Andrew Weinreich: Today we will be speaking with Payal Kadakia, the Founder and Executive Chairman of ClassPass, a monthly membership program that provides people of all fitness levels access to boutique fitness classes and gyms across the world. I first met Payal before she started ClassPass, when she asked me to become an advisor for her company under the precursor name, Classtivity. Since ClassPass launched in 2013, it has facilitated over 40 million reservations across 8,500 studios in 39 cities globally. I would love if we could start with the vision of ClassPass taking us all the way back to Classtivity.
Payal Kadakia: Great yeah. So it really started, you know, the whole company started out of a pain point of mine which was just searching for a ballet class online. And in that moment I think obviously there was the technological gap that existed, but more importantly, it was to connect people back to their passions and things that sort of make them feel alive. And you know, when we’re younger a lot of us have a chance to keep exploring, you know, pursue our passions from being active to creative, and I wanted to create a place where people could continue to pursue that side of themselves.
Andrew Weinreich: So our goal is really to understand how data has driven you from the earliest inception of your vision to where we are now. So I’d love it if we could talk about what the initial product of Classtivity looked like. And then we can drill down a little bit about what the feedback was on that product and the data points you were receiving on that product.
Payal Kadakia: The first website we had, it was a search engine, so very similar to OpenTable, where we aggregated thousands of class-level detail. Some of it was bookable immediately from the website. So it was really just the search engine for classes.
Andrew Weinreich: And the initial price point?
Payal Kadakia: So it was by class, so every class had a different price point based upon what the studios or providers charged. So it ranged anywhere from $5 to $45 per transaction.
Andrew Weinreich: There was an initial $99 products. Can you talk a little bit about that?
Payal Kadakia: Oh yes, okay, so you’re actually fast-forwarding to ClassPass. What I also wanted to just say is with Classtivity in terms of data and knowing it didn’t work, and I think that’s also just a really important thing of knowing how far off we were. We had 10,000 people coming to the website and no one was going to class. That was sort of for me a pretty important point to know hey, this isn’t working and for us to build another product. So then we actually launched another product called the Passport and the Passport was a $49 offer where you could try 10 classes. You had to be a new member at each of the studios you were going to class to and you could try it for one month.
Andrew Weinreich: So what’s really interesting was there was a vision for what you were going to do for individuals and then separately there was a vision for what you were going to do for the studios. Right?
Payal Kadakia: Yeah, I mean, in any marketplace the number one thing is making sure transactions are happening. There’s got to be liquidity, without liquidity no marketplace exists. And that’s really to me what we were always trying to get to is a place where people were actually reserving classes and that’s really what took us three to four years to get into.
Andrew Weinreich: But the initial vision was, and this is the part I think that surprised so many people, that people are comfortable doing one type of class, and so they would join a pilates studio or they would join a yoga studio and no one really before you had said that diversity of classes was a value. That was the central underpinning for the participants, right?
“So now we were like okay, wait people want to pay us more money, what’s going on?”
Payal Kadakia: Absolutely. And we actually stumbled upon that. So, and I think this is what’s amazing, that we realized, so when we had the Passport product which was the month-long discovery, we thought people would do the dabbling and the variety for a month and then commit to a studio. And our internal metric was that 75% of people who gave a class a four or five rating, because we were collecting reviews on every class, would then go and buy a package at the studio. We only saw that number at 15% and when we saw such a low conversion we, first of all, knew that, hey, this would be a really bad partnership for the studios because we’re not, they’re giving out these classes for free and we’re not now giving them any clientele that’s going to actually convert. So that was problem A. And then problem B, for me, from a mission standpoint was, wait this is going to be a product that’s only going to be in people’s lives for a month, it didn’t feel as compelling. That being all said, so those were two problems, the beauty of the passport was what we realized separately was how much people loved the variety. So they loved it so much so that what started happening is they were- people were signing up with multiple e-mail addresses month over month. And the way obviously the product worked is you were restricted in being able to sign up for the same studios. The studios started calling us saying, hey I saw this person again, I thought they couldn’t come back, and we were like they can’t. And then we started looking at the user emails, we started realizing that they were signing up with multiple email addresses. So now we were like okay, wait people want to pay us more money, what’s going on? So then we did a survey and we sent it out to the members who on the Passport and we asked them if they would, if they could go back to their studios that they liked, a few more times would they sign up for this monthly and 95 percent of them said yes. That’s when we knew we had to build the subscription.
