Deep Dive Into MINDBODY and Wellness Distribution In Travel 2019

January 8th, 2019

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We see many synergistic growth opportunities between MINDBODY and travel. Expect the company to become a more regular fixture within the industry ecosystem.
— Luke Bujarski

Introduction

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Executive Summary

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The MINDBODY business model

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From the MINDBODY app.

From the MINDBODY app.

Notes: Revenue reported through Q3 2018. Estimates for full year 2018 were calculated by averaging year-over-year change in first three quarters. Projections for 2019 to 2023 are based on best guess and are intended to show general trajectory.

Notes: Revenue reported through Q3 2018. Estimates for full year 2018 were calculated by averaging year-over-year change in first three quarters. Projections for 2019 to 2023 are based on best guess and are intended to show general trajectory.

Visit the MB investor relations page for granular financial details.

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The subscription business

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We believe that MINDBODY offers significant value at these price points. There is additional room to up-sell and incrementally increase subscription costs over time.

The MB solution suite is robust and scalable from one to many locations. The MB sales team is organized into three buckets: independent single location, mid-market customers with 10 or less locations, and enterprise customers with over ten locations. The base cost subscription covers one location. Rates are negotiable at the enterprise tier (multiple locations).

The Booker Software acquisition added another 10,000 establishments to the MB marketplace. MB also obtained Frederick, a popular marketing automation software for wellness businesses. Frederick sells as an add-on feature to the base price of subscriptions for an additional US$99 (U.S. rate) per month.

Average monthly revenue per subscriber has climbed since 2015.

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Point-of-Sale Solutions, Hardware, and Processing

MINDBODY offers a complete point-of-sale (POS) solution i.e. software, hardware, and payments processing. MB subscribers can opt for third-party POS solutions. However, integrating the full MB suite of solutions makes it easier for businesses to collect, manage, analyze, and deploy customer data when optimizing for operations and marketing.

MB is a merchant of record. It has its own payments processing division which collects monthly service fees and per-transaction transaction fees on bookings processed through MB. Monthly fees range between US$9.95 and $25. Transaction fees vary based on volume and geography. MB only processes payments directly in specific markets; and uses partners to accommodate in other markets.

From the mindbodyonline.com website

From the mindbodyonline.com website

Point-of-sale integration deepens the client relationship and helps with MB subscriber retention. This drives reoccurring revenue on monthly subscription dues and payments processing, as MB becomes more deeply integrated into day-to-day operations.

Payments accounted for 35% of total consolidated Q3 revenue. For the full year 2017 MB generated US$71.2 million in payments revenue (39% consolidated revenue). Since processing fees are critical to top-line line growth and profitability, MB prioritizes its international expansion efforts in those country markets with stable currencies and compatible payments ecosystems.

Payments for products and merchandise

Wellness businesses also operate digital storefronts for products and merchandise e.g. hair care supplies, apparel, and workout equipment. Businesses running MB-enabled branded apps can build their online stores into the app which powers both the content management, inventory, as well as the payments processing.

Moving into products deepens the revenue opportunity on payments processing. We can see a scenario where MINDBODY expands into stand-alone health and wellness retail establishments e.g. vitamin stores, health food stores, and beauty product stores. In short, the revenue opportunity for payments processing is immense.

Transforming brand, service provider, client interactions

MINDBODY is now investing in a new cloud based infrastructure set to enable other capabilities as part of its mission to transform customer experience but also how wellness businesses operate. The future of appointments businesses will be mobile and seamless with more direct interaction and relationship management between the customer and service provider. Contractors operating their businesses under an umbrella brand e.g. hair stylists working for a salon will take on the responsibility of customer interactions. Rather than channeling through a front desk. MINDBODY aims to be at the forefront of this transformation.

The MINDBODY Marketplace

The company’s ad division is called MINDBODY Promote. On a call, a representative stated that Promote will “likely become a bigger priority going forward”. MB CEO Rick Stollmeyer offered a compelling account at a Wells Fargo Tech Summit in December 2018 (listen to the recording here). The marketplace model is an evolution away for a traditional business software company. The company collects commission on demand generation services rendered through ad units on the MB app. It also pushes inventory out to partners e.g. Google and Facebook and collects 15% commission on these transactions.

Intro offers

Establishments powered by MB can create featured ‘intro offers’ to generate demand via the MB app. Promoted offers and the MB marketplace fit within the context of changing trends in fitness – particularly in competitive city markets like Los Angeles, New York, and San Francisco (MB’s three lead markets). MB ushered in many of the advancements in online scheduling and booking that has changed how the sector manages their operations and marketing.

The fitness consumer

The typical Manhattanite millennial – for example, might pay for an annual membership to their favorite general fitness facility e.g. gym, but may also look to supplement her regimen with classes offered at other establishments. These can be other full-service and multi-location centers or boutique studios offering a specific type of program – spin classes or hot yoga, for example.

From the MINDBODY app.

From the MINDBODY app.

In-demand facilities more easily convert customers to annual memberships and see less direct value in participating in the MB marketplace. Less popular or specialty fitness facilities e.g. yoga studios can augment their base membership revenue by selling non-members access to individual classes.

