole idea of changing your business model from the ground up. Reach out to me on Twitter, @KinseyGrant, or on Instagram, @KinseyRGrant, and let me know your thoughts. I’ll see you next time.