Andrew Weinreich: So for the initial mission was offer a program or offer a path for people to achieve their fitness ambitions. But it was never, offer them a path to get this diversity of choice, is that right?
Payal Kadakia: Well it was, offer them an easy way to start exploring boutique fitness and then find your home. We just thought people would ultimately find their home after because that’s the way everything worked. Like you couldn’t, like you said, dabble this way before ClassPass existed. The only other way to really do that was the gym. So like the models didn’t exist. So no one really knew how to do this. So forget knowing if people are interested, but it was really about hey if you discover you’ll find the place you want to stick to.
Andrew Weinreich: What’s so interesting about the pivot is oftentimes you see a company try something, it fails and then the founder says, we still have some cash, let’s just try something else. Here you tried something, which was based on lead-gen driving people to the studios as you put it so they could find a home. And as opposed to pie in the sky let’s try something else, it sounds like it was really the data that was driving this decision that people really did want variety and they wanted subscription.
“…it was in the data and the other thing like I always think is so important it was in the emails that our customers were writing us.”
Payal Kadakia: Absolutely. I mean, given since you’ve been involved in the company you know we had our first pivot, which to me was like a very massive pivot because we were going to offering a complete new customer proposition, you know this, I mean to me was just another iteration of the program we started with the Passport. We just didn’t realize that people would love discovery so much, and I totally agree it was in the data and the other thing like I always think is so important it was in the emails that our customers were writing us. So at this time most of the team was doing all the customer service and you could hear it in people’s like emails essentially and in that how much they loved the variety and that was what gave them the confidence and the motivation to keep working out. And that’s something that they had never felt before.
Andrew Weinreich: So, was the, I’m curious about because I think a lot of people deal with this issue of facing a pivot when something doesn’t go exactly as they wanted to. Was people creating fake email addresses, was that principally because they were capped on the number of classes they could take at any one place, or was that the subscription business model of these studios is just fundamentally broken that-
Payal Kadakia: No, so they were, the thing is the product we offered was a one-month product, so it wasn’t a subscription for the first seven months. It was a one-month product and then we were trying to get them to buy a package at each of the studios. So in that one month, they only could try Passport for a month, ClassPass didn’t exist at that point. So they were frauding us in the sense that they were buying that one month over and over again to keep going back to studios because it was just a 30-day product, that was all it was … And they had to be new at each studio.
Andrew Weinreich: I want to turn to the data on the studios in a second but I imagine there’s a lot of interesting zeitgeist on the data, like do New York City people like to spin more than Chicago people?
Payal Kadakia: Yeah we’ve seen a lot of trends. I think what’s really crazy is like ClassPass with how- because we kind of sit above the entire market like there’s lots of trends that start and new trends that begin on any other day and we kind of, sort of fill the volume at a holistic level. So we kind of sit above that but at the same time like we do, and a lot of this is if there’s outdoor classes or if there’s indoor, we see a lot of spin in Boston and strength training in New York. You know, we do see a lot of those types of trends.
Andrew Weinreich: Are there other uses for that data over time?
Payal Kadakia: Yeah absolutely. I mean I think, you know, we’re not heavy right now in the apparel space or anything like that, but I do think like knowing what people do with working out especially because there’s so much of an emphasis today on working out, like just knowing what products people will need, I think there’ll be a massive use for the data. It’s obviously not our priority currently.
Andrew Weinreich: How far can you go on driving personalization? I mean if someone says to you, I know most of the people that use ClassPass are the most fit people in the world, but eventually you’ll have people that say I’m looking to lose weight or, I’m wondering whether you can take it to that level and say, wow, I know you’ve been doing a lot of yoga and pilates, maybe you need to think more about a high-intensity workout so we can recommend this for you.
Payal Kadakia: Yeah, we have so much of that data in-house at this point and we’ve started building a recommendation algorithm. It’s always important to make sure, you know, for us, people love working out. So as long as they get to class like that task is the number one thing … to focus on, is what’s going to be the easiest way to get you to class. And even we’ve seen recommendations do well, we’ve seen the social graph people have in having recommendations from friends be one of the biggest drivers.
