Consumers complain, but will they leave?
On April 27, ClassPass, the startup that grants booking access to networks of local fitness studios informed its New York customer base that it would be changing its membership pricing model. Instead of paying $ 125 for unlimited classes each month, existing customers now have to fork over $ 190 each billing cycle and new members have to cough up $ 200. This is the second time ClassPass has raised its monthly membership fee in less than a year; it increased the price from $ 99 to $ 125 last July.
In addition to raising the prices of its unlimited class membership, ClassPass introduced a new tiered pricing model that allows existing New York customers to take five classes per month for $ 75 or 10 classes per month for $ 125 ($ 135 for new customers).
“We have to evolve our business model and adjust prices in order to create long-term sustainability with both our members and the market,” CEO Payal Kadakia said in a statement. “We’ve also realized that a one-size-fits-all membership is not diverse enough to serve all of our members’ unique needs, which is why we have decided to roll out new plans. We wanted an easier entry point for new users who have an appetite for boutique fitness, as well as the ability to keep offering an exceptional experience to those who love our unlimited product.”
Ricardo Rubi, partner at management consulting firm Simon-Kucher & Partners, says it’s not uncommon for companies to change their pricing models as their goals and positioning in the marketplace evolve. While newer companies tend to have simple structures to attract customers and marketshare, he explains, well-established organizations with strong brand positioning often have complex models to derive the most value from their customers.
Originally, iTunes customers could purchase any song for $ 0.99. But as Rubi notes, it changed its model in 2009 and started charging customers $ 0.69, $ 0.99, or $ 1.29 per song, depending on its value-level to the consumer and how much the company had to pay for it.
“When a company that originally wanted to gain a lot of consumers finally gets a critical amount of users with a simple pricing model, they may want to then make that model more complex in order to extract more from that existing user base either in revenue or behavior that helps them reduce costs or helps them grow in other ways,” Rubi explains.
ClassPass seems to be on this trajectory. According to the company, it’s seen usage and engagement on the platform double, and its number of studio partners has surged from 300 in January 2015 to more than 900.
“Prices go up, so there are always price increases,” says Robert Passikoff, Ph.D, founder and president of Brand Keys Inc—a customer loyalty and engagement research consultancy, “but I think my very first thought was ‘uh-oh.’”
The reason, perhaps, was that many compared the new prices to those of upscale gym Equinox, a business ClassPass was trying to compete with cheaper per class costs.
— Sarah Moore (@Sm00reski) April 27, 2016
— Diana Tsui (@chupsterette) April 27, 2016
— Christen Clinkscales (@christen_marie) April 27, 2016
Passikoff suspects that the negative sentiment is the result of customers feeling like ClassPass used a “bait-and-switch” technique and that these tiered pricing products are not what they originally signed up for or have come to expect.
Not only can this make customers feel like they were duped, he says, but it also can cause them to lose trust in the brand; plus, it complicates the customer experience. Rubi also notes that customers are more likely to complain about a product’s price when they feel “locked in” to that product.
“You can’t jump from something that’s very, very simply to something that’s very, very complex,” Rubi adds, however “because you’re going to confuse people”
But how much of this social ranting is just blowing off steam and how much will actually result in customer churn?
Well, it depends.
According to Rubi, having customers complain about a product’s price signals two things: They noticed the price change and they found it so unfair that they were willing to take “soft action.” Although these complaints might not result in immediate churn, both Rubi and Passikoff agree that it offers new or existing competitors the chance to win over disgruntled customers.
A few New York gyms swooped in on this opportunity. For example, Observer reports that David Barton’s New York-based gym TMPL allowed ClassPass users to try its classes and gym facilities for free the weekend following the pricing announcement. The article also says that these prospects could receive a discounted TMPL membership rate of $ 120 per month, versus $ 165 for regular members. In addition, Fast Company shared a Crunch Gym email promotion that offered ClassPass users a free enrollment and May membership if they switched.
At the same time, price isn’t always the main deterrent. Both Rubi and Passikoff agree that the experiences customers have with the brand are generally more powerful. For instance, Rubi says that customers are much more likely to complain about overcrowded fitness classes or not being able to book their desired session than they are about price. And these factors, he adds, or more likely to contribute to churn.
This is where ClassPass’s new business model can actually help decrease customer churn. Rubi says that, in general, introducing class limitations will lower class attendance frequency, which can be a positive for customers attending overcrowded classes and experiencing dissatisfaction.
He also says increasing the unlimited membership price by 100% from its original total ensures that ClassPass is catering to the value of the enthusiasts and providing them with a “fairer” experience. Plus, he says introducing a lower $ 75 option puts a “positive spin” on the new pricing model and provides a cost-effective way for customers to try out the service. Finally, he says offering existing customers a lower membership price than new customers is “clearly aimed” at avoiding churn.