Pivoting To Success: ClassPass CEO Fritz Lanman On Entering The UAE Market
The CEO of ClassPass on how his enterprise built a winning business model (and thus managed to secure a total of US$255 million in funding).
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The UAE is one of the nine countries which ClassPass, a New York-headquartered online fitness subscription platform, will make an entry into this fall. The global expansion plan builds up on the company's already existing network of 10,000 partner fitness studios and gyms in more than 50 cities across the US, Canada, Singapore, the UK and Australia. In addition, the company's 2019 agenda includes adding 17 new international markets to the growing network.
ClassPass has come a long way since 2013 when Payal Kadakia, its founder and current Executive Chairman, chalked her startup's vision "to make every life fully lived." Having read it out loud three times, I placed it quite high on my list of best-crafted startup mission statements. However, its different forms spread across ClassPass' website are no less inspirational; for instance, there's one that says the company "celebrates the way you push yourself every time you press book."
Of course, pushing themselves has been exactly what the ClassPass team has done since one of its early investors and the current CEO Fritz Lanman stepped in to help Kadakia operate the business in 2015. "Our model was working, but it just wasn't good enough," Lanman recalls, during my chat with him when he recently visited Dubai. "One interesting thing about Payal and I, and how we've decided to run this company is that just because something is good, it doesn't mean that it's great. Good isn't good enough. We've always looked for how we could improve our business model, and we'll continue to do that and innovate."
ClassPass started off as an unlimited fitness subscription platform that relied on its affordability and seamless booking experience via the app to lure in customers. However, the initial model, and a few of its consequent pivots didn't turn out to be a particularly solid base for building a sustainable business. "When I took over, the model was unlimited workouts, but then we switched it to selling five or 10 classes a month, which was good, because it brought us to the consumer who wasn't willing to go all in on studio fitness," Lanman explains. "That allowed people to start using ClassPass as a supplement to their running routine or their gym routine. It was successful, but we still weren't satisfied, because there were brands that didn't want to work with us, there were classes which weren't listed on our platform because we had only the cheapest stuff, and we would only let our customers go to their favorite studio three times a month."
With the first pivot – turning from an unlimited offering to just five- and 10-class monthly subscription packages– the ClassPass team still struggled to reach a three-fold target, including enabling studios and gyms to earn, customers to get good value for money, and themselves to have profitable margins as well. The main problem Lanman faced wasn't that they weren't generating profit –they did– but that the way in which they were earning revenue was in conflict with their mission statement. "Studios were cautious to only give us spots that they knew they weren't going to sell," Lanman says. "We had a fixed amount of breakage, which we could price to the consumer, and the more they used it, the less money we made. That was a traditional gym model, and that's how our competitors work. For us to make money, we either had to hope that customers would not work out, or we had to negotiate a lower rate with the studios that we were paying them for a visit. So, we were against our customer, and against our studios."
Therefore, Lanman and the team decided to push themselves again, and come up with a model that would tick all the boxes. And their new credit-based system, which was unveiled to ClassPass subscribers at the beginning of this year, turned out to be a win-win solution for all parties involved. "In our new model, we want the consumer to buy more points. We make more money the more they spend and use their points, but we do let them roll over their unused points, hoping they will eventually use them. The credit system allowed us to get rid of the limits, and it allowed us to work with brands that never worked with us before, and it allowed us to list premium, peak-time spots. We coach studios on how to set prices for their different spots, because now they can have really high price spots, which have high expected value. They couldn't do that before. We take their spots, and convert that into our points system, and then we can add a point on top for ourselves. And that's the model that the hotel industry uses. They take a cut of the revenue they get, instead of making money on consumer breakage."
Lanman explains that he was hesitant to start the now on-going international expansion until he became fully satisfied with the business model- a decision considered controversial among his peers at the time. "It was because our model was kind of working, right?" he says. "These local competitors have been around for a few years, they've been probably doing okay, so it was working. However, the best thing about what we did is that now when I show up in Dubai, the first question is how we are different from the competitor X, Y, or Z. And I say, let me just tell you our story. And it is much easier to tell a new story for the first time, than it is to US fitness studios who have a historical experience with us. They've lived through the old model, they have preconceived notions about what we are. I'm finding the international community really open to hear a new story for the first time. It's really a lucky thing that we didn't turn on all these new cities before."
ClassPass has developed proprietary technology that, Lanman explains, is easily applicable in other parts of the world, but he goes on to reveal a few points he finds crucial when launching new markets. "Google Maps works in every market, and Uber and Facebook work everywhere," he says. "It's just technology, but an interesting thing is that the innovation in the fitness and customer experience space is not really the software. The same machine learning math that will give you recommendations will do that regardless of whether you're living in Dubai, Sydney, or New York City. So, the customization is really on marketing, on how you reach consumers, on how you motivate them and inspire them and convince them to give this category a try. And the innovation in the user experience space is always being taken on by the local entrepreneurs. So, we just need to wait till the market is ready for us, meaning until there are enough local entrepreneurs who have their local businesses that are working. Then, we know that a particular market is ready for us."