Andrew Weinreich: But I’m wondering whether the recommendations eventually go a step further. Whether or not someone is developing soreness in their shoulders and whether there’s greater interactivity on the data you’re abstracting from these people and the recommendations get to a place where it’s, here’s what you need to do to round out your fitness objectives, here’s what you need to do to round out your health objectives.
Payal Kadakia: Yeah, absolutely. We’re constantly adding new variables and seeing how they perform and based on people’s goals, we’re actually developing a lot of that right now.
Andrew Weinreich: Can you describe or characterize the business models of these boutiques? You know how profitable they are, how strapped they are, how they deal with how they think about their inventory?
Payal Kadakia: Yeah I mean, you know, I think it’s hard to generalize because they’re so different like there’s really a distribution of the types of studios we work with. That being said, I think the premise that we started this on and the studio that we worked with in the beginning, a lot of them were, I would consider them like entrepreneur-led, sort of like, one studio places where you know most of the times they were at 50 or 60 percent excess capacity, right, in terms of their utilization. Once again these were things that not many of our studios knew early on. I remember actually spending most of my time in the early days trying to build utilization curves for them because it was something that even the industry just didn’t really think about before. You know, they have fixed costs, but it is really important to try and fill incremental spots, right, and develop, get that incremental revenue. So a lot of our propositions to them from the Passport was, we will fill your excess capacity, so much so that I remember in the early days too, we would, you know, the onboarding that we had them, we would explicitly ask them, how many spots do you want to give us in your classes? And we would do it at a class level if we needed to and many of them would say like just take it like 100 percent, but we didn’t 100 percent because we didn’t want to cannibalize and if they have loyalists going to their studio, we wanted to make sure we weren’t taking away any spots from those people.
Andrew Weinreich: You walk into this beautiful studio and you assume that someone has a nice lifestyle business. Are most of them on the cusp of not having enough revenue to survive, are they month-to-month? How do we think about the viability of all of these studios? And there seems like there’s been this massive proliferation of them over the past 10-20 years. How do we think about their viability?
Payal Kadakia: I think a lot of it has to do with product, like I actually think about it very similar to the way tech startups are. There are some of them that have a product that’s like super viral and attracts a lot of people and those get off the ground and even ClassPass today, we even help them get off the ground and open up new locations and as they start opening up new locations they have more synergies and are able to push costs down. That being said there’s also others that I think sometimes they have too much rent or they, you have to manage them like a very small business, right. You need to make sure your rent, your staff, all the people that you have hired, you’re paying them what you need to, but then the projections that you have for people coming in can really help cover that. But it’s not how many of these studio owners think, it’s one of those things that they want people in the door because they’re so passionate about what they do. I don’t think that many of them are unprofitable, but I also don’t think many of them have this abundance of a cash flow.
Andrew Weinreich: Does OpenTable provide a level of analytics to help for the restaurants to help them manage towards profitability?
Payal Kadakia: I don’t know their exact system for the restaurants, but I’m assuming with how integrated they are there’s no way that the restaurateurs aren’t learning from what’s going on with OpenTable and I even remember that’s part of OpenTable’s sell, would be, we would send you X amount of people which would provide you X amount of revenue per month, and I’m sure they’re getting that data and sharing it back to the restaurants.
Andrew Weinreich: What’s interesting is I would think everyone basically has dinner at the same time, but you can work out I imagine at any time of the day. I would think ClassPass could provide such an incredible level of analytics to the studio to the point where here are the classes that are working if you timeshift them if you expand capacity.
“So we’ve learned things where if you have like a 50-minute class it performs better than like a 60-minute class.”
Payal Kadakia: We already do that and we provide a report, literally an annual report for this for our studios that actually takes together the best trends. So we’ve learned things where if you have like a 50-minute class it performs better than like a 60-minute class, like just random data points like that, that have been able to really shift them. The most important thing though for them has been the ratings and the reviews that we’re able to send them on a teacher level which is so impactful to them. You know, they can actually change that and this goes back to what I was saying about fixing your product. Like how, for a new startup, you know how to fix your product based upon what people are saying, and we’re giving them that insight right away.
