Nationwide stay at home orders have caused traditional gyms and boutique fitness studios to shutter their doors, leaving many Americans looking for at-home alternatives. Peloton’s digital operating model has allowed them to capitalize on this forced shift in consumer behavior. Peloton is described by the founders as a “media-technology-retail-logistics” company that sells digitally connected cycles, treadmills and subscriptions to fitness classes. With over 2M subscribers, only 17% of their revenues in Q2 2019 were generated through subscriptions and the rest are from hardware sales.
Digital Operating Model
While quarantine requirements have boosted the demand for Peloton’s products, their platform business model was designed to thrive in a digital world. There are four key components that have allowed Peloton to create value and capture a winning share of new at home fitness demand.
1. Peloton Digital App
One of the key components of Peloton’s success during the pandemic is their digital platform which houses all of the workout content. The Peloton platform provides remote access to both live classes and thousands of on demand classes in varying formats. With such an established and diverse library, Peloton became an obvious choice for consumers looking for at home workout options. During the pandemic, Peloton has extended their free trial from one month to 90 days in the hopes of attracting more users.
2. Vertical Integration
Peloton controls their user’s entire workout experience – from the hardware and software to the content and fulfillment. Peloton fulfills 58% of the orders received, helping ensure they have ability to meet an increase in demand. Additionally, 85% of peloton users own a Peloton piece of hardware, cementing consumer stickiness. Intentionally integrating across the supply chain protected Peloton from COVID disruptions and allowed them to continue to meet consumer expectations. This business decision and emphasis on experience has resulted in a NPS of 86.
3. Digital Community
Peloton also benefits from a highly engaged and loyal online community that generates network effects. During a highly stressful and uncertain time, Peloton classes offer support and a way to clear your mind. The motivational instructors make the workouts extremely engaging and garner dedicated followers; Peloton has over 700K followers on Instagram. Additionally, the platform allows for user engagement, letting you see who is in the class and connect with your friends. This makes it extremely similar to an in-person class and attracts those that are missing the social aspect of studio workouts.
4. Revenue Streams
By utilizing fintech platform Affirm to offer a monthly financing plan, Peloton has made an originally steep purchase price of $2000 more accessible and increased their target consumer segment. Particularly in a recessionary period like COVID, consumers are more willing to make small monthly payments for the bike. Additionally, Peloton benefits from monthly recurring revenue from the 2M content subscribers and recently lowered the fee to 12.99/month. Compared to other fitness companies, this secure cash flow likely gave them more room to weather the pandemic.
Growth in Corona
Peloton has seen an expansion in their target consumer base for two reasons. Due to the pandemic, there has been an emphasis on wellness that, combined with more time available in the day, has increased overall demand for workout classes. Second, those who traditionally work out in gyms have been forced to seek at-home alternatives.
The Peloton app has seen a surge in user engagement and acquisition. YoY app downloads have increased more than 400% in March and early April. Peloton has not commented on the number of new hardware customers but there are a few signs that point to increased demand. Delivery times, which are usually one to two weeks for bikes, have now been quoted at four to seven weeks. Additionally, a program where users could buy bikes that have been returned after the 30 day at home has been discontinued. This indicates that there are enough consumers that are willing to pay full price and more customers are keeping the bike after the 30-day trial period.
Is this growth sustainable?
Peloton is operating in an extremely crowded and competitive space. They need to capitalize on the current mass movement towards digital fitness and speed up the pre-existing trend of shifting from boutique to home fitness. The pandemic has speed up this adoption for a subgroup of people who will continue to work out at home using Peloton’s digital offering. As we enter a recessionary period, consumers will look for more cost-effective ways to get the same boutique fitness experience. The large existing class library and brand awareness makes Peloton very well positioned to meet the at home fitness consumer needs.
Customers that purchased Peloton hardware during the pandemic will continue to pay their monthly subscription fees. With a $2000 price point and a 93% retention rate, customers who purchased the bike during COVID will continue to use the bike because of the high investment and superior experience.
Some of the newfound demand will begin to fade as stay at home orders relax and consumers begin to return to other workouts. However, Peloton has a 10% conversion rate from their digital platform to a hardware purchase. With such a large increase in digital members, Peloton will be able to convert free trials to customers who use the bundle and have a higher LTV.
One concern with this surge in demand is around TAM. I’m concerned that they have cycled through their target segments faster than originally anticipated and, post pandemic, there will not be many people left to sell to. To sustain this level of growth, they will need to leverage their brand awareness and network effects to increase subscription revenues. Peloton should create more lower priced products and classes focused on fast growing segments (i.e yoga, strength) that do not require their hardware. This will expand their TAM, diversify revenue from hardware purchases and help to attract users that are about to end the 90-day free trial.
Peloton’s growth will subside from current highs but will still see an uptick from pre-COVID rates. Peloton will sustain benefits from the pandemic through an accelerated at-home fitness trend and can capitalize on the increased brand awareness to capture demand.