MB intro offers target fitness customers that are either completely uncommitted i.e. have no base membership and prefer paying by the class, are interested in augmenting their base membership with other classes, or are actively looking to switch (or could be persuaded to switch) their base membership.

Dynamic pricing

Businesses can also deploy dynamic or ‘flexible’ pricing within the MB marketplace to optimize revenue and utilization on the supply side. Airlines and hotels regularly deploy revenue management to increase load factor and occupancy. Dynamic pricing on MINDBODY is similarly and particularly relevant for businesses offering group classes.

A typical yoga class – for example, might accommodate anywhere between 1 and 30 participants. Typical yoga mat dimensions are 2 feet wide and 6 feet long. A very full yoga studio can stack yoga stations just inches apart.

The MINDBODY marketplace, through dynamic pricing, helps maximize class occupancy by offering discounted rates or ‘last-minute offers’ for less-than-full classes. These could be new classes added to existing schedules or classes offered during off-peak hours. MB collects a 12% commission on confirmed bookings. Dynamic pricing is currently only available in the United States.

Third-party connectivity

The company has over 800 API integrations with back-end and consumer-facing applications. This includes pure marketplace competitor sites such as CLASSPASS. Facebook is one significant third-party booking channel for MB, particularly with its appointments-driven businesses (not classes). MB allows customers to integrate schedule and booking features directly on their FB business page. MB collects 15% commission on bookings outside of the MB app or MB-enabled apps.

The company also integrated with the Reserve with Google feature in June of 2016. Reserve with Google is the company’s latest move to strengthen its position in local search and commerce. Through RwG, local businesses can now become bookable directly through the Google Maps or Search (see recent deep dive for Reserve With Google: Implications For Online Travel And The In-Destination Experience).

Despite the potential, an MB representative recently stated that RwG has not generated the results that the company had anticipated (per commentary directly from the CEO). We suspect that (and rightfully so) MB recognizes its lead marketplace position and is hesitant to commit fully to Google as a booking partner. Direct traffic to the MINDBODY app is more valuable to the company. On the back end, customers using non-MB analytics apps such as iKizmet can pull in MINDBODY data.

Current and Projected Performance

Consolidated year-over-year revenue increased 37% in Q3 of 2018, with 42% CAGR between 2012 and 2017. We project total revenue for 2018 to reach US$251 million. The company recently reported 11.9 million registered app users (including MB and branded apps). Approximately 188 million classes and appointments were booked in Q3 of 2018.

Roughly 60% of revenue originates from subscriptions and 40% of revenue comes from payments processing. The company also reports on a separate revenue line item labeled “product and other” – roughly 1% of consolidated revenue.

Long-Term Financial Model

Source: MINDBODY investor relations page

Source: MINDBODY investor relations page

If finalized, the Vista Equity Partners acquisition will accelerate longer-term profitability goals. The deal will buy all of MINDBODY’s existing shares for US$1.9 billion, and will return MINDBODY back to private ownership. MB has operated at near negative EBITDA margins in recent quarters. The CEO stated that bigger spend on R&D, and “growing pains” with the booker.com integration dragged on profits.

MB App vs. Branded Apps

The high tier subscribers pay the MINDBODY premium in order to have a custom mobile app branded in the name of the establishment. These hosted, mind-body enabled apps drive 67% of all bookings. An MB customer will have both a branded app and a listing on the MB app to capture additional demand from the marketplace. Here customers can push special offers and rates to attract new and non-returning customers (visitors). Booking volumes on the MB mobile app appear to have flattened in recent quarters but we expect volume to accelerate once again as MB matures into a global consumer brand.

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Alignment with travel

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Notes: LUFT calculations expenditure and person-trips data originates from the  U.S. Travel Association .

Notes: LUFT calculations expenditure and person-trips data originates from the U.S. Travel Association.

Conclusions

What this means for MINDBODY

MINDBODY is just starting to shed its old skin as a pure business software provider, as it transforms into a marketplace and payments platform. The mobile consumer and specifically visitors will become central to marketplace model and MB app adoption. We can see how MB could become a more mainstream consumer brand and, by default, a traveler-relevant service not unlike a TripAdvisor and its subsidiary Viator. Clearly, traditional travel products like tours and peer-to-peer experiences have a unique relevance for travel consumers. Nevertheless, the broader transformation of local commerce will introduce travelers to new options and things to do. MINDBODY will be there to facilitate and broker the connectivity between wellness businesses and travelers.

What this means for MINDBODY enabled businesses

Travelers tend to be less price sensitive than locals ie they spend more. New Yorkers visiting Rome will pay New York prices for yoga classes. Using MB to sell into this high customer value segment is attractive for wellness establishments operating in popular tourism destinations. The CEO confirmed that the MB app know when consumers are traveling.

What this means for travel brands

Partnerships are all the rage in travel. The wellness consumer i.e. those using MB are likely higher income earners that travel frequently. The push into in-destination experiences by the big platforms. Google and Facebook are pushing into bookable activities. This will benefit MINDBODY as all manner of appointments become easier to schedule and reserve. The company’s API integrations will make it possible for travel businesses to to cross-sell their customers on wellness products.


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