Andrew Weinreich: Have you gotten to the place yet or is this maybe further out maybe several years out, where studios are able to say before ClassPass this was our revenue, this was our profitability, and this is now with ClassPass, here’s the differential on a studio basis? I know you don’t have access to all of their data but I’m wondering whether there’s some way where you complete that loop.
Payal Kadakia: Yeah I mean our number one thing is to grow the market and so we’re obviously every once in a while we try and do like a case study, a subset of studios. Like I said, a lot of our studios are new and I think back to your earlier question, they’re in very different stages. We have start up studios and then we have the big studios. So it’s sometimes, like for us it’s about focusing in on making sure that we’re growing the pie and introducing new people who weren’t necessarily going to any of these studios before versus just cannibalizing the current traffic that’s really going through. Once again it’s still hard to pinpoint it by any individual studio because there’s a shift and a mix going on within ClassPass, and then there’s a shift in the mix going on outside of ClassPass in these studios already.
Andrew Weinreich: I’m not going to ask you obviously how much you pay the studios, but I’m curious whether or not the studios and the individuals each understand each other’s pain points. In other words individuals understand that this is excess capacity, so you’re acquiring classes at a discount and whether studios understand the pain points of the individuals. And I’m getting to I guess asking the question about, ClassPass at one point offered an unlimited package where you paid a fixed price and you could go to as many classes as you want, and it seemed like there was this disconnect where individuals didn’t appreciate the pain points of the studios and studios didn’t appreciate the pain points of the individuals. And I’m wondering, if you could talk about that a little bit and whether you think there’s this sense of understanding how the whole ecosystem works by the different parties.
“As a founder I was trying to get people who are scared of boutique fitness to walk in, which means these are not people who know what the price of these studios are just by nature of who we were targeting.”
Payal Kadakia: Yeah I mean I think it’s a great point. As a founder I was trying to get people who are scared of boutique fitness to walk in, which means these are not people who know what the price of these studios are just by nature of who we were targeting. It’s easy for people to be like, don’t people know that these class are $35 or and I understand that, but at the same time then there was this entire user base who was completely just scared, right? Like I don’t know how to walk into Barry’s Boot Camp or this new spin class like I’ve never done spin in my life. So we were always trying to remain accessible and in a way package something together that felt more exciting than any individual workout because the individual workout was scary to people.
Then on the flipside I do think for the studios, they, look every person is, it’s so important to make sure that even the cancellation fee we have where you can’t, if you miss the class you get charged for late cancel because at the end of the day to me, the number one thing for them is spots, right. If they have 10 spots and all of a sudden you tell them you can’t make it and they were banking on you being there, it’s like an unfilled spot that could have been taken by somebody else and to me that’s like an opportunity cost that they’re constantly playing with. And it was important to sort of start, and we’re doing a better job of it even now, but training our customers on the fact that … even that, we don’t charge that fee because ClassPass is trying to be greedy, we charge that fee out of a principle of protecting our studios. So there’s always this two sided marketplace dynamic. Here’s the one thing, I’m really glad we made it really easy, but sometimes it is good to add friction because it helps people be disciplined and educate them on the two sides of the marketplace. It’s the same thing like Uber now will charge you if you’re a rider if you make them wait for two minutes, they can cancel. There’s little things like that you have to do as you grow to help enable the respect on both sides of the marketplace.
“I’m really glad we made it really easy, but sometimes it is good to add friction because it helps people be disciplined and educate them on the two sides of the marketplace.”
Andrew Weinreich: Yeah. How much are you comfortable talking about the $99, and then that fee was raised for unlimited? What’s so interesting is a lot of businesses start and they get sort of the bottom of the barrel users. You got the best of the best, and those best of the best in one sense I know you don’t like to refer them as abusers, but can you talk about how large a percentage of the user base was going to so many classes that ClassPass was losing money on them?
Payal Kadakia: Well so it’s always a hard situation in the sense that, you know, when we actually first started and we actually started at $99 for 10, those users were actually going on average to five. So we didn’t actually start with these crazy users, if anything we were like how do we get them to go more because we could see that the people who weren’t using the product would churn out.
Andrew Weinreich: So the thinking was if they’re only going to five we can offer unlimited, it’s a great marketing ploy and it costs us nothing.
