Peloton: A subscription addiction?
Connected fitness company Peloton went public off the back of some high profile IPO failures, but does its subscription model make it a diamond in the rough? UHY Hacker Young’s Robert Collings puts the rubber to the road to find out.
As Uber, Slack and other high-profile tech companies currently trade below their IPO price, did the recently public ‘connected fitness’ company Peloton, really have any chance? The company hit the headlines last week when their share price slumped by 11% on the first day of trading – perhaps a sign of caution by investors as they lick their wounds over the aforementioned IPOs.
Peloton follows a hardware-based subscription business model. It sells exercise bikes for around £2,000, which comes with an interactive screen attached to the front. Once you’ve got the equipment, you’ll also need to pay the £39 per month subscription fee to access their live classes, content, community and other perks.
This type of business model is proving increasingly popular. Research firm Gartner predicts that 75% of businesses selling direct to consumers (D2C) will offer subscription services by 2023. The so-called ‘subscription economy’ is a huge growth area and it’s easy to see why – recurring revenue, consumer convenience, ongoing relationship with customers, etc.
While Peloton boasts high-profile users such as Richard Branson, David Beckham and Michelle Obama, whether it finds success as a public company is going to be a tricky one to call. One thing’s for sure though, it knows how to play the subscription game.
High initial investment
Paying £2,000 for an exercise bike isn’t for everyone. The price point is designed to attract those that can afford not just to pay for a premium piece of kit, but also the ongoing subscription cost. Peloton generates around 80% of its revenue from hardware sales with a pretty tidy gross profit margin of 43%, but these numbers are somewhat irrelevant – it’s the high price point and the customer loyalty that is key.
Ploughing a large sum of money into an exercise bike makes you feel like you probably should use it more than a few times. Once they’ve got you sitting on the bike all ready to go, then the subscription service comes into play.
Subscription, addiction, referrals
When you’ve just forked out for the bike, paying a tiny bit more per month to get the complete service is an obvious choice. After all, it’s pretty much on par with how much you’d pay to access spinning classes at a health club, but Peloton comes with the added convenience of being ready when you are.
Once you’re paying for your subscription, you get access to classes streamed over the web from Peloton’s HQ in New York. They’re live, so occasionally the instructor will call out the names of those in on the session. The whole experience is designed to make you feel like part of a community, which makes you feel more motivated to keep going. The more you do it, the more progress you start to see, the more you start to feel good about yourself. And when a product makes you feel good about yourself, you start telling your friends how amazing the product is. It is referral marketing at its very best.
Taking a look at the numbers
Subscriber addiction to Peloton is clear when you look at the numbers – the net monthly churn rate (the percentage of subscribers that cancel their subscription during any one period) for 2018 was just 0.65%, much better than the generally accepted average of 3% to 5%.
The lifetime value of each customer for 2018 was $3,593, and that’s not including the hardware revenue. That means subscribers actually end up paying more for the subscription than they do for the product itself.
Overall, this type of business model is only going to become more popular. Apple is launching a whole range of subscription products to complement their hardware sales, and Amazon also operates subscriptions in addition to their core business.
Whether Pelton is a good investment decision remains a debate to be had, but if there’s one thing for sure, it’s that the business model is an excellent example of how to win the subscription game.