A Billion-Dollar Idea Is In Flux As ClassPass’s CEO Steps Aside

ClassPass has proven that there is an appetite for an all-in-one pass to a smorgasbord of boutique fitness studios. The difficulty is in finding a price that satisfies customers, studios, and its own bottom line.

Now, in another sign of the urgency of that quandary, the company’s founder, Payal Kadakia, says she’s stepping down from her role as CEO and will become executive chairman. Fritz Lanman, former executive chairman and co-operator at ClassPass, will take over as chief executive. Lanman also has two other companies, Doppler Labs and Verst.

In a blog post today, Kadakia wasn’t exactly forthcoming about her reasons. “I have unwavering confidence in his ability to help make ClassPass everything I’ve always envisioned,” Kadakia wrote of Lanman.

The swap comes as the fitness subscription platform is figuring out whether its business model can be sustainable. Early on, its biggest selling point was its affordability: $99 per month for unlimited classes. For the price of a nice gym membership, you could get trained by specialists daily. The ClassPass app was another perk, making it easy to book and cancel classes on a whim (or well in advance). The rate was set low to attract customers and block out competitors.

But the fitness subscription has twice raised its price since launching, first to $120 for unlimited classes in 2015, then to $190 for unlimited classes in 2016. In November of last year, it killed off its unlimited offering altogether, saying that it was unsustainable. Now ClassPass offers five- and 10-class monthly subscriptions, with prices varying based on location. In New York, a 10-pass costs $120 per month.

In order to turn a profit, ClassPass must strike a balance between what it pays out to studios per class and what customers pay for classes. As I reported last year, that means that ClassPass needs users who don’t fully use their subscription package. At the current rates, it may be hard for some users to justify the cost if they’re not using every class.

Each time ClassPass raised its prices in the last two years, it saw some users opt out. In recent weeks, ClassPass has been promoting especially enticing deals to lure former customers back in, like a 70% discount on a membership or a free month of classes.

Still, the company says it’s enjoying its strongest quarter to date. Even after it dismissed its unlimited classes subscription, only 5% of its users canceled, according to the company. A representative for ClassPass says the user base has doubled in size in the last year.

In his new role, Lanman will be charged with both keeping stable and growing a business model that’s a bit unpredictable. Since he began to assist Kadakia in running daily operations at ClassPass 15 months ago, he’s hired an executive team, including a CMO and CTO. In the last year, Lanman and Kadakia have been toying with other ways to expand the business, including forays into other fitness categories like on-demand video and out-of-studio trainings. They’ve also experimented with dynamic pricing for classes, so that students will pay for their class space based on how desired it is (or isn’t).

Lanman has also spent time building out the engineering department. He has a particular interest in developing the company’s machine learning capabilities. He thinks that ClassPass can provide studios with insight into consumer behavior that will ultimately earn them more money. Providing services and software to studios may also be more lucrative for ClassPass than connecting exercise junkies with classes.

Edging into services for studios may put in more direct competition with MindBody, which provides business management software for many of the businesses ClassPass works with. MindBody also helps power the ClassPass app. In the interim, there’s room for ClassPass to provide complementary tools for studios.

ClassPass has raised $84 million to date, including a $30 million round in 2015 led by Google Ventures.

This post has been updated to reflect additional input from ClassPass.