The Economics of Apps

What do these Apps have in common? Classpass. Mealpal. And Cups? You guessed it — the same business model some of the most disruptive and innovative apps of the last few years have offered — they take a service that most people want, take their payments up front for it, and connect them to a large group of (often) off the radar service providers that provide the service, usually for a discount. The Apps are fundamentally the same. Get a discount for a product or service (the specific of which you get to choose from a range of options) by using this app. Chris Murray, a Senior Consultant at IBM, points out “Modern customers are most loyal to a brand that will save them time and money. Subscription-based startups like [those mentioned above] have recognized consumer needs and exploited inefficiencies in their respective industries to maximize customer value. We even see this trend in the personal grooming segment with Dollar Shave Club and in upscale clothing with RentTheRunway.”

While these apps function as full- fledged companies in most cases, they are actually little more than payments platforms, if you think about it. And beyond that, the similarity is that these apps function by creating an ecosystem of goods and services — creating an environment to offer discounts to customers. It’s an interesting business model, one that most industries are careening towards, sometimes on a much larger scale. But does it work?

That’s debate-able, but by now there are plenty of use cases.

ClassPass — the app that connects boutique gyms with consumers for a discount — is one. From 84 million in initial investments, to now being valued at over $400 million, the app has been on a roller coaster ride since its founding in 2013. At first, the unlimited, $99/month model was attractive to a large group of young gym goers who liked the flexibility to move from gym to gym and the discounted access to boutique classes the pass offered.

But over time, it became clear that the model wasn’t working. Gym owners were less than pleased when ClassPass users were taking up spots in their classes (again, at a discount) and weren’t converting into studio members. ClassPass’ initial sell to boutique gym owners was that their service helped introduce them to new clients, but without any new clients signing up full-time and for full-price, gym owners started to be wary of the start-up.

In addition, declining revenue lead ClassPass to rethink their membership models. This lead to a few subsequent changes in the payment plan — first a price hike, and then a tiered membership model, making ‘unlimited at a discount’ a thing of the past. Initially, members were incensed, but ClassPass explained that the tiers were still a discount, and the new model made it easier for everyone to get what they wanted — consumers paid only for the classes that they’d actually take, boutique gyms were further protected from overuse, and ClassPass protected their margins by setting a fixed price. How? The tiered model fixed the class price so that it never dips below $13.5 a class (it’s $15 if you select the models with fewer classes). This is still a significant discount but it protects both ClassPass and the studios from the ‘Super Gym Goers’ who were taking so many classes it was driving price per class into the single digits!

ClassPass initially thought that their app would be used by people who wanted to try out classes and would eventually sign up for full time memberships at boutique gyms, but over time they realized that their consumer base actually used the app more for its range of options, ease of booking, flexibility, and discounted price. Because of this change in the scope of its service, it makes sense to have a tiered, fixed model to appropriately manage the relationship between gym and consumer so that it works to benefit everyone involved.

Other apps have picked up where ClassPass went wrong (over-discounting a product to the extent of revenue loss) and have started out with models similar to the tiered one that ClassPass eventually adopted. MealPal — basically the ClassPass of lunch- has set plans to keep the price of lunch at or slightly above $5.99 a meal, depending on which plan you purchase (they currently have 12 meals/month and 20 meals/ month.) CUPS, an app that connects coffee drinkers to cafes, used to have a similar model where you bought packs of drinks, but now simply offers consumers a 15% discount on all beverages they order and pay with through the app. While there isn’t much info on why it made this switch, it probably has something to do with how people buy coffee, which is generally more on the go than in packs of 10 lattes.

Ecosystem subscription services surely have their place in the future of industry but what can new payments platforms and models learn from them? Companies exploring subscription services can learn a lot by looking at how these apps have grown and changed in their individual markets.

A Couple of Things Seem to Make or Break Apps

So what is the secret to a successful ecosystem subscription service?

