Transcript

How to price your product to scale, w/ClassPass' Payal Kadakia

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Every weekend I felt like I was a little like mini road show where my parents would come with me and I'd have my costume and my cassette and I'd have to like walk in and make sure like the music played all right. That's Pyle Kadakia. She's been on stage since she was three years old.

My earliest memories would be waking up on Saturday morning and going to one of my friends basements and we would dance together with a group of ten girls and learn Indian folk dances, which really connected me to Май культр і коннектимі та май асестрс. Her talent. So what we now call Bollywood style dance.

Was a combination of technical skills with empathy. Indian dance has a lot of skills associated with it from just like regular technical skills, but it also has this beautiful expression associated with it too, which taught me like wow, like you can actually help someone feel something when you express yourself. Dance gave Pyle a form of expression. But she cared about most had less to do with what she expressed. and more to do with how the audience experienced it.

I'm always performing for other people and I even think about rehearsals and even when I think about music, I'm like, how is someone else going to feel when they hear this and when they see this and when they see these costumes or they see us in this formation. Pyle kept paying attention. She danced her way through her childhood. She danced through college and MIT. She danced through her first job as a management consultant.

In two thousand eight, she founded the Saw Dance Company to realize her own vision for Indian classical performance. Never left the audience. Whenever I'm practicing or rehearsing, I'm always thinking about My audience.

It's like same it's very similar to always thinking about your customer. Pyle is constantly asking herself, How is my audience going to react to this move? How is this beat going to make them feel? How are they going to be transported by these costumes or this music or that twirl?

When you're in the spotlight You have to ask those questions. And company founders are also in a kind of spotlight with customers tracking their every move. Hyle knows this firsthand. Бизнь чисні, що фоне і черв клас пас.

The fitness subscription service. Her years watching the audience would serve her well. In this different kind of spotlight, change the rhythm, and suddenly everyone's murmuring and fidgeting in their seats. One step in the wrong direction and you can lose the whole crowd. There was nothing quite like ClassPass when Pyle launched it.

There was no preset choreography, no rhythm noriff on. And that meant she had to make up some of the moves as she went. Improvising in public on many of the things your customers cared about most. For example, and especially How do you know what price to put on a first of its kind product?

How do you gauge what's low enough to entice crowds of new users, but high enough to keep you in business? You probably won't know. For a while. And in your company's early days, I'd argue it's more important to get users in the door. Even when you're taking a very steep loss.

But when you ultimately need to change the price. They'll grumble for sure. A few might storm out. But if you brought enough of them in and you've created something really compelling. Many of them will stick around.

That's why I believe. The price that bleeds your business may save your business. You gotta have incredible talent at every position. It's like this huge push. There are fires burning when you're going out. Can you believe it? Such an idiot. And then you go back to this is totally gonna be amazing. There are so many easy ways. I have no idea what to do. Sorry, we made a mistake. But you have to time it right. Oops. Working out of a free bedroom partners. It just seems absolutely nutball. Ten years later, I'm like, well that's just how you do it. We haven't made it just how you do it. This

is masters of scale. I'm Reed Hoffman. Co founder of LinkedIn. Partner Greylock. And your host.

And I believe that the price that bleeds your business. May save your business. Nearly all startup founders essentially start out deep in the red. It's why I call startups the walking dead. Cost of serving your first few customers is astronomical. And you're in a race to bring those costs down and revenue up.

As quickly. Depending on the price point you set. Each new customer may dig you deeper in the grave, or lift you out of it. That all depends.

On what we here in Silicon Valley call Your unit economics. How much do you spend on that customer? And how much do you make in return? The NBA's

We'll tell you to work out those numbers as soon as possible. In their view, the prudent entrepreneur first proves that the unit economics are sustainable. Once you can say, yes, here's what customers will pay for my service, I'll break a profit by this date. Then you're free to scale, and not a moment sooner.

