Share of Life

Peloton: Looking Past a Pandemic Punchline

Written by
Sarang Paraskar
Peloton: Looking Past a Pandemic Punchline

Peloton paved the way for connected fitness amidst a pandemic. But they are losing customers and the stock price is down 70%+ from a year ago. In this POV, I will explore how Peloton can accelerate its digital transformation process to become more customer relevant.

And just like that… Peloton is back in the spotlight. Despite a history of PR blunders, one cannot deny that Peloton has grown to be a cultural phenomenon. The team behind Peloton has successfully created a brand that transcends into popular culture. Be it the “Pelotech” in Netflix’s Emily in Paris or the brand collaboration with HBO’s And Just Like That, brand recognition is at an all-time high. Peloton sports a 70 NPS, indicating just how favorable customers view their Peloton experience. Yet according to Vertic’s digital insights the brand has dipped down to a negative net sentiment score, the lowest being -60, on social media multiple times. When you pair this with the knowledge that Peloton shares, which lost nearly three quarters of their value last year, will be removed from the Nasdaq 100 index on January 24, 2022 - you realize that you have a brand with big wins and equally big opportunities. In this article I will dig deeper to look past the advertisements and share some insights on these wins and opportunities. I’ll also share how Peloton’s digital assets and online customer interactions could have helped strengthen their performance during these turbulent times.  

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Peloton provides a fitness ecosystem built around “connected” exercise bicycles and treadmills, online class curation and fitness tracking. Founded in 2012, Peloton built a luxury brand with a premium price point and a Tesla like customer experience of direct-to-consumer sales and boutique showrooms. Even at a ~$2000 price point for their flagship bicycle, as of September 2021 Peloton has managed to grow a community of about 6.2M people that have at least one main piece of equipment. Besides fitness equipment, Peloton also sells subscription-based exercise apps ranging from $12.99 to $39 per month, and accessories such as cycling shoes, resistance bands, dumbbells, and workout mats. During the pandemic, Peloton bridged the gap between the popularity of group fitness classes and the mandated isolation protocols of the pandemic. Peloton’s success paved way for a category of connected fitness brands like Mirror (a cable-pulling cardio machine class), Hydrow (a group rowing machine), and Tonal (a connected weight training machine).

Popularity amidst the pandemic

The COVID-19 pandemic normalized DIY fitness and accelerated the adoption of technology powered fitness providers, personalized at-home workouts and in-home fitness equipment. Digimind reported that by the end of 2020 there was a 57% increase in people talking about healthy living on social channels over the previous year. According to the 2020 Fitness Tech Report by SportsTechX, fitness-tech apps raised a record breaking $2B from investors in 2020. A 2021 McKinsey survey showed that monthly consumer spending on connected fitness equipment increased by 5% and spending for paid apps rose about 10%. A little more than 10% of the American population have also set up home gyms or have accessed fitness resources online during the pandemic.

Peloton catapulted to popularity amidst this change in consumer behavior. Their revenue in 2020 was $1.8B, about double of what it earned the year before. As far as share of earned media goes, there are over 3M mentions of the brand on social platforms and online publications since the onset of the pandemic. Peloton outperformed fitness equipment icons like Hammer Strength, Life Fitness, Techno Gym and Star Trac. Some have said the brand developed a cult-like following of loyal customers. The brand was able to seamlessly integrate itself into the customers life by fueling their passion for health and fitness. At Vertic we say they captured Share of Life® by way of share of passion.

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Peloton hit their first roadblock in January 2021 when they couldn’t keep up with this massive growth in sales. To address extensive delays in order fulfillment and delivery they invested in expanding manufacturing capabilities overseas and employee headcount. They also acquired Precor to further their manufacturing capabilities in the US. Yet they continued to face the impact of global supply chain constraints leaving them with high operating expenses and, on the customer facing side an overwhelmed customer service team.  

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Unfortunately, the situation hasn’t improved much, and “Peloton Customer Service” is searched on average 18100 times a month online. This brings me to their most recent financials.

Peloton’s revenue for Q1-2022 was $805.2M, up 6% compared to this time last year, but their earnings were far below expectations. EBIT was down 600% year-on-year and confidence in shareholders plummeted, causing the price of Peloton’s stock to drop 35% on November 5th, 2021.

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Peloton has two primary streams of revenue. The first is the “connected fitness products” stream. This makes up 62% of total sales and includes revenue from the sales of Peloton Bike/Bike+, Tread/Tread+ and related accessories. The second is the “subscription segment” stream. This consists of earnings from providing users access to online classes.

We see a surprising yet telling piece of information: revenue from the “subscription segment” was $304.2M, up 94% year-on-year, whereas revenue from the “connected fitness products” segment was $501M, down 17% compared to this time last year. In their statements, Peloton disclosed that the reduction in revenues for the “connected fitness products” is due to a lower number of units sold as well as due to a reduction in their Bike price which was in effect from August 2021. Peloton spent a handsome $284M in marketing expenses – up 148% to promote the bike price cut.

