Peloton's Struggle with Subscription Commerce
02 Mar 2022Peloton’s recent travails remind us that a great product and a great business are not one and the same.
Having benefitted dramatically from changing habits during COVID-19, Peloton is in a remarkably different spot now. Financially overextended, the company shows a very poor post-IPO share price trajectory culminating in replacement of the CEO and big staff layoffs.
This may seem strange because Peloton enjoys avid support among customers (I, for one, use my Peloton bike almost daily). The product gets many things right: a minor example is the way in which ‘cool down’ workouts are suggested at the end of an instructor-led ride. Here Peloton is reminiscent of YouTube queuing up videos they think you will like in order to prolong your in-app experience. Of course, increased engagement on the Peloton app translates to a better workout and a healthier body, not to greater exposure to advertisements and deleterious health effects. And this is partly a function of the way in which Peloton monetizes: it’s subscription rather than ad-driven. You pay a fraction of the cost of a monthly gym membership and you can get fit in the comfort and convenience of your own home.
But the digital service, monetized through subscriptions, is only half the story. Peloton’s offerings are premised around the purchase and use of the company’s stationary bike equipped with a digital screen running the app. To be clear, there are many Peloton exercise programs that do not involve the use of the stationary bike, but primarily customers invest in the bike before discovering these other activities. Many of the ‘stickiest’ features of the service, like participating in leaderboards or being called out by the instructor for a great effort, require owning a Peloton bike.
This arrangement of ‘bike purchase plus fitness subscription’ is the fundamental weakness of the company’s model. It’s hard to be a subscription based company if you can’t yield subscriber growth. But today, Peloton can only do this by inducing people to buy the (expensive) physical device upon which the subscription is predicated.
The requirement for a physical device to deliver a digital experience is obviously not a novel problem, it’s a general one with many useful examples to draw from. Consider the launch of the original iPhone as a case in point. The iPhone never would have gotten the traction that it did if consumers were expected to pay nearly $1,000 up front for the device along with a phone plan. And this is what Peloton is attempting to do with its stationary bike, more expensive than a Smartphone, much more narrow as a fetish.
The success of Peloton will require elimination of the most important objection to uptake, which is the cost of the bike. This can be done in a variety of ways. It starts with understanding that customers have a single goal. The demand to buy one thing and subscribe to another is for customers an artificial, externally imposed requirement. A simple solution is to bake the cost of the bike into the subscription, which in effect means understanding, as Barry Macarthy surely does, that durable subscription businesses are often as much about solving for financing questions as they are about product design ones.