But Silicon Valley, as regular listeners may have noticed, tends to operate by a different set of rules. Frequently, you have to scale first. And figure out your unit economics later. In fact.

is the prudent route for anyone playing in a winner takes all market. Your competition won't wait for you to figure out your unit economics. They'll take all of your customers while you're still in the middle of your MBA calculations. And then your unit economics are really irretrievably bad. So you have to be prepared to lower prices to unsustainable levels. Give your work away for free, if you must.

And even as you hemorrhage cash, keep telling yourself what many of Silicon Valley's iconic entrepreneurs have told themselves. I'll figure out a way. to break a profit later. I want to give you a sense of how an entrepreneur starts flirting with fatal prices in the first place. It has nothing to do with gutsiness or heedless risk taking.

In fact, the best entrepreneurs that I know are highly risk intelligent. And they would absolutely love to figure out what their unit economics are before they scale. So why don't they? Because the most scalable ideas require a leap into the unknown. They don't begin with a business plan, they begin with an observation of human nature driving a crazy hypothesis.

A nagging thought. That might sound a little something like this. I've danced my entire life. It's such a big core part of who I am. I danced through MIT, I danced through Bain. It was something I just never let go of. And I wanted people to have something like that, that they could run to and go to and feel sort of refreshed in their life. Kyle Kadakia has danced her entire life.

It's essential to who she is, and she wanted other people to have something like that. That was the inspiration for class pass. Her fitness subscription service. For a flat monthly fee. Users can sign up for a staggering variety of fitness classes.

They can dance if they want to. Or do hot yoga. Or spin classes. The sheer variety of classes is precisely what makes class pass such a hit. Since it launched in twenty thirteen, ClassPass has scaled to more than forty cities.

But the variety is also what makes class path such a fiendly difficult thing to price. How do you set a fee for a grab bag of different classes that people use in different amounts? How do you get the whole range of customers and fitness studios to all agree that the price is right? Pyle couldn't answer any of those questions at the outset of her entrepreneurial journey. In fact.

She originally tried to sidestep those questions entirely. Before class pass She had a much less complicated business plan. In 2011, she founded a startup called Clastivity. The idea behind Clastivity was quite simple. Should create an online hub where users could sign up for all types of classes.

Not just fitness, but painting classes, pottery classes. Any activity you could hope to master you could find on Classtivity. In short. It would be a search engine for classes. I was online, I was searching for a ballet class.

I obviously had used things like Zoc Doc, Open Table, Seamless Web. It made sense. I was like, okay, let's build an open table model for classes. Open table Let you search restaurants near you and find well An open table at the right time.

Pile aspired to the same model. Offer comprehensive listings and a pass through service for reservations. It made sense to investors, I raised capital, I hired a team that bet on the idea. So how would clastivity break even? Simple.

Like Open Table or Seamless, she would charge a small transaction fee. And like that. She'd be in business. In fact Pyle was so convinced she'd be in business.

Big business. That our team invested a year and a half in web development. We just wanted it to be perfect because we just thought it would work. It was gorgeously designed. A fully realize vision.

Ready for launch day. Frequent listeners of the show may recall my theory that you never want to release a fully realized vision in the software world. In fact. If you're not embarrassed by your first release, you released it. Too late.

Many successful entrepreneurs have discovered this counterintuitive theory. The hard way. They perfect their product, as Pyle did, and then on launch day. Well I'll let her tell the rest.

June of 2012, we launched Classtivity. Finally open to the public. We had Thousands of classes listed, a beautiful design. And I would say we did about Ten reservations a month. It was terrible.

Yes. She said. Ten reservations a month. I mean, our whole entire business was obviously based on the revenue share we would get off of every transaction. And the business model was built on getting millions of transactions if n you know, through the platform and we weren't doing that.

So you launched with this notion of being the Yelp or the review site and the ability to choose good classes and be informative. And then what you found is people used you as a search engine. But didn't actually book. Right. I hear the story all the time.

