Getting Peloton into Shape
Peloton has been all over the news recently and for wrong reasons. In early May 2022 it recorded its biggest quarterly losses and earlier the company had laid off 2800 employees world-wide. The market cap has fallen 80% from its pandemic high and the new CEO Barry McCarthy has had to raise additional capital to tide over the cash crunch amidst the weaker-than-expected bike and hardware sales. This is a mighty fall for a company that was flying high just a few years ago.
How did this transition occur and what can the company do to get back to where it was? It is necessary first to understand the value proposition of Peloton – a state-of-the-art home-fitness experience supported by platform technology to enable customers to interact with the fitness-instructors and other customers in a gaming-type community. Peloton targeted high-income younger customers with high value for time initially and the communal and gaming aspect of the subscription-based fitness regimen made its users zealots, addicts, and evangelists. When the pandemic hit, all these factors were in place to fuel a fast-paced growth. With gyms closed during the pandemic, consumers found the value proposition of Peloton as an attractive substitute and the social media based positive word-of-mouth helped the sales of the bikes as well as subscriptions. Buoyed by the demand and facing possible shortages of hardware due to supply-chain constraints, the company even planned for its own manufacturing plant to meet the surging demand. Then the pandemic effects started waning. Gyms opened up and those customers who had purchased expensive bikes and subscriptions plans and did not get as much value as the others, started cancelling the subscription plans, selling the equipment and started returning to their gyms. The backlog of undelivered bikes and negative word-of-mouth did not help either. With decreasing customer base and the resultant cash crunch all hastened the free-fall encapsulated by the firing of the co-founder and the previous CEO, John Foley, by the board.
In retrospect, Peloton’s mistake was trying to grow too fast and assuming that the pandemic-induced demand will last. Not having sufficient capacity and supply-chain problems all led to negative externalities all of which could have been avoided by pacing the growth appropriately coupled with stellar customer experience. However, the growth during the pandemic did occur with a much-reduced customer acquisition cost than otherwise and even with the attrition of customer-base after the pandemic, many more customers were exposed to the Peloton experience, with some of them staying on the platform beyond the pandemic. The real challenge now is to retain these customers, who perceive much more value in the Peloton experience as compared to those who have already churned. Realizing this value Peloton provides to these customers, the company has already increased the subscription prices, which is a right move. It is also making it easier for customers to own the bike by decreasing the price of the hardware. This would, of course, increase the customer acquisition costs as they could be taking losses on the hardware sales, but if they are able to retain the customers for a longer duration, Peloton should be able to recoup the customer acquisition costs and make net profit on each customer through an increased customer lifetime value. The company is also planning to sell the hardware through third-party channels, instead of selling it only through their website. This should also make it easier to acquire customers while making the customer acquisition costs a bit higher.
A successful rebound for Peloton ultimately rests on customer selection. Peloton does not need just more customers, but it needs more customers who will stay with their subscription plan for a long time to be profitable. This depends on how Peloton is able to reach out to those right type of profitable customers, how it is able to use its die-hard evangelist userbase to market to those customers through appropriate word-of-mouth campaigns, and how it is able to continually provide high value to its userbase through innovative community-based experiences. Thus will lead to a virtuous cycle of high retention, positive word-of-mouth, and easier acquisition of the right customers, enabling Peloton to get back into shape!
P.K. Kannan is the Dean’s Chair in Marketing Science at the University of Maryland Robert H. Smith School of Business.