Industry Quick-Summary: Event Subscription Startups

I recently subscribed to MoviePass, a $10 a month service that allows a card-holder to see as many movies a month as possible, provided you don’t go and see more than one movie per day. On the surface this seems like an incredible deal – a movie ticket, depending on where you live, is probably approximately $10. So in other words, when you see one movie a month, you are essentially breaking even – this math isn’t that hard to figure out.

The obvious follow up question, and one I have heard from basically every person I have told about MoviePass, is “So, what’s the catch?” And it’s a question I struggle with myself. There are some hang-ups to the service: only seeing one a day prevents you from taking in double features (does anybody do that anymore?), you can’t buy your ticket until you are actually at the physical location, you can’t buy tickets ahead of time, you miss out of some big events, etc. The bugs, however, are not really that big of a hassle. I was able to use MoviePass when I saw Black Panther on the opening weekend, which was pretty incredible. All it took was for me to be smart enough to know what theaters and what times were going to be less crowded than others.

All-in-all, I have been very satisfied with my MoviePass subscription. But I love going to the movies. I spend some time in this space talking about the movies that I go to. I enjoy movies for a million different reasons. But if you are someone who doesn’t like movies or only likes them a little, MoviePass might not work for you. The question you have to ask yourself is whether or not there are twelve movies you think are worth it to see over the course of one year. For me, I would probably like to see at least twenty movies every year. But I am not sure that I am in the majority with that opinion. During a recent survey, 21% of American adults said that they like to go to the movies at least once per month, if not more. The remaining 79% of adults, either go a few times a year or never at all.

This probably shouldn’t come as a large surprise – the heralded downfall of the American moviegoer has been trumpeted by members of the media for quite some time, and for good reason – fewer people are seeing movies and movie theater chains are not doing as well as they used to. Developers now are not as certain about anchoring a development project around a movie theater as they once were – it is thought of as an addition, not a main attraction. If one were to wear their most negative-shade of glasses, it would be easy to see how doomed cinemas were.

However, enter MoviePass. This new product provides an opportunity to open up doors for more people to see more movies. It also creates an avenue for to push more product (see: movie posters and trailers straight to subscribers inboxes) to a more captive audience. It’s uncertain whether MoviePass is here to solve the problems of giant cinema chains, cause them more headaches, or do something in between. One thing is for certain: they are doing something that could probably provide a template for startups moving forward.

Boxed-In

The idea of a subscription based company is nothing new – the idea has been around for quite some time. In some instances it goes by different names, such as membership-model or club-model. One of the recent subscription-based movements that has taken off in the past couple of years is the retail subscription model. Notable examples include: DollarShaveClub, BlueApron, FiveFour Club, and many others. These can be broken down into several categories: Beauty & Cosmetics, Women’s Apparel, Men’s Apparel, Personal Care, Child & Baby, Pet, Beer & Wine, Vitamins, Coffee & Tea, Leisure, and meals (however, this category is a hybrid we will discuss more in the future.

Even as subscription e-commerce startups offer an increasingly diverse array of products and services, from apparel to pet care to leisure activities (as detailed in CB Insights’ subscription market map), investor interest in the space has wavered over the past few years. The space has witnessed notable exit activity in recent months, including the acquisition of beauty subscription startup GlossyBox by The Hut Group in Q3’17 and the acquisition of France-based subscription pet care products startup Animalbox by Doctissimo in Q2’17.

However, it is undeniable that subscription “boxes” has exploded in growth over the past several years. Technology is not the underlying reason why subscription businesses are growing; technology is a catalyst for this growth. The use of technology in the explosion of subscription businesses is only a reflection of demographics of the customer base it's attracting. There are about 5.7 million subscription box shoppers in the US today according to Hitwise. They overindex for: College Degree, Liberal politics, Female, Household income exceeding $100 thousand, and Children ages 3-5 in the household. That's not to say that all or even most subscription customers fit the above demographics but it does mean that people who fit those demographics are much more likely to be subscription customers.

The most important reason for subscription companies' growth is that retail tastes have changed. It's not enough anymore just to give consumers what they're looking for, if they know what they want they can get it with a click any time. To get a consumer excited, you have to offer something they're not expecting and subscriptions are an ideal instrument for surprise. They also help take away the uncertainty for some consumers when purchasing a product – when it comes in the subscription, a customer knows that it can be highly regarded and is probably a smart investment. Successful subscription boxes are adapting and personalizing their boxes to each individual consumer.

