On Mindbody, Classpass and the battle to become the Uber of fitness

Over the past few weeks I've received numerous phone calls from Investment Analysts, who work for Institutions investing in public companies, wanting to get my opinion about Mindbody. As you may be aware mindbody IPO'd back in August. 

My standard reply has become that I'm not really in the business of providing industry analysis to investors looking to allocate tens of millions of dollars in capital, but if they want to join me on Strengthen your studio, our podcast about the business of yoga, it would be an interesting discussion and I'd love to have them as a guest.

Then they tend to not want to talk to me anymore so I thought  post on the matter would be nice.

While mindbody provides software and payments processing to small businesses in the "health, beauty and wellness" space, what's most notable about them right now is that lately they have been pushing the mindbody connect app very heavily.

They've gotten so aggressive with pushing the app that it's downright intrusive and degrades the student experience for their customers. Visit the schedule of a company that uses mindbody, they interrupt the flow and ask you to download their app. If you register for a class at a business that uses mindbody, they send you a text message asking you to download the app.

Why is this?

It's one thing to want to provide an app as an option for people to interact with your system. We do the same thing. But why would mindbody care so much about people using and downloading the connect app? Why do they care if you register for yoga class or book a massage via the company website, or via their connect app?

The answer lies in their S-1 filing and understanding what's going on in the technology industry as it relates to investment dollars and company valuations. Throughout mindbody's S-1, which shows they are losing about 50 cents for every dollar in revenue ($70 million in revenue, $35 million in losses), and that they make 37% of their revenue processing credit cards, they repeatedly refer to themselves as a "marketplace". Over and over again, they pound the drum that they are the worlds largest marketplace connecting wellness providers with practitioners.

As a company with $70mm in revenue, $35mm in losses, has never been profitable and is currently valued on the public markets at somewhere around $750 million, being a b2b SaaS company is simply not enough for mindbody anymore.

Small potatoes people! 

What's big now in the tech investment world is Marketplaces.  Everyone wants to know what's going to be the next "Uber of __" or the next "Airbnb of ___". 

Which brings us to ClassPass. 

What ClassPass is trying to do is to become the Uber of fitness. For a monthly membership fee, ClassPass members can visit any participating gym/studio/box up to three times per month. Why I believe this matters in the mindbody discussion is because classpass, who has been around for only 2 years, is currently valued in the private markets at $400 million, on reported revenue of $60 Million. Because they're private, what we don't know is whether they're profitable, or if they're losing money, and if so, how much.

But in any event, private investors are assigning more than half the value, and they're only $10 million less in revenue than mindbody, who has been around since 2004.

I don't think these numbers have gone unnoticed by mindbody, and I think the stage is being set for mindbody to attempt to compete with classpass, and in the process start competing with their own customer base. I also think acquisition is possible but I don't know that mindbody can afford classpass at this point. 

However it plays out, mindbody will, I believe, quite literally attempt to turn their customers into a product.

I should take a moment to point out that we're now in full on speculation territory here. These are my opinions and my readings of the tea-leaves, not some insider knowledge I have. But the opinions are informed by S-1 fillings, news reports and observing real things happening with real products.

And of course the other reality: If mindbody wanted to put their customer's needs ahead of their own, they'd already not be doing a lot of the things they are doing.

Remember the question: Why does mindbody want their customer's customer to use the Mindbody connect app so badly? Why do they care how a student books a class at a yoga studio? The ClassPass valuation makes that question a little easier to answer, doesn't it? As a public company with a fiduciary responsibility to their shareholders, I simply don't think mindbody can ignore all of this, and it explains the groundwork they're trying to lay down.  

At $60million in revenue ClassPass would have about 50,000 customers. That's a lot of customers, but one thing I've learned about serving these businesses is that you get access to a lot of individual practitioners for every customer you serve. If you assume an average of at least 1,000 students for every individual studio, mindbody probably has access to over 70,000,000 individual students/practicioners. Add in students from churned customers for whom they still have data and the number is probably threefold.

If Mindbody came out with some sort of 'Mindbody Pass' and they got one tenth of one percent of their active student user base to convert, they'd have 70,000 paying student customers.

This, I think, is whey they're pushing the connect app so hard.

Now again, it's important to keep in mind this post is being written by someone who worked with a team of people to build an entire system to compete with mindbody, primarily because I thought their calendars and account setup process were disrespectful.

So I'm very very biased.

But as far as I can tell, mindbody is a company that scaled too early with broken per unit economics, is currently selling dollars for fifty cents, has never been able to turn a profit, IPO'd because they couldn't raise more money on the private markets with the valuation they wanted, and are laying the groundwork to steal customers from their own customers because they have a fiduciary responsibility to maximize shareholder value. 

The very existence of ClassPass serves as a constant reminder of the "opportunity" mindbody has, as long as they're willing to turn your studio into an uber driver.