As of Q1-2022, Peloton has 2.49M “connected fitness” subscriptions and a churn rate of 0.82%, 26% higher than 0.65% of Q1-2021. The number of average monthly workouts per customer decreased by 20%, from 20.7 to 16.6. In other words, current customers are reducing their monthly use of Peloton’s online classes. Looking at these numbers, one can’t help but wonder if the global roll out of vaccinations is impacting Peloton’s Share of Life®. One can assume it’s because existing Peloton customers are switching back to reopened gyms, choosing activities outdoors or maybe Peloton is just one of their many workout streams in a week. One YouTube blogger mentioned that she reduced her Peloton usage to once a week and made room for other forms of exercise because she was past the “honeymoon phase” with Peloton. A 2020 McKinsey study highlights that with overwhelming choice, customer loyalty is on the decline across B2C categories.

TLDR: In 2021 Peloton spent ~$800M on expanding manufacturing capabilities within the United States to meet anticipated sales growth and counter global supply chain constraints. However, sales dropped. In Q1-2022 Revenue from the Peloton app subscription was up but fewer bikes were being sold despite a price drop that cost them $284M to advertise. Peloton was $3.67M below revenue expectations. They also faced a higher churn rate which suggests that in the midst of trying to solve supply chain issues Peloton probably overlooked a change in the market and in their customer’s lives. They are losing the Share of Life® they gained in 2020. The C.R.E.E.D framework helps illustrate this and sheds light on opportunities for Peloton and their customers to regain a fully intertwined relationship with customers - increasing the brand’s Share of Life®.

Applying C.R.E.E.D. to illustrate Peloton’s Share of Life.

C.R.E.E.D is a five-part process to achieve Share of Life®. Create ongoing Commitment. Create nonstop Reinforcement. Create digital Empowerment. Create renewed Excitement. Create continuous Development.

Commitment: Peloton already does a great job at creating strong customer commitment via a paid membership. It offers an “all-access membership” for $39/month and a “digital membership” for $12.99/month. Subscriptions provide unlimited access to content in Peloton’s library of live and on-demand fitness classes. By offering a subscription-based app, Peloton not only secures themselves recurring revenue but also positions themselves as the customer’s fitness partner for life. This ensures engagement with the customer that extends beyond the one-time purchase of Peloton’s equipment. If you do not have Peloton equipment, you can use the app on your phone/tablet at the gym with another cycling bike or treadmill – in this instance the app lowers the barrier for customer acquisition. Aside from a sound marketing strategy, this is also a great business strategy for Peloton. For Q1-2022 gross profit from equipment sales was $60M, whereas that from subscriptions was $202M! At their current 20-25% growth rate in subscriptions, analysts have projected Peloton’s Connected Fitness Subscriptions will surpass 5 million in 2025 and 10 million by the end of 2028 – generating over $2.2B in revenue in 2025. This significant revenue stream is from the subscription growth alone.

Reinforcement: Peloton pioneered connected, technology-enabled fitness, and the streaming of immersive, instructor-led boutique classes. Peloton’s live classes often involved instructors interacting with users and congratulating them on milestones. Tracking points and achievements while exercising is an exemplar of gamification. This direct one-with-one approach between brand and customer reinforces the brands commitment. Cultivating community and bringing people together is not only what makes Peloton’s subscription app tick, but it takes forward some of our learnings from the pandemic. Downloads and use of fitness and health apps grew during the pandemic, but the human component seems be the primary attraction. Airnow Data Market Intelligence reported that during the first few weeks of mandated self-isolation, overall downloads of health and fitness apps grew 27 percent, but apps that include a community component saw four times as many downloads. For years home exercise equipment’s were considered glorified coat hangers. But with a dynamic product like Peloton, these machines are alive and emotive. While Peloton has done a great job at fostering a community of fitness enthusiasts, to prepare for a time when more consumers return to gyms and studios, Peloton should strengthen their user communities to keep users coming back because that is what they liked about the brand in the first place. How else can Peloton reinforce the idea of community? They can do so by extending a connection with other areas and aspects in their customers’ life. One such area is how engaged people are in driving positive impact within their communities. 2020-2021 saw multiple social justice movements that were galvanized by communities of informed and engaged public. Perhaps a digital marathon to raise money for causes that their customer base cares about or user generated content on digital channels like a blog or an experience platform for the community to learn from one and other – share tips on diets, workout routines and troubleshooting their equipment etc.