Subscriptions don't go on forever, eventually consumers end them. The key to enhanced profitability for subscription businesses is selling products that are good enough to lengthen the life of the average subscription. he cost of doing that, what's called Customer Acquisition Costs, is one of the most important keys to a subscription company's profitability and success. Google search is the biggest source of customers for subscription companies and social media is second.

Think Outside The Box

Subscription boxes are really just the beginning. That’s the market that has taken off and has seen some serious success for the aforementioned reasons in the section above. But there are so many other subscription models that need to be paid close attention to. Subscription-based events have already started to catch some steam. However, it’s not the typical “event” that sees some of the best success. The most prominent example is ClassPass.

ClassPass is a new-age gym membership. The “event” in question that is being subscribed to is the gym class / fitness lesson / yoga hour / cycle class / etc. that ClassPass members are paying to attend. Instead of having to pay membership fees to a bunch of different gyms and yoga studios and fitness centers (and these memberships can be wildly expensive), a ClassPass member pays a fee to ClassPass and then has a certain number of classes from various gyms that they can take. There is a maximum number of classes that a member can attend per month and the Company enforces a class cancellation fee for whenever there is a no-show that signed up through ClassPass. As a result, by December 2017, ClassPass has booked 45 million reservations.

ClassPass announced a $70 million Series C led by Temasek Holdings in May 2017 that valued the company at $470 million. The Company, founded in 2011, has grown like bananas because they are providing a vital service that people want and need: variety and accessibility in a person’s fitness regime. This subscription allows a member to personalize their fitness experience while at the same time potentially saving money.

ClassPass utilizes a credit / tiered based pricing system that allows for a user to spend a certain amount of money and receive a certain amount of classes. The Company partners with studios and helps provide “incremental revenue”, advertising the ability of ClassPass to fill up empty spots in existing classes with high-quality clientele.

The average price for a monthly membership at a specialty fitness studio is typically 2 to 4 times higher than that of a traditional gym. According to the IHRSA, over a third of the $25.3 Billion generated by the industry in 2015 in the US came from these specialty boutique fitness studios. While there are few chains and franchises that have emerged over the last few years such as Orange theory, SoulCycle, Corepower Yoga, CrossFit, Pure Barre etc. the very large majority of this segment of the fitness market is fragmented and these fitness studios are typically run by a local small business owner with one location. The #1 challenge faced by these fitness studios is often customer acquisition. They typically have a fairly fixed operating cost to serve their customers and offer a certain number of classes each day and these typically include rent, utilities, teacher & staff pay

For the longest time, the fitness industry’s business model has been based on selling monthly memberships to consumers while maximizing the number of subscribers with a membership size cap that is a high multiple of the actual capacity of the facility. This is driven by the fact that not everyone is present at the facility at the same time and more importantly many members end up paying for monthly subscriptions that they do not use or that end up being underutilized.

When ClassPass’ program was first rolled out, customers were able to take advantage of unlimited  classes all throughout a city and all throughout the day. They were no long restricted by financial or timeliness constraints. Getting access to these classes was convenient and made easy through the web portal at first and eventually through a dedicated app on iOS then on Android. With the integration with Mindbody (the dominant software system used by a large portion of fitness studios in the US), consumers could have a smooth experience once they showed up at the studio.

ClassPass worked seamlessly with the software system they used to manage their studio and created very limited overhead for them while enabling them to restrict which classes were available to ClassPass users or the number of ClassPass users allowed per class. This level of control which was introduced over time helped strengthen the relationship with studios which could opt out of the relationship at any time. When talking with fitness studio owners, you’d often hear that they wish they’d receive a higher revenue rate per class from ClassPass but, they are often worried and skeptical of these 3rd party “middlemen”. These companies significantly challenge their business model and ultimately capture a slice of the pie by being an intermediary between consumers and providers without always making the pie bigger and therefore resulting in less overall revenue to be shared among the fitness studios.

In order to become more profitable, ClassPass need to change the way its pricing model worked. In order to do that, it eventually dropped the “unlimited” plan altogether in favor of monthly, frequency-restricted passes. This meant that ClassPass was getting rid of its Super Users – those folks who were generating way too much cost compared to the amount of revenue that they were bringing in. This mean that ClassPass was no longer the affordable option. The change, however, has not slowed down growth.