Since the beginning of this year, ClassPass has also unrolled a series of new products in the US market, including corporate membership program, and ClassPass Go, a standalone, free app offering high-energy, guided audio workouts. It also kicked off its long-awaited ClassPass Getaways, a series of experiential events exclusively offered to ClassPass members, with a day-long event in the Hamptons. For its new Dubai-based members, ClassPass offers a months' free access to a diverse cross-section of fitness and exercise classes.
At the beginning of last year, and just before the ClassPass team started taking over the world, Lanman officially took over the daily running of the company from its founder and current Executive Chairman Kadakia. Such a change is rarely streamlined in the startup world, but Lanman points out that in ClassPass' case, it happened quite organically. "I think that a lot of entrepreneurs feel they have to be the CEO," he says. "It's an ego issue. Payal and I have had a great partnership from the beginning. She took my money, and not from some probably more famous investor that she could have let invest. She put me on the Board as the Chairman. She then kept asking me to spend more time at the company. And I think that the best part of how we did it is that it was organic. I agreed to spend a year on the ground, helping her fix the business, and improve the model, and by the end of the year, it wasn't even a discussion, because we had already exchanged roles. She was already the Chairman, coaching me and giving me advice, giving input to the management team, and she was focused on projects she was particularly passionate about, but she didn't have to run the business day to day. She was finding that it was getting in the way of her creativity. She is also an artist, and has her own dance company. If she's not dancing, she's not innovating, so all of this was organic. We are really lucky to have that relationship."
As an angel investor, Lanman has also invested in the seed rounds in over 70 technology companies, including Square and Pinterest. In addition, he has also built and successfully exited four companies as an entrepreneur: Wavii, Vamo, Square, and Origami Labs. He was also a part of the team that enabled Microsoft's $240 million Facebook investment in 2007. "Normally, you start as an entrepreneur, then you sell to a big company and work there, and then you become an investor," Lanman says. "I was at a big company straight out of university for almost a decade, did some really cool things there, and got to learn a ton from some really smart people. I was able to be a part of Microsoft's investment in Facebook in 2007, when Microsoft put US$240 million in Facebook. It was really that experience that showed me what a small group of highly motivated, missiondriven people can achieve. When I graduated from university, Microsoft was that one dominant tech company that you go work for. It was like Google, Amazon, Facebook, Apple, all combined. I learnt a ton there about how to build and shift software, how to do marketing, how to run a company at scale, but it wasn't until I became an entrepreneur that I learnt it fully. It's because running a startup of five or even 100 people is a completely different muscle, than running a 100-, 1000-people organization. I really learnt how to do startups by trial and error, and I had lots of errors, I would say. My first three companies got sold, but they were varying degrees of success. One was a great success, one was okay, and one of them was more or less a failure, although it sold as well."
Besides his own entrepreneurial pursuits, Lanman has also had front row seats to see companies like Pinterest or Square get built in his capacity as an angel investor in them- and that, along with his corporate experience, has given him a unique perspective when it comes to leading a business. "I've learnt by doing, but I've also learnt that there are some things that you can't take from Microsoft and apply it in a startup, and vice-versa. You have to really pay attention to how you operate the business, and to how organized you are, based on the stage and the size of the business. I sometimes have to be more disciplined and say, "Look, we are not a big company. We haven't made it yet,' and because of that, despite of me wanting to do ClassPass Getaways and take us into travel, I have to be disciplined and say no to some stuff. We just need to take the thing that is really working well right now, such as this aggregator of studio fitness model, and take it global, and the only additional layering that we can do are gym and some wellness. So, as a startup, I think that you need to be very disciplined, very agile, very honest. But one of the great things that I learnt at Microsoft is not to get complacent. Microsoft has 19, or maybe 17, different businesses that generate over US$ 1 billion in revenue, and they could have stopped after Windows and Office, but they didn't. They kept going. Also, in Microsoft, we could let things that weren't working live longer, but at a startup, you can't. You have to be ruthless about prioritizing, about what's working and what's not working. There's no time to say, "Oh, this is not working, but let's give it another year.' At a startup, you have to think in weeks and months."
It's pretty clear that Lanman's prudent approach to building a business has been applied at ClassPass as well, and that's been recognized by investors too- ClassPass has secured total funding to the tune of US$255 million since its inception in 2013, with its latest $85 million-worth Series D round being led by Temasek, a Singapore-headquartered investment company, and with participation from the Growth Fund of L Catterton, the largest and most global consumer-focused private equity firm in the world. When asked about the company's main advantage over its competitors, Lanman replies, "We've been very quiet when talking about our business model, because we didn't want the 75 international clones to copy our new model. I think it's pretty surprising for them. One thing is our business model difference. The other thing is all that machine learning, and all the data and the reports that we are able to generate because of that."
However, Lanman is quick to point out that no business is invincible. "I've met some brilliant small teams that can achieve a lot, so I'm not writing anybody off," he says. "Really small entrepreneurs can do great things, and I have a lot of respect for them. We take competition seriously. This is a big market, and I don't know whether there needs to be only one player, but I do think that we are a formidable competitor."