Unintended Lessons from MasterClass
On Monday The Information published a deep dive into the issues facing MasterClass. It is not looking pretty. Fortunately for those of us not invested in the training company, there are lessons we can learn for our own businesses.
Consumer Businesses are Entertainment Businesses
Why do people buy your product? Mostly to meet a need: food, laundry, transportation, bodily hygiene. In general all of those needs can be met with very low priced commodity-like products. Why would someone pay more than they had to? Sometimes it is because they want to reduce the chance of something bad happening. Brand is a good way to help with that. But often the answer is that consumers want to be entertained. Entertainment can mean a lot of different things to a lot of different people, but if your customers are not enjoying the process of buying or using your product, you are on your way to a low priced commodity.
MasterClass can be thought of as a skill-training company, but for most users I suspect it is not replacing education, it is replacing entertainment. From the article:
Avi Gandhi, a creator economy consultant and former entertainment executive, believes price increases by streaming services like Disney+ and Netflix could prompt some consumers to pare back spending on non-essential forms of entertainment, making it harder for MasterClass to compete.
Product-Market Fit does not always scale
When a company finds product-market fit, that usually means they have some marketing channel that is working. The assumption is generally that that high growth rate will go on, if not forever, then at least for another year. It works until it doesn’t. All products have some sort of limited TAM, and some happen faster than others. When the growth is happening executives should be happy, but also very worried about where they are going to find the next tranche of growth — either new customers, new products, or new marketing channels. MasterClass did not:
In early 2022—with fewer people cooped up at home—the company’s sales growth slowed and user engagement began to decline, according to two former employees familiar with the figures. Monthly active users of its app shrank quarter over quarter for the first time since the pandemic boom in the first quarter of 2022, according to data from web analytics firm Similarweb. At times, the company’s annual churn rate has been as high as 52%, according to two people familiar with the figure. That’s slightly higher than the 47% average annualized churn rate for major streaming services, according to estimates by Parks Associates.
The power of celebrities
MasterClass is powered by celebrities. That, plus the high production value of their classes (often >$1MM per class) is what set them apart from the rest of thier ilk. In theory the celebrity is there for their expertise, but in practice the celebrity is there for their celebrity. There are a lot of people who can teach acting better than Natalie Portman (one of classes), but none of them are as good as Natalie at being a celebrity.
This example from the article drives home the point. The experts had to get involved to save the content from the celebrity:
In 2020, MasterClass ran into an unusual snarl on one of its latest courses, a 3.5-hour, 17-episode deep dive into the fundamentals of bread baking led by Apollonia Poilâne, the third-generation CEO of Poilâne, an acclaimed French bakery with locations in Paris and London.
During the filming of the course, which took place in France in the summer of 2020, some of Poilâne’s recipes simply weren’t working, according to a person who was involved with the shoots. Her rye dough didn’t rise properly and at least two of her breads came out overcooked.
Ultimately, MasterClass hired a Los Angeles–based freelance baker to rework Poilâne’s recipes after the fact and spent nearly 100 additional hours editing the footage in the course to hide her missteps, a time-consuming process that cost MasterClass around $10,000, they said. Poilâne’s team had to approve the recipe changes before release of the course.
How much do you give away for free?
MasterClass has a zero marginal cost product. It is a natural fit for freemium models - especially if the product can be pushed in front of potential buyers. They tried pushing it through Delta’s in-flight screens but it does not seem to be working very well for them. A similar protential program with T-Mobile looks like it has been killed. Even though it does not seem to be working, this is the right type of stuff for the team to be working on — new marketing channels:
Rogier, the company’s CEO, began looking for new ways to restart growth. MasterClass built out an enterprise partnerships team that inked deals with SiriusXM, Delta Airlines and other businesses, announced in 2022, to increase brand awareness by making MasterClass content more easily available.
The hope was that a curious Delta customer would watch a MasterClass course on their flight and sign up later for a subscription. But the arrangement ended up converting far fewer subscribers than the company’s business development team had expected, according to a person familiar with the figures…
…In late 2021, MasterClass signed a similar agreement with T-Mobile, promising in a public announcement to reveal more about the relationship the next year. But several months after MasterClass announced the partnership, Rogier had second thoughts and scuttled the deal, according to a person with knowledge of the agreement. Rogier was concerned that T-Mobile was getting too much out of the partnership, through which the carrier was supposed to offer its customers a free MasterClass trial subscription, according to the person.
The transition from B2C to B2B is difficult
At GA we used our B2C brand to expand into B2B, but for most companies it is very difficult. Meta is trying to do it with their VR-products, but it has not been going well. At their last major event they co-presented with Microsoft (a major B2B player), which is likely the right choice (I am more optimistic for Apple’s VisionPro next year, but their consumer focus should give everyone pause).
In any case, MasterClass is trying to get into the enterprise market. The problem is that the elements that were/are important for consumers — the celebrities and entertainment — are NOT what is important for B2B. The buyer and the customer are not the same person, so the product needs to drive either specific defined criteria, or solve a real business problem. The only problem it seems to solve now is employee entertainment (a standard issue with a lot of corporate training). From the article:
Throughout 2021, it began investing more resources in MasterClass at Work, a corporate subscription product, and pitched Deloitte, Microsoft and other companies on the idea of buying MasterClass access as a benefit for employees. In internal company meetings in 2022, MasterClass executives described MasterClass at Work as a potential lifeline for the company during a time of slowing sales and decreased engagement, according to two former employees familiar with the discussions.
The company began reshaping the type of lessons it produced to appeal to a more professional audience, according to one of those employees. Throughout 2022 and 2023, it began creating more courses with a personal or professional development bent, said the person. The goal was to produce content that could both interest the average MasterClass user and be easily packaged as part of a corporate subscription program, they said.
But MasterClass at Work is still in its infancy. In 2022, the team responsible for those corporate partnerships brought in far less in sales than expected, according to a person familiar with the figure.
The article made it feel like the team at MasterClass are trying all the right things, but they those things just don’t seem to be working (yet). The business still has a chance, but “figuring new things out” is the hardest and most uncertain of all the business challenges.
Keep it simple,
Edward