“We should invest in people not ideas. A good idea is often destroyed by bad people and good people can always make a bad idea better” Simon Sinek.
One of the topics that we heard during our visits was to invest in people because ideas usually change. In the startup world, this is usually referred to as pivoting. Which means making the crucial decision to change your business model to satisfy your customer needs. If a company does this successfully they can grow exponentially such as Netflix when it switched from a DVD subscription model to an online streaming platform. In here I am going to talk about the moments when a company should consider pivoting as well as talk about the story of classpass which has done two crucial pivots.
A company should consider pivoting only when it is absolutely necessary. There are many reasons why it might be necessary for a company to pivot, However, in this article, I am going to focus on 3 reasons. First, There is limited or no response from the marketplace. You might think your product is great but if there is not enough interest then a pivot might be necessary. Second, One aspect of your business makes most of your money. If only one aspect of your business is profitable you might want to focus on that and capitalize on what is working. Third, your perspective changed. This might mean that after you launched a product the incentives don’t align with your initial vision or that your goals have shifted. These along with other circumstances can open an opportunity to pivot
A quick summary of ClassPass:
Who: Paypal Kadakia (Founder and Executive Chairman) and Fritz Lanman (Lead investor in Series A and CEO).
What: ClassPass is a two-sided platform that connects customers with studios.
Where: Founded and headquartered in New York City. It is now available in 50+ cities across the globe.
When: Founded in 2013
Why: To makes finding and booking fitness classes effortless.
In the beginning, Classpass offered an unlimited subscription plan. Where customers would pay and they will be able to go to any classes they wanted for the months. Classpass makes money by having members in their subscription and it pays a studio every time that one of classpass members attends a class. As you can see these impose a few problems, classpass mission is to get as many people into studios. However, the economic incentives did not match with their mission. Under this business model, classpass was incentivized to get as many subscriptions as they could that used the least amount of classes because that would yield the highest profit. This is why on November of 2016 Payal Kadakia who was the CEO at the time sent an open letter to the community explaining why Classpass was discontinuing the unlimited plan. She mentioned many of the reasons mentioned above and others (click here to view the letter).
Once they decided to switch subscription models Classpass released packages of 10 classes and 5 classes per month with the option to buy add-ons for those that want to work out more often. That business model lasted for around 2 years. The problem with this business model is that it valued all the classes at the same price. However, in reality, some classes are more expensive than others and some are at peak times. This is why Classpass rolled out the credit system this year. This allows customers to purchase a certain amount of credits each month and it allows studios to set the price of their classes. This has allowed Classpass to increase its inventory because many studios weren’t willing to put their best classes or those during peak time because they didn’t feel they were being fairly compensated. Also, this new credit system allows users to use classpass while traveling which wasn’t possible before because each city had unique pricing. It will be interesting to see how Classpass pricing strategy keeps changing to better align the company’s mission with economic incentives.
I believe Classpass is a great example of how a company has been able to pivot effectively. It is also very interesting to see how companies that are using subscription models usually have difficulties setting their prices and they need to switch their models a couple of times before they find the one that works best. Some examples of this include movie pass, Netflix, Ride pass(Uber), and many more. Also, it is important to note that pivoting doesn’t always mean a complete change in the business model such as Slack changing from a gaming company to a cloud-based team collaboration tools. It can also be a change in the pricing model like what Classpass did. This goes more along the lines of what Eric Ries describes as a pivot “A change in strategy without a change in vision”