From entrepreneurs who failed and those who succeeded. The difference The successful ones keep trying. Not by digging in and assuming they were right, but But by asking themselves what

Over and over. Where did we go wrong? Pyle's team started with the problems they could see on the website itself. Which created another problem. In the middle of the summer, we started playing with buttons.

I always remember I call it the summer of buttons'cause we were contemplating, well maybe it's'cause of the color's wrong or the shape is wrong or you know, we were thinking it might be a UI problem and it wasn't. The summer of buttons. I know a lot of entrepreneurs. Уз. And I sympathize with Pyle.

When your service is underperforming, it's incredibly tempting to hyperfocus on the user interface. Because that's under your control. You can swap out colors and move the buttons around the page for months. Sometimes it creates a breakthrough. More often?

It's a dead end. Interface changes are really useful for improving a user interaction that's fundamentally working. What design can't do It solve a fundamental problem in your business model. All those other entrepreneurs who survived a summer of buttons

They all came to a similar crucial insight. Which Pyle has carried with her. Throughout her career. I think the other thing I've realized over time is that technology actually wasn't gonna solve everything for me. And I think a lot of times when you're like, Oh, I have an engineer to build a site and I don't need to do anything or I don't need to get any other information and that was actually wrong. It was really just see if I can actually get someone to class in any mechanism possible, even if it was manually making reservations, which we did a lot of once we figured it out. Because it wasn't important yet to get to a place where we were building scalable technology because we didn't actually even have one customer.

But ultimately, if you're a visionary like Pyle, you're not just trying to change the way a user interacts with a button. You're trying to change the way they interact with the real world. And she was not about to change the world at the rate of 10 reservations a month. I wanna bring out something Pyle didn't do at this critical junction in her career. She didn't go on autopilot. And believe me.

After pouring a year and a half of work into a website. You'd want to go on autopilot. Instead, Pyle had a moment of reckoning. I remember there was this clear day, it was about two months after we had launched, and I I think I just had to have that honest moment with myself. I was talking to an advisor. We'd money in the bank, you know, so I wasn't actually worried, but the worst thing you could do in that moment is actually just coast and let it fail.

You can't rebuild from a bank balance of zero. You need money in the bank. And the hard truth is you can't even begin to test your theories on pricing until your customers reach some level of critical mass. You can either go the conventional route and get your unit economics to work before you scale. Or you can do it the Silicon Valley way. by bleeding your business with super low prices that massively build your customer base.

But the hard truth is you can't do either of these. with 10 reservations a month. Kyle would have had to build a new runway after that failure to launch. But this is one of my favorite things about entrepreneurship. You have to refine your theory of human nature.

Every consumer internet entrepreneur And arguably. Every entrepreneur, period. Needs to have a theory of human nature. Your product should be based on your theory about how humans behave.

both as individuals and as groups. That theory should underlie your strategy, your product design, your incentive program. Every decision you make. For Pyle, she kept returning to that founding theory that everyone should discover a fitness routine that doesn't feel like a chore. But a calling

Or an escape. You shouldn't force yourself to go to class but You should feel compelled by the class itself. It should be for them. Like dance was for her.

A source of inspiration. But there was a fundamental flaw in her theory, one that she wouldn't discover and never could have known until she really started asking her users. What do I have to do to get you off your couch? And into a class. To me, the hunt was to get someone to go to class.

And I think all ideas were on the table, but I just was like, let's go build something new. We were sitting behind the screen here, right? For a year and a half, we were building API integrations, we were building like scrapers to get the schedule data, we weren't talking to our partners or our customers, and that was also something that we started doing. Pyle started interviewing fitness studio owners. She asked one after the next. How do you get people to sign up for a class? And immediately she spotted a pattern of responses.

Many of them were offering a first class for free. Till this day, most studios do that. А фрі клас. That might not sound innovative, but But free is actually the force multiplier.