Payal Kadakia: Exactly, so that’s actually, so we did a summer promotion. And then there was a lot that happened, there was a lot of then, you know, we raised funding, there was copycats in the market, there was a lot going on at the time and it was just a shift, like growth was the number one priority for us. And the other thing we started doing at this time is, the other thing in a market place is you usually think your cost will go down as you get volume, right, correct, that’s what usually happens.
Andrew Weinreich: Yep.
“So some of these dynamics were all great for the product experience. But when you fast forward it, what was happening is we were ending up with users who were engaging more and a per class cost that was going up not down at the time.”
Payal Kadakia: We started attracting a lot of the top studios so our costs were actually then going up too on a per class basis because we started adding amazing studios. So some of these dynamics were all great for the product experience. But when you fast forward it, what was happening is we were ending up with users who were engaging more and a per class cost that was going up not down at the time. And so once again we knew we had to make a shift and then the first shift we made was a $25-ish price increase and what actually happened and we didn’t know, we had been thinking and we needed to test it as like the concept of adverse selection. If the people who end up staying on a product are the ones for all your higher usage, a price increase doesn’t do anything then. And that’s exactly what happened, and so then we decided, I knew we’d have to go higher. But I built this product for people who are scared not like fitness fanatics, so it was important to me to have a price point and a plan in the market that felt more accessible. So then we started building the five pack and the 10 pack and we saw those do really well, like the same way the company grew we saw the same types of growth with them.
But then once again the adverse selection on the unlimited plan even got worse. So the people who stayed on the unlimited were going obviously above 10 because if you’re below 10 you would take the 10 pack. So we were then, the average and unlimited we had to actually push up to $200 and then at some point, same problem happened and we ultimately decided to get rid of it. I actually always remember this time in the company because it was one of those times where I walk into work and employees would come up to me with new ideas to figure out ways to get people to stop working out like that, like that’s ultimately what happened. I remember I was getting a podcast in my team and they were like, oh how many times do you work out, I was like, I work out every day, and they were like, don’t tell our members that. I’m like, what do you mean don’t tell our members that? And I’m like, this is not good, this is not the reason we started this company and I just knew that that’s what started happening. And so we had to make a shift and ultimately what’s been great is we lost less than five percent of our users from that change, and we actually have been growing in our new plans and our add on bundles. So we actually have, people can still work out like as many times as they want, it’s just the usage and the economics are just more aligned now.
“I actually always remember this time in the company because it was one of those times where I walk into work and employees would come up to me with new ideas to figure out ways to get people to stop working out…”
Andrew Weinreich: Now they have to pay for it.
Payal Kadakia: Yeah they just pay, there’s bundles that they can constantly keep adding to their membership.
Andrew Weinreich: So just for my own edification, was the extreme once a day that people were working out or was there a core of people that were going to multiple classes a day every day?
Payal Kadakia: The distribution was very varied. I can’t remember the exact specifics at that time. At the end of the day we just definitely had a bunch of people who were bringing the margin down.
Andrew Weinreich: Do you think of ClassPass now as a data driven business?
Payal Kadakia: Yes absolutely.
Andrew Weinreich: When you think about the prioritizations going forward if you had to rank growth, revenue, retention, how do you rank those?
Payal Kadakia: I would say retention, growth, I mean all of them. [Laughs] Retention, growth, revenue.
Andrew Weinreich: How many cities is ClassPass in?
Payal Kadakia: Thirty-nine.
Andrew Weinreich: And how does, for those people that think about well, isn’t what venture capital for constantly using equity financing to blow out the market and grow, grow, grow. I know ClassPass just did a large financing. How do you view the role of, for a company at your stage, the role of venture financing and are we in a place where- I mean ClassPass just did a huge financing, but if we were at a different time would the financing have been 10 times that and the mandate, if we were in the late 90s would the mandate have been ‘grow at all costs, knock out the largest gyms?’
Payal Kadakia: I think it was like that two years ago. I don’t think it was even just the ‘90s. I think the markets are different and once again I don’t take it as it’s like a negative or a positive, I just think people, the corrections happen at the time they need to, right? And I would say there was a phase where everyone was like, it was grow at all costs and there was a phase we had to grow at all costs. We had a lot of copycats in the market and we had to just make sure this was our product, and it was ours to lose, at the end of the day we invented it. Luckily even for us I think we got to that other side I would say before the markets turned, and then for us the number one thing, I think at the end of day, I think you have to always remember, especially with a subscription, it’s so important to, you could always acquire new people, but you have to keep people you have. So it’s a really important thing to make sure you’re constantly getting more money and more of a better experience from your current subscribers which we’re also investing in and at the same time then figuring out growth. I would say though with the raise we just did, I would say we’re focused on both growth and retention.
