One Chart Mindbody's Investors Need to Understand

Mindbody (MB) finished up 2017 with many of its key metrics heading in the right direction. Revenue was up 30% and its adjusted earnings came into the positive territory up from a loss the previous year. But this cloud software company, whose platform helps wellness providers run their businesses, lost 3% of its customers year-over-year. One chart in the company's investor overview presentation provides key insights into what's happening. Read on for the details on this chart, what's going on, and why management is actually glad it's losing some of its customers.

The chart explained

The chart below represents key drivers of Mindbody's revenue streams: customers and bookings. The customers are divided into two categories: high-value subscribers and solo subscribers. High-value subscribers (orange bar) are Mindbody customers that generate the most revenue for the company through subscription fees, payments volume, and other services. Solo subscribers (red bar) represent the number of single practitioner customers using the Mindbody platform. An example of a solo practitioner could be an independent massage therapist working out of his or her home.

Image source: Mindbody's investor overview

The green line shows the total number of bookings by Mindbody's clients on the platform. These could be a Yoga class, a hair salon appointment, or session with a chiropractor. When Mindbody's customers are making bookings, it is likely a revenue-generating event and Mindbody gets a small share in a payment fee.

Each of these components are showing positive growth trends until 2017 where the solo practitioners takes a big drop off. Turns out, this is exactly what management wanted to happen.

What's going on?

Solo subscribers have been a part of Mindbody's customer set for years and a driver of growth, but the gross margins and revenue for these customers aren't ideal. Comparing the average monthly revenue per subscriber, the high-value subscriber in the company's target markets produce 370% more revenue than solo practitioners. What's more, the cost of onboarding and supporting a solo practitioner make the profitability of this customer set undesirable.

At the end of 2016, management decided to phase out solo subscribers and stopped selling new subscriptions as of January 1, 2017. It also raised the price of installed solo practitioners from $45 per month to $55 per month. With the high churn rate of this customer segment and no new solo practitioners being added, this category of customers dropped 54% in 2017. When these subscribers have to renew in 2018, their former plan will no longer be available and will be forced to upgrade or drop the service all together. Management expects the number of customers in the solo category to reach near zero by the end of 2018.

Even though the number of customers decreased in 2017, it didn't significantly impact the company's growth. Overall revenue grew an impressive 30% year-over-year with subscription and services revenue growing 34%. Bookings grew 24% year-over-year, which was a primary driver of its payments revenue segment growing 25%.

In addition to making these strategic customer changes, the company took the opportunity to update its tiered subscription offerings.

Image source: Getty Images

Less choice, but more value

In last quarter's earnings call, Mindbody's management reduced the number of subscription offerings and increased prices for the entry-level package and the top tier package.

Chart by the author. Data source Mindbody's investor overview.

This simplification of the company's offerings aligns with software changes that provide more value for its customers. On the low end, the entry-level package is a more robust and feature rich package. On the high end, Richard Stollmeyer, CEO, explained that "we raised the price of Ultimate just because branded mobile app has become a richer and more valuable add-on in the past couple of years." Additionally, the CEO indicated that these pricing increases had "no real impact on the attrition rates of high-value subscribers."

Warren Buffet would like this move. He always likes businesses with pricing power, ones that could raise prices without losing customers. Mindbody's customers have benefited from the continued software improvements to its platform. Two examples include dynamic pricing which enables its customers to optimize booking revenue and the company's acquisition of Fitmetrix which enables fitness studios to integrate performance tracking into its classes and with specific workout equipment.

Even with losing the solo subscriber segment, the company is expecting to grow revenue in 2018 between 26% and 29%. Furthermore, non-GAAP net income will improve this year to between $9 million and $13 million, up from $0.7 million in 2017. Understanding Mindbody's strategic focus to keep the right high-value customers will help investors realize that sometimes, losing customers is a good thing.