That countless Silicon Valley companies have used to achieve scale. It's like the dynamite that they use to blast through mountains of indifference. And like dynamite, freebies are also pretty dangerous. You better know what you're doing. And set off a control that nation.

Freebies are an extreme example of the fatal pricing. That will bleed your business. There's no faster way to get a lot of people in the door than with a giveaway. But if those freebie seekers don't convert to paying customers, then you're just left with hemorrhaging. For the price that bleeds your business to save your business.

You need a conversion path. Pyle devised the perfect experiment. She'd already partnered with studio owners across the city. She had a central view of all their freebies. and occurred to her that she could bundle all of those three classes together into one package deal.

A user could then hop from class to class. and perhaps discover their true fitness calling. And passport. would benefit. By bring him in the door.

Of all those varied studios. We had this idea of packaging it together into one product call the Passport. said what if we could offer a 30 day period where people could go and try 10 classes. And on the other side of it, we would do retargeting, remarketing to get you to go back to these studios. This was you know a new idea. It was great that we had built a lot of like the scheduling software and what was nice is people did like this idea, so we started finally seeing reservations. We had people buying this product. The passport was an immediate success.

User enthusiasm ran so high. That when their thirty day grand tour expired, some users try to cheat the system. They signed up for a new passport under a new email address. Basically They started forging passports.

Pyle was delighted. So we started thinking about this and I was like okay everything is really actually pointing towards a subscription Because people were signing up with multiple email addresses. So we did a survey and 95% of our users said they would buy the product again if they could go back to their favorite studios. Through the power of free Pyle had discovered a whole new market.

You might call it the market for fitness dabblers. To Pyle's surprise, They never discovered their fitness calling through one class alone. They found their fitness calling through a variety of classes. Her vision had come into focus.

And it revealed a picture that she could have never foreseen. They wanted to do a spin class on Monday, a dance class on Thursday, a yoga class on Saturday and I think the other really beautiful thing here was that people realize their potential. And I think, you know, for me as a founder with the vision we always had, I wanted people to find what I had had in dance. In a strange way, this passport product, that was the magic to it. And that was

That still is part of the core of what made ClassPass everything it is, is that people loved variety. And no one realized that. There was this market out there for dabblers when everyone was trying to push everyone to be like complete loyalists. And and there are, you know, definitely both sides, and I think people go in and out of those cycles in their life, but there was only sort of the gym for the dabbler. She could see it. A confederation of gyms of

for the fitness dabbler. One class pass. And ninety five percent of your users. Wanted it.

Now she's on to a truly scalable idea. And she's about to take an extraordinary leap. Into her theory of human nature. When you build substantial wealth through your business, it's often tied up in a single equity position. The upside is real, but so is the risk, and knowing when to act isn't always obvious.

Creative planning works with business owners to build a strategy around concentrated equity. When to diversify, how to manage tax risk, and how to protect what you've spent years. Building. Creative planning where wealth works together. Learn more at creative plating dot com slash masters of scale.

Hey listeners, Bob here. If you listen to Rapid Response on Masters of Scale, you may be missing half the show. Because every Friday we release a second rapid response exclusively in the Rapid Response feed. The guests and topics are just as compelling and timely from Ford CEO to NASA's administrator to the lessons from The Devil Wears Prada. It takes about 10 seconds to find, just search rapid response wherever you listen to podcasts and hit follow to make sure you never miss an episode. I hope to see you there. Oh

Humans will never be more intelligent than AI. There can be two types of companies. Those were great at AI and those that went out of business because they weren't. How do we build a future? That is human centered. I'm Rana El Chaoyubi.

On my podcast Pioneers of AI, we answer that question and so many more. As an AI scientist, entrepreneur, and investor, I know what it takes to build AI that works for everyone. Every week, I sit down with the pioneers shaping our future. And we take you behind the scenes of the AI that's transforming our lives. Find pioneers of AI wherever you tune in. Scale entrepreneurs don't just posit a theory.

