Peloton´s business model evolves around offering a connected fitness & wellness experience across a wide scope of disciplines, including indoor cycling, indoor/outdoor running and walking, bootcamps, yoga, strength training, stretching, and meditation. They way they do is by offering both hardware (“Connected Fitness Products”) and software (“Connected Fitness Subscriptions”) of the highest quality to its members.
As you can see below, their main source of revenue comes from their Connected Fitness Products (around 80% of total revenue) and the remaining 20% accounts for Subscriptions. The numbers, which are made public in their website, pretty much speak for themselves, and Peloton can be considered one of the “clear winners” in the fitness space during 2020:
Peloton Connected Fitness Subscriptions grew 113% to almost 1.1 million.
Paid Digital Subscriptions grew 210% to over 316,800; total Members grew to approximately 3.1 million
Fiscal 2020 revenue grew 100% to $1.8 billion
Average of 17.9 Monthly Workouts per Connected Fitness Subscription, versus 11.5 in the same period last year
Average Net Monthly Connected Fitness Churn was 0.62% for fiscal 2020 while 12-month retention rate was 92%
These are simply impressive figures but if we look at their evolution over the last few years we can see the feat is even more remarkable given the amazing momentum they already had.
Peloton´s “North Star Metric”: Member workouts
After listening to this episode of Dan Martell´s SaaS Growth Stacking podcast explaining how to identify a business´s “North Star Metric,” which ultimately is the key metric that guides the major corporate decisions, our opinion is that “member workouts” are Peloton´s north star metric as, following Dan´s description in that episode:
Prove that the customer is obtaining value from the service: The more a member rides his / her Peloton bike shows that they are enjoying the service
Lead to revenue: more workouts lead to more subscription renewals which lead to more earnings.
Are unique to the business: For instance, fashion or FMCG businesses will have no interest in tracking “member workouts,” right? So these metrics cannot be copied from one business to another.
Looking at Peloton´s reports, the rate of growth in member workouts is simply astonishing, with a particular focus in 2020, in which Peloton has greatly benefited from the effects of Covid-19, in which overall “at-home” workouts have increased around the globe.
What also stands out is that members are actually diversifying the type of workout they carry out as years go by which makes sense as people ultimately seek some variety within their workout routine. For us, this is also a great sign of customer engagement, and again, higher engagement should drive higher revenues for Peloton.
Peloton´s NPS: A powerful driver behind its brand growth
At the core, Peloton enjoys a fantastic brand strength that can be measured in several ways.
On one hand, they have a 94 Net Promoter Score (NPS) among their US Bike users. In case you are unfamiliar with NPS, it is a metric that looks to understand if consumers would recommend a given product or service.
When completing a survey, have you ever had to answer a similar question to this one: “On a scale of 1 to 10, with 1 being “no chance” and 10 being “definitely,” ¿would you recommend our service to your friends or family?” Well, this question is actually measuring NPS.
On the scale, those who grade your brand between 1 & 6 are considered “detractors” while those grading 9 & 10 are “promoters.” The 7 & 8s are considered “passives.”
The calculation to arrive at NPS is relatively simple, as it subtracts the % of promoters from the % of detractors. The final result can therefore range from -100 (all respondents being detractors) to +100 (all being promoters).
Peloton´s NPS score of 94 is quite honestly, an astonishing result.
Another aspect that can determine Peloton´s brand popularity is the evolution of searches on Google, which you can see have evolved significantly over the past 5 years at the worldwide level.
While there is a constant rise of searches across that time frame, there are a few dates that stand out:
In december 2019, Peloton launched an ad that was highly controversial as it was labelled as “sexist & dystopian”
One year later, in december 2020, the brand made official the purchase of fitness equipment manufacturer, Precor, proving how much things can change in a year.
To finish this section, we also looked at social media followers, which as of august 2020 the main figures were:
333K members on the Peloton official member page
4.3M people follow Peloton instructors on Instagram
Peloton´s official Instagram page has over 1M followers
However, we are of the opinion that social media engagement figures would be needed to truly define brand strength on social platforms but in essence, based on NPS, Search Intent and Social Media Awareness, Peloton´s brand recognition carries very positive momentum.
Peloton in the international landscape
One thing that does stand out is the small percentage that international markets contribute to the total revenue figure, even though they have presence in major markets such as the United Kingdom, Canada and Germany.