Empowerment: Enabling healthy living is innately an empowering service to users – it comes easy to Peloton. According to a 2020 IHRSA study, ‘the COVID era fitness consumer’, 68% of survey respondents reported that they prioritized their health more after the onset of the pandemic. Exercise was the most reported means for relieving stress with 65% of gymgoers surveyed reported using exercise as stress relief. In his POV for Business of Apps, Jonathan Harrop says that the share of consumers who reported using mobile apps to fulfill health and fitness goals increased from roughly 50% before the COVID-19 outbreak to 75% in June 2020. Looking at the hashtags most associated with Peloton over the last two years, the brand is associated with empowering terms suggesting fitness journey, motivation, community, and transformations. The app and its community-based tracking has not only supported users in measuring their goals but also motivated them by fostering online support systems.

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However, this empowerment takes place much later in the customer journey. There is a big opportunity for Peloton to improve their ability to empower customers as soon as they transition from prospects to buyers. Order fulfillment delays and lack of order visibility fail to empower customers at the very onset of their journey with Peloton. The inconsistent e-commerce experience not only contributes to the churn of existing customers but also dissuades prospects from purchasing. From a business standpoint this is within their crucial 30-day return period, and it is also the reason for those negative sentiment scores we looked at earlier. According to McKinsey only 20% of journey capabilities account for over 40% of customer satisfaction. These deflection points in customer experience begin to accumulate and have a macro effect on customer sentiment. According to a recent CCW Digital report sponsored by Salesforce, 69% of consumers say that personalized care influences their loyalty to a company. Peloton addressed this by hiring 3000 employees in 2021, some of whom were probably hired specifically to handle personal customer inquiries. But this also set the brand up for high operating costs amidst their decreasing sales. This could have been avoided with a digital first approach. Peloton could have digitally transformed their supply chain with a sophisticated back-end process and leveraged an iPaaS integration platform to access fulfillment data and solve for service issues before they become customer-facing nightmares.

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More than the delay poor communication and access to information is a big trigger for customers. If Peloton had access to fulfillment data, they could easily share it as a self-service functionality for customers to access on the .COM or the app.

But wait! There’s more… According to CNBC by the end of January 2022, Peloton will asking future customers to take on shipping and setup costs. Previously, those fees were included in the price of their equipment. It is crucial for Peloton to prepare for this predictable pain point and ensure appropriate and engaging installation content that is easily accessible on all their digital properties and formats.

Excitement: With growing competition from cheaper bikes and other connected fitness players like Hydro and Tonal, it has become even more important for Peloton to captivate, motivate, and retain customers. This once again reinforces the importance of the app – a hub for Peloton’s content. I think they are on the right track for creating excitement and I’ll share a snippet from their Q1-2022 report:

“During the first quarter, we added eight instructors across regions and modalities, introduced 60 new scenic rides and runs… and launched an outdoor running program called “You Can Run”. We know music is important to our members and is a significant competitive advantage for Peloton. During Q1, we hit a major milestone by celebrating our 100th Artist Series collection and in July, we hosted our fourth annual “All For One” music festival, a three-day event featuring 65 classes, 40 instructors, 25 artists, and eight modalities, resulting in a 9x increase in Member engagement vs. the prior year.”

Taking the users off their bikes for an outdoor run is a great example of maintaining excitement in a reopening economy and finding new ways to stay entangled with the customers. It’s brand engagements like this that drive that 70 NPS.

Development: Peloton is continuing to develop and evolve to stay ahead of competition. They mention that they utilize engagement data and direct feedback to guide investments in content, music, software, and other areas that influence their NPS and satisfaction scores. Additionally, they just introduced Peloton Guide, an AI-enabled camera that connects to your TV to make strength training workouts safer. It provides paying members instant access to Peloton’s expert instructors and exercise videos while tracking their movement and progress. On the software end, Peloton, has continued to make their UX frictionless with the addition of real-time subtitles for their deaf and hearing challenged customers and an improved search feature for classes. One area where Peloton could develop further to gain an edge over competitors is that of data security. Peloton needs to make sure it protects the business and the customer’s data. Recently they were found to have an exposed API that would allow hackers to gain access to customer data. Wearable tech brand Garmin also witnessed a ransomware attach in July 2020. A data breach is also a breach of trust and can jeopardize Peloton’s relationships with consumers. Another opportunity for development is integrations. The app’s capabilities are limited when customers try to use their Peloton screens to watch online streaming services like Netflix. A lack of integration in this instance means that customers loose access to their exercise metrics if they choose to watch a show during their workout. It’s crucial for Peloton to better such integrations because they are at the heart of maintaining entanglement with customers.

Final thoughts

Peloton has built a brand with Share-of-Life®. I believe the brand owes its entanglement with customers to the subscription-based app. The C.R.E.E.D framework both illustrates this and provides nuggets of opportunity for further improvement so that Peloton can stop losing that Share-of-Life®. Investing in compelling content that is exciting, cultivating communities and ensuring a smooth and secure digital first CX at every stage of the customer journey is essential for the future of Peloton. I believe the brand is rich in equity and their subscriptions will be the key to drive growth and share prices up again.

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