They go one step further and ask. So how can I use this thir? To change human behaviour. In Pyle's case, she was asking. If my mission is to get everyone to lead a more fit lifestyle,

How do I facilitate that? Now most entrepreneurs take the easier path to scale. They play to our vices because vices are actually much stronger than the virtues. So for example, convincing someone to floss or convincing someone to go exercise is actually much, much harder than to convince them to watch something scandalous. You know. The equivalent of people who slow down to look at the burning car on the side of the road.

One thing I've been saying for the past thirteen years is that I tend to invest in companies that play into one or more of the seven deadly sins. Facebook plays into our vanity. LinkedIn. Greed, naturally. I could go on. But the point is

You don't just want a trigger for user behavior, you want a hair trigger. Now Pyle might not be able to tap that hair trigger response to exercise. Because that's just human nature. She's trying to rev up. Virtuous behavior.

Which is much harder to get started. But the hardest ideas are often the most scalable, and it's one reason I admire Pyle's relentless pursuit of this business model. She'll have to fight to get users into the habit of exercise. and their habits will shift unpredictably. Which means her prices

Will be highly unstable as well. And even if she compels users to try out a few classes. That will only solve half her problem. There was another problem, which was that people weren't going back to these studios. That's right, the other half of her user base.

The studio owners. We're essentially asking What's in it for us? Would any of those users taking advantage of our first free class Ever return is paying customers?

And that was ultimately the promise we had made, and these studio owners were giving us these classes for free. So long term it wasn't great for our partnership with them. But the good side of this product was we realized people loved variety. So Pyle had to make a decision. Would she continue selling a thirty-day passport?

Or would she remove that expiration date and enable users to take a variety of classes Indefinitely. In essence. Should she rebuild? Her business model.

That wasn't an easy decision. Because clastivity was finally coming out of the red. They were making money. It was a simple business model based on a small transaction fee for each booking. We actually were 100% profitable because we weren't paying the studios. But at the end of the day, I was fast forwarding in my head and I'm like, this just feels like a bad deal site, you know, and a bad program.

I didn't want to change people's lives for a month. I wanted to change people's lives constantly and and the only way to really do that was through a product that was gonna have more retention. And so we decided to move into the subscription. And I think, you know, my team was like I think they were retired. I think people have to remember this was three years in. Right. And I mean at this time we were also making every reservation manually. We all stayed up till two three in the morning every night. A reservation would come in. We didn't build the technology early on. It would literally send one of us an email. We would go in. onto the site, make the reservation and send a confirmation back to the customer. And so all of us were doing that. We were all doing customer service. So there was a little bit of that of people just being like, Well, we finally are there. Like why why do we need to change?

And what we ended up agreeing on, which was fine because I didn't know, is we actually didn't know if the passport would become legion. For the subscription. So we decided to not completely let go of the passport at the time. And then when we launched class class, we realized it was just tweaks to it, right? So from a engineering perspective, it was the passport, it was just with You could go back to a studio, okay, great, and it was a monthly subscription.

So in twenty thirteen, one year after the launch of Clastivity, Pyle launched a service that would become her second startup. She called it Class Pass. For a$99 a month membership fee, users could sign up for 10 classes a month. They could dabble away.

Indefinitely. And if that doesn't sound like a radical departure from the passport, then consider the user response. Three months into the subscription, the revenues of ClassPass overtook the revenue from the Passport. And I think the other part was they started getting these letters. From

That were just about their lives changing and that they never enjoyed working out and they look forward to working out and they felt more confident, they got a promotion, they found love. Like it was this interesting thing where I realized I had changed people with the product and that was really what I had set out to do. It was as if her users had said. Forget classtivity. Forget the passport. Forget all of the work you've done over the past year. We now W

Class Pass. When your users send a clear signal to scale a product You have to jettison any other products that might steal your team's attention. We talked about this in detail on the episode called The Big Pivot. With Stuart Butterfield from Slack.