1. The Price (& Discount)!

Subscription services are tricky because most of them focus on providing some kind of deal — be that a cheaper product, a discount, or other incentive — for purchasing ahead of time and in bulk. What can be tough is finding the right balance of the things that make them appealing to consumers, but also do not devalue themselves (or members of the ecosystem) by being too inexpensive. (Precisely why ‘ClassPass Unlimited Membership’ didn’t work — super gym goers were able to drive the price of classes down, boutique gyms got over-crowded, and the entire process did not convert visitors into full time members. Studio owners were not happy)

In addition, it’s important to get the application of the discount right. Take CUPS for example. The discount — 15% on coffee- has always been the same. Yet, as discussed above, they changed their model from buying packs of drinks to offering a discount on any beverage purchased through the app. What this does to the experience is make it much more flexible — you check the app when you want coffee and always get a discount — instead of being a rigid ‘you must now drink 10 lattes.’

2. The Experience

User experience — a seamless, easy one that feels like almost zero work — is pretty much a must. Any winning App should make it easy to streamline clunky processes in almost any industry, and be accessible at all times through a smart phone. The whole point is that these services are popular because they automate would-be chores: making lunch, finding a new gym class, even paying for coffee every day. User experience should be the crux of the service — if you don’t make it easy for people to use your service, why would they?

Take the present MealPass experience. You have to order lunch for the next day between 7 pm and 9:30 am, presumably to give restaurants a head’s up on how many lunches they have to prepare. You then have to select a pick up time, and go get your lunch in that window. Not idea, but worth it for a deal, right? The glitch is that MealPal doesn’t have an app. It’s only accessible on a desktop- which users find annoying as they don’t usually use their laptops during those hours. Thus, instead of alleviating a chore, MealPal has added one to their consumers’ lists.

3. The Ecosystem

Getting the right balance of consumers to providers, and an even spread of both, is tough. It can be difficult to manage relationships between the two, and make sure that everyone is happy with the result.

One of the issues with these kinds of subscription apps is that they are not always evenly spread around cities, or available in all places across the US. Using MealPass or CUPS in New York can be tough unless you live in downtown Manhattan, where the highest concentration of restaurants and coffee shops are. So having a balance and getting new businesses to participate in your app should be a top priority.

In addition, these platforms have two customers that they need to keep happy — on one hand, they have the consumer, looking to find the product/service, and on the other, they have the businesses with the products/ services that they are connecting to the consumer. These platforms have a responsibility to both, as they need both to participate in the platform for their business model to work. This takes constant communication and thinking about the experience from two — sometimes very opposite- sides. It can be a lot to juggle, but no app would be successful without getting this right.

The future of ease in payments and services will focus around creating larger, more robust ecosystems that seamlessly connect consumers with exactly what they need. There are so many opportunities for financial services companies to benefit from such payments platforms — from building and owning the platforms themselves, to joining the ecosystems created by such apps. For example, if these subscription services become more prominent, how will it change financial planning and budgeting? Will our financial planners’ jobs be to point us to better services that will cost us less? Or perhaps they can have their own partnerships to give further discounts and benefits through these payment platforms.

What it really comes down to though, time after time, is a seamless experience that makes it easy to access the products and services we want. There are endless possibilities for payment platforms to connect consumers and the things that they want and need, but the ones that stand the test of time are the ones that make it feel effortless. While there are many components of effortless experience, one of the most important is being aware of the user experience and constantly updating it to meet the needs of all in the ecosystem. Murray adds, “Subscription-based models will continue to disrupt industries. Banks and payment networks need to understand the emerging ecosystem and integrate their own value-added services to complement this new age of commerce.”

And he’s right. One of the reasons that ClassPass is still successful today is that it listened to its users on both ends and has worked to make the experience better. It certainly hasn’t been easy, and it hasn’t made everyone happy. But, it has kept the company afloat instead of burning out. In the digital age, this might just be the most important aspect of user experience — that it grows with the customer.