Andrew Weinreich: Few more questions. How do you decide what markets to go after from here, geographic markets?
Payal Kadakia: The number one thing we usually do is look at a number of studios that are in there because without the studios we don’t really have a product. The other thing we’ve obviously also looked at is English-speaking, just for right now because obviously changing languages adds a huge amount of complexity. So that’s sort of been like our current focus, and if there’s studios we assume that there is an active culture.
Andrew Weinreich: How many studios do you need in a city to, in an urban area, for it to be meaningful as-
Payal Kadakia: We actually do this analysis by code. So it’s actually it’s even more detailed because you have to make sure it’s about location, and we actually do our marketing in that way too, but usually it’s somewhere, we usually like to launch with around 50 studios.
Andrew Weinreich: So are there hundreds of more markets in English-speaking parts of the world that have 50 or more studios in close proximity, or is there, in order of-
Payal Kadakia: I’d say there’s probably somewhere around 40-50, I would say that are English speaking, but that doesn’t mean we wouldn’t go towards the non-English-speaking ones. And in general I think the ClassPass ethos of bringing studio fitness everywhere, we can A, create the market where we need to, or we’re also working on a large digital product and endeavor because at the end of the day it doesn’t really matter, we want to make it so it doesn’t matter where you are.
Andrew Weinreich: Tell me about the digital, the streaming product.
Payal Kadakia: It very much reminds me of Netflix going from DVDs to streaming. You have to kind of keep up with what’s going on in the world around you. I don’t know if five years ago I would be like, oh yeah, well ClassPass will obviously be, like, have a video platform and people will connect to or work out that way. But now people are and I think we’re really excited about a lot of the new technology that’s being invented and sort of getting people engaged in their own homes. And so it’s a really interesting way of bringing the ClassPass experience into the homes of everyone around the world. So it will be less of a local market play.
Andrew Weinreich: The whole Peloton experience frankly shocked me because I didn’t appreciate why you would want to work out from home, why you wouldn’t just watch a YouTube video and or a single YouTube video, what the value was of it being current. But is that what you’re seeing on the streaming side that people are more excited about a class that’s offered today as opposed to one that’s-
Payal Kadakia: Yeah I think yeah. I think we see live and interactive as a really important piece of it. It’s because that’s how a class is at the end of the day. You have other people there, it’s an experience, it’s someone is holding you accountable. Why, if I work out at home or if I go to the studio and you always push yourself a little bit more at the studio because there’s other people there, and there’s an instructor there and they can connect with you and see how you’re performing. So it helps add to the work out.
Andrew Weinreich: What else did I not ask you? What else can you tell us about ClassPass’s plans for the future? Any other verticals.
Payal Kadakia: I think ClassPass in general, I also, to me boutique fitness is one part of it, like I think well we’re already offering things like the gym and runs and sports games, so it’s really about we want to help people with their entire fitness sort of journey. And I think what we’ve realized is that it changes over time. That’s what actually keeps people engaged and excited because people fall out of routine all the time. And so yeah we’re continuing expanding into other adjacencies in the active space.
Andrew Weinreich: So is there a natural convergence with wearables and nutrition and ClassPass, or do we think about those in the future still as separate verticals?
Payal Kadakia: I don’t think we’ll be, we’re not that tied to nutrition if that makes sense. I think it’s going to be more about like ClassPass being a place for you to track. If you’re booking all the things that you’re doing on ClassPass you might want to know how you performed. So if we were a place where you could log your something that happened on one of your fitness trackers and keep track of it over time, so pretend you went to the same class again and this time you performed better, being able to track that in one place versus 40 is a lot easier, right. So I think it will be very much tied to like the goals and programmatic way of working out that you’ll see us integrate with other wearables or other data centric activity trackers.
Andrew Weinreich: Payal, we’ve had lots of conversations, none as an interview, but thank you.
Payal Kadakia: Thanks, Andrew.