Because shuttering a legacy product is never easy. But it's easier when it's failing. It's much harder when you've seen modest success, like Pyle did with Passport. That's when you'll really struggle to throw away your hard work and that modest stream of revenue. Sometimes a blunt talking mentor can help you rip off the band-aid.

I remember talking to another advisor and he told me to get rid of the passport. He was like it's crack to you guys. I mean it was Kind of funding our business in a way, right? Because we were making cash from it. It took me about three months to kinda come to terms with that. I felt like I had given them what I wanted, right? Like that mission inside, like it literally was realized in the subscription product. And so decided to shut down the passport and classtivity. And I remember him saying to me, you know, the passport will be a chapter in your book. And you know, in the halls of class class today, I mean, the passport is like a data field, right? Like my engineer's like, what was that? And I'm like, right. He was totally absolutely right.

So with classtivity vanishing down the memory hole. Pyle could give her undivided attention to her newest venture. Class Pass. She had hopeful investors. She had wildly enthusiastic users.

And the thank you letters to prove it. She was poised for a rapid expansion into new cities. She would get to test her theory of human nature on a global scale. Only one piece of the puzzle remained. The price

At what price could she enroll enough subscribers? to this new model of fitness. She had an inkling. Of what users might pay. So we have this product out in the market, 99 for 10.

So for ninety nine dollars. Her users could take up to 10 classes each month. Why ten? It seemed generous enough. The average user took five classes.

So the average user probably wouldn't even notice the cap. Or so she thought. You know, one of the things that was interesting is Ten classes actually to some people was impossible.

And to some people it wasn't enough. And we also started getting people who were sometimes churning saying, oh, I only went to eight. And I'm like, this is so interesting that people were like tying themselves to this number. Notice how she didn't expect users to tie themselves this number. In fact They tend to tie themselves up in knots when you try to change that number. This is the Gordian knot of user expectations.

And there's no easy way to untangle their demands. Almost any move you make. After you've slapped an initial price on your product. comes with a risk of sending your customers scattering. When user sign up for that price

The one you probably used in marketing, the one that your earliest fans decided was worth it. You've sort of made a promise. At the very least, you've solidified a key part of your company's brand. Think about Subway Sandwich Shop. And they're inescapable earworm.

Seven dollar foot long. Just doesn't have the same ring to it. So when you hike your prices. Even by a negligible amount.

Some of you users Will feel like you've broken your promise. At that point. It's personal. And it can drive even your most passionate fans to come at you.

With pitchforks. So why risk it at all? One word. Competition. Hyle noticed them closing in.

It started with a successful experiment that class pass ran. To test their users' appetite for classes. And so we kind of wanted to once again experiment with this idea of what if we like didn't put a number on it to see what what would actually happen. And so we launched this summer promotion called Unlimited Summer. Oh Where people could go to as many classes as they wanted to

And we saw people love it. This flat monthly fee Offering unlimited access is another classic pricing model to bring customers in the door. There's no faster way to get them to commit than to create a subscription. Especially one that auto renews.

In some cases, monthly fees create a cash cow. They feel like a bargain to customers. While actually creating profits. In other cases, Monthly fees with unlimited access.

bleed your business in the short term. But save it in the long term. after a crucial price hike. Pyle doesn't know yet. What our unlimited pricing will do for our bottom line.

But she knows it'll give her the critical insight. She needs in the customer behavior. And from that She can make sure her price was right. For now though.

It was working. Demand had surged, but Customers love the offering. It seemed like the right time to start around of funding. And then we announced our series A, our twelve million dollar round.

And it was a great moment and I was in hindsight. I'm like, I don't know if I would have done that because what it did is it spurred competition. In every market. Pyle series A financing real money. But it also brought in the wolves. Class past competitors started popping up all across the US.

And they each had the benefit not only of Pyle's idea. But also a fresh start. They weren't beholden to those promises of pricing of number of classes that class pass had made. Everyone was copying the unlimited model, right? And so it became a little bit hard to Go back on that.

