Why Peloton’s Biggest Problem Isn’t the Hardware

The turnaround plan for Peloton prioritizes the growth of its digital offerings over its high-end bike and treadmill sales as the company looks to boost its recurring revenue and appeal to a wider user base.

In outlining the company’s budding Fitness as a Service approach, Peloton CEO Barry McCarthy told analysts on the company’s fourth-quarter earnings call Thursday (Aug. 25) that he was rolling out a stratified pricing format that is aimed at adding users rather than selling hardware and cutting costs as it has been focused on for much of this year.

“It's time to get back to the business of expanding the franchise,” McCarthy said, “and we do that by expanding the TAM (total addressable market) and we do that principally with a ‘good, better, best’ strategy that targets not only the premium segment of the market, but the value segment of the market and the use case for connected fitness with a competitive platform.”

Shift to Digital

In pointing to the brand’s efforts to increase its pre-owned rentals, expand its retail strategy — including Wednesday’s launch of a Peloton store on Amazon — and get more people to subscribe to its app at a range of price points, McCarthy said roughly half of its paying customers were currently using connected fitness related content on the app. He said it was “quite clear” subscribers were using the app on somebody else's hardware.

While Peloton has historically shied away from that idea, McCarthy said going forward that is something it will be leaning into.

“I would be delighted for you to use our content on somebody else's hardware that you’ve already purchased,” he said, “That's the big install base and I think it's a big opportunity for monetization for us and we’re going to lean into that segment of the market as well, in order to grow TAM.”

In noting that Peloton’s business was driven by the growth in recurring subscription revenue, which not only widens the playing field, but also carries much wider profits margins and is much simpler to deliver than a 500-pound treadmill, McCarthy said the company was not backing away from the high end of the market either.

“So we believe — I think the net promoter scores for our various products support the notion — that in the premium segment of the marketplace, the integrated hardware user experience with Peloton is the absolute best and there are people who are willing to pay a premium for that and we want to serve that marketplace well,” McCarthy said.

However, he added, since revenues were not growing as fast as desired, the company had no choice but to broaden its appeal to a wider market.

“We're going to have to reach for new market segments and that's where the ‘good, better and best businesses, services and digital app strategy comes into play,” McCarthy said while noting that it was also working to streamline other pinch points that have sent the stock down more than 70% this year.

One of those is delivery, a problem Peloton is looking to alleviate via a redesign of its gear to enable customers to self-install equipment.  There are also plans afoot to increase the drop ship aspect of delivery, as well as use more third-party retailers to complement its existing points of sale.

“This is not a substitute for our own retail strategy. This is a recognition that we need to be where our customers are,” McCarthy said. “Sometimes that's in the store; sometimes at our website,” he added, noting that there were roughly 500,000 searches a month on Amazon for “Peloton.”  “So there's an opportunity to sell there and other retail formats as well.”