Given a certain number of users per month, ClassPass has a precise fixed revenue based on its set membership cost but a variable cost structure given that it pays its studios per class attended. ClassPass negotiates the rate it pays to studios individually. Their standard formula is to look at the cost of a 10 class pass at that studio and then set its per class pay rate to 50% of 1/10th of that cost. As an example, in Seattle the average 10 class pass cost at studios is around $150. This means that ClassPass would typically agree to pay studios who charge that rate $7.50/class. The more active ClassPass users end up being, the less money ClassPass makes as its payout to studio partners ends up increasing. The average ClassPass user ends up going to 1 to 2 classes per week on their unlimited membership.

One extra class per user per month can mean the difference between making money and breaking even. In other words, one extra class per user per month beyond that could mean bleeding money and going out of business over time. This “unlimited model” only works if there are enough under-utilizing members to subsidize the over-utilizing ones (Just like the traditional Insurance model). While the unlimited membership model proved to be a priceless “marketing strategy” to grow by a factor of 50 in 2 years, it just was not sustainable in the long term. ClassPass therefore had to make a major pivot by sticking with a monthly ongoing subscription at different price points for a specific set number of classes per month: i.e. either 3, 5 or 10 depending on the plan. The best thing about having a limited number of classes is that it builds in a way to prevent against profit loss. There is no way for a customer to sign up for too many classes per month and bleed the Company dry. This allows for the Company to actually promote the usage of fitness facilities.

The business model is still evolving. The valuation of the Company has bounced around and is still trying to find solid footing, from what some reports would lead you to believe. New leadership promises of more sustainable and healthier growth in the near future. Ultimately, ClassPass is one of only a few pioneers in this space, so it is hard to tell how successful a company like this could end up being. This is also probably the best comp for MoviePass moving forward, more than any other media startup.

Data Everything

Subscription services explicitly claim that they are providing a better, more personalized experience. Consumers will give up personal information if they think they'll get a better experience for it. Most subscription services rely heavily on consumer data in order to provide a more perfect solution/product. Some of them also rely on this data to help generate revenue and improve their business model in the long-run.

A key component of the MoviePass business plan is that they are able to sell their user data to movie theater chains, movie studios, and other advertisers who might be interested in learning more about a movie-goer and the audience that sees a certain movie. In the advertising universe, the more data that can be acquired, the better. MoviePass also sells advertisements on their platform and through their built-in email lists. The companies that are buying these advertisements know that they have a captive audience – if someone is signed up for MoviePass, you know they are more likely to see some movies.

It should be noted that the use of this data has come under some heavy scrutiny as of late. Concerns about what they are doing with this data have been brought up by various media outlets. The CEO of MoviePass, Mitch Lowe, has been so open about the plan to monetize MoviePass user data that while attending the Entertainment Finance Forum on March 2, he titled his keynote presentation “Data Is the New Oil: How Will MoviePass Monetize It?”

During the presentation, Lowe opened up for the first time with specifics about what kind of user data MoviePass is interested in — and instantly caused a frisson of anxiety among users. As first reported by Media Play News, Lowe told attendees that the company planned to track users’ behavior before and after the movie — by tracking their movements to and from the theater.

The company soon issued a follow-up statement in which it stressed that the data tracking was being used only for internal purposes and would never be sold to an outside company. “We will not be selling the data that we gather,” the statement read in part. “Rather, we will use it to better inform how to market potential customer benefits including discounts on transportation, coupons for nearby restaurants, and other similar opportunities.”

The actual reaction to this news from the customer base is yet to be seen. The Company has still, for the most part, maintained serious growth over the past year and has not shown any signs of slowing down. However, it is possible, in the wake of the Facebook data scandal that happened in March 2018, that data usage like this becomes more taboo and there are even legal ramifications that could potentially occur. This might hurt MoviePass’ business model altogether, or it might just be a tiny hiccup. It is way to early to be seen.

Conclusion

In summary, there are just way too many variables at play to see if these event-based subscription companies are going to have a lasting impact on the American economy. There is a lot of potential for these companies to shake up how some of life’s better experiences (working out, going to the movies, attending sporting events) are taken in by the American consumer. And it doesn’t have to stop at entertainment events – I could see several subscription services sprouting up for other types of events that happen frequently, such as parties, sports, and others. The opportunities are endless. The people that are starting these companies are true visionaries in this field, but they might just have bad eyesight.