Imitation is the sincerest form of flattery, right? If you pilot an idea and everyone copies it. It's a good indication that you're on to something. But it also means two things. One, if you don't lean all the way into that idea.

Your users might drop you for the five, ten, twenty similar products that have popped up. And two. You better start sprinting. with all those competitors fielding the unlimited model. Pyle found herself locked into it.

Not only that. She had to both perfect that model and get it up and running before any of her competitors did. So we went to the ground and you know, we had to fight our own battle too. Say let's hit the pedal of the metal, let's go as fast as possible. Yep, absolutely. For class pass, that meant staking flag in the national fitness landscape. City by city they decided.

Which they could not afford to lose. Me and my co-founder sat down and were like, let's just go. And we decided it was called Operation 2015. Twenty cities. by January one of twenty fifteen.

So in two and a half months. we decided to launch twelve additional cities on top of what we were going to. They were definitely gonna need a bigger team. I remember that whole weekend we just spent, you know, interviewing sales folks. We sent them out into the markets and we did it. And so by January one. we were in twenty markets.

Twenty new cities. 12 of them in two and a half months. Make no mistake. Kyle and our team sprinted. We needed to make sure like the studios we were getting on board were right, so we had someone go and try them. Pyle basically airdropped employees in a new cities like soldiers. We always just send people in. Soldiers who could reach personal line around the clock.

You have a problem, like, you know, call my call myself. Everyone at Class Pass sprinted for those grueling two and a half months. And when they looked up? They'd done it. They were in twenty cities.

And their competitors? Mostly left behind. But the problem with being that far ahead in uncharted territory There aren't any footpaths you can follow or markers you can orient yourself with. Pyle had latched onto the unlimited model.

But she hadn't yet figured out the unit cost of each bundle of fitness classes. She'd made a big promise to her users. They hadn't made any promises in return. Some took The unlimited offer, seriously.

Attending so many classes, they did more than bleed Pyle's business. They caused a hemorrhage. For them, class pass was a bargain. Others barely took a class. For them, it was absurdly expensive.

And this split in behavior. is one that many businesses grapple with. How do you set a single price when usage patterns vary so wildly? How do you know who your lawyer users are? How do you know just how much they'll pay?

What are their breaking points? You cannot answer these questions. by running limited time only experiments with your pricing. You have to go all in to really understand how users will respond. And Pyle had just grabbed this bull by the horns.

ClassPass was a rollicking success. Now she had to figure out how to sustain that subscription model. Indefinitely. The price that bled their business Could save their business.

If she gets the numbers right. This is when we went through a series of price changes and we spent, you know, the next year and a half doing it. And look, there's no blueprint, but I also didn't want to be a gym membership in the sense of like making someone sign a year long contract to really be able to benefit from people not going. It was a little bit hard because we were kind of flirting with like two different models and trying to change people's behavior. Pile was torn. Smaller bundles of classes for lower fees? Or unlimited classes for a higher one.

They just didn't have enough data to decide what was going to be the most sustainable. ClassPass tried to run both models simultaneously. So we ended up launching a five pack and a ten pack, but what that meant Because we knew the lower usage users would go on the five and the ten, the unlimited plan had to go up even higher. And this process of fine tuning prices

Rarely goes off perfectly the first time. We did a small price increase and it wasn't enough, which is It's really hard to do. Right. When you know you put it out there, it's like a hard moment. And then it didn't work because we were turning out a lot of the users who weren't going to enough classes because the price was higher. And we were trying to find this price point where maybe it was low enough where the lower usage users would stick with us. It just It wasn't happening. So after the first price increase.

I think I I started realizing I'm like we're just gonna keep having to increase price. So the way Pyle sees it. The price changes were a difficult but necessary part of keeping ClassPass available to more users. Keeping it running for that matter. Her customers felt differently.

After the unlimited subscription price went up for the second time. One user tweeted. Raise your hand if you've been personally victimized by class past. No no. Canceling my membership now, tweeted another.

To be clear. ClassPass was not the first company to experience that particular kind of customer riot. And I definitely won't be the last. When Netflix raised its subscription prices, customers were outraged, not necessarily about the new price tag, but how it made them feel. I can definitely afford it. One angry ex customer said.

but I'm dropping them on principle. When last pass The popular password storing app. raised its premium prices by just one dollar a month, a customer tweeted. This is a slave in the face. Some amount of backlash is inevitable.

It's just human nature. No one ever wishes they could pay more for a service, no matter how much they love it. And what happens frequently in growth cases like ClassPass. As you start With a business model that's unsustainable.

It's the only way to hook that vital set of early users. But if you stay with that business model. You die. This was also true of PayPal.

was tens of millions of dollars each month. That was considered crazy at the time. Now it's a bit more common. For example. Uber's burn rate is considerably higher.

Eventually they'll have to change their pricing, either how they pay drivers or charge customers some years down the road. It's hard to predict. And I bet Uber's executive team couldn't tell you right now either. It's the nature of working in fields. Where the rules are still being written.

At PayPal. One of our early promises was simple. Add a friend to the platform and you'll each get ten dollars. It was an easy effective way to build out our early user base. But eventually it got so expensive that PayPal's co-founder, Peter Thiel, wanted to scrap the entire idea.

And break that early promise. In order to keep costs down. But from my point of view, there was a way to keep that sparkly eye catching promise intact. We just had to dim the sparkles a bit. We still gave users and their friends that gift of ten dollars each.

But to get it. You had to give us a little more. You would have to enter your credit card. Validate your bank account. and load fifty bucks into your new PayPal account.

We kept that promise of ten dollars. You just had to work a little harder for it. And this brings me to my next point. When you're making the critical transition From bleeding your business.

To saving your business. You have to be hyper aware. Of avoiding a mob reaction. And mobs. rally behind very simple statements.

They're gonna get fired up if they read. PayPal stops giving new users the money that they promised them. But they're probably not gonna linger for too long on PayPal asked for slightly more information from new users. But

continues to give them the money that they promised them. You have to know what is it about your service that your customers find invaluable. Protect that. And that's the only promise that really matters. Pricing riots die down.

And if you have a service that customers really love. They are eventually gonna let you out of the doghouse. Take it from Pile. Yes. The uproar about class past pricing got very loud and pretty mean.

But at the end of the day. We lost very little of our members. Some of them, I think, supplementated their class membership, so they stayed on the the ten pack and ended up getting a gym membership. So Pyle inadvertently catalyzed your reaction. that was ultimately at the heart of your company's mission. Get people exercising. Exactly as often as they wanted.

Some of your users were sticking with ten classes a month. Maybe so they could try out Taekwondo or spin or dance every once in a while. But taking the money they might have spent on an unlimited pass And spending it at their local gym instead. And the entire process.

The price tweaking, the different models, the customer reactions. Tot pile a lot about the alignment of mission and money. And I think I've learned this lesson. Whatever your vision is and your business model need to align when you're realizing that the business is hurting at the expense of your mission actually working. That's not a great

Set up. And chances are, if your vision and your business model are truly aligned. You've created something you love. Meaning there's a good probability that other people out there are gonna love it too. And if they really do love it.

and you've built something both innovative and invaluable. Ляка нефлікс, орс пас, орс. Your users will put down their pitchforks. And they'll plan their next workout. while binge watching an entire TV season.

Because for Pyle, it's something about the feeling that class pass offers that's important. It's a feeling she's ready to chase alongside her users. It's a feeling of being limitless, right? It's a feeling of I can work out and I can go to class. It's not just about like the prices and if it's the product isn't limited. And we're still on that journey of making sure that the product feels that way. And I think that's on us to figure out because that is what our core mission is. I'm Reed Hoffman.

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