In particular, revenue coming from North America (USA & Canada combined) was 1.743,6 M (93%) vs $82,3 M (7%) coming from the other Germany & UK, although the evolution has been very positive since the launch of international operations with a growth of almost 400% in 2020.
As we will cover in the next section though, our feeling is that over the next couple of years, revenue contribution from international operations will increase significantly.
Peloton´s potential growth opportunities
The above analysis shows that Peloton is currently riding the “peak of the wave” but this does not mean they will remain stagnant and not investigate further avenues of growth. The challenge for them is to maintain those impressive results even after people move on past the pandemic and start new routines that may not imply working out at home as much. In other words, it seems Peloton was able to capture almost 13% of the 4.4 million customers in the United States that cancelled their gym membership during 2020. Now the question is if this is simply a "temporary" growth and how will they maximize the LTV of these customers. According to co-founder & CEO John Foley, Peloton has an addressable market of 200 million people, so they identify plenty of room for growth...
In an effort to try to determine where Peloton will go next, in our personal opinion, we wanted to share five strategic moves the brand could consider to keep positive momentum in the future, although probably the full range of possibilities is much bigger.
Enter new markets:
This may seem an obvious decision, but the question would be: Which market? While the purchase of fitness manufacturer, Precor, in december 2020 seems to be primarily aimed at solving manufacturing & supply chain issues in the United States (the brand confirms being able to increase production capacity by 700%), the truth is that Precor has access to 100+ markets around the world and its distribution network could open up a few doors to new markets.
The company is fully aware that new competitors are emerging in different markets. An example of such a case would be Spanish brand, Volava, which offers the same service as Peloton. In fact, the company's founder admitted that he started the business after trying to buy a Peloton bike but not being able to get Peloton to deliver it to Spain.
Volava is quickly expanding in Europe and it has already signed distribution deals with companies in Germany and the United Kingdom. In fact, Volava has secured an additional investment round and it will even start selling its products through Amazon and potentially, Decathlon.
We wrote the following paragraph during our initial forecast of plans Peloton could consider:
"In our view, and without being knowledgeable of the strategy that the brand is following, English speaking countries such as Australia, New Zealand, etc. may make more sense at this time as long as it is feasible from a supply chain perspective.Not only would it prevent Peloton from incurring on a large investment to create additional content, these markets seem to have purchasing parity figures similar to those in the United States or United Kingdom."
And then, in march 2021 the brand actually made official that it will enter the Australian market in the second half of the year. Well, we are not sure if we get the others right, but at least we are comfortable knowing we at least saw one of them coming :)
New products: Strength Training adjustable weight
Another possible route for diversification would be to expand its current product portfolio, in addition to the current Bike and Treadmill. In our view, and based on the data we shared above in which strength training seemed to be becoming more popular among Peloton members, the next step could be the launch of a connected fitness strength product similar to what Tonal has developed.
This in fact, aligns with predictions from Loup Ventures, which assures that Peloton calls “the strength business an important vertical for the company to plant its flag and sees intriguing upside for new products from the acquisition of Precor.”
Analysts from the firm had this to say in that regard, as reported on Seeking Alpha:
"We believe that Peloton's next product is most likely a strength machine (similar to Tonal). Outside of strength, Peloton still needs to lower the entry price for its bike category, which currently starts at $1,895. By the end of 2021, we expect that the company will have a bike available for less than $1,500. This is more difficult than it appears, given Peloton needs to provide equipment that is more durable than conventional home exercise equipment to reduce customer support and warranty claims."
As a side note, we would be thrilled to see some form of “connected & adjustable kettlebells or dumbbells” being launched. Just putting it out there...
Physical locations: Showrooms, Boutique Studios & Retailers
The acquisition of Precor at the end of 2020 was a move to control the supplier end of the value chain. In our opinion, the next step, in order to cover the full spectrum of the market, would be to expand its “physical” presence and establish additional touchpoints with potential new members. This could take form in many ways but on this post we want to focus on three of them:
Showrooms & Hotels
Peloton is already familiar with this field, as it already has a total of 95 showrooms and on the other, according to their financial report as of June 30, 2020, there 2,200 bikes across 1,200 hotels. So the obvious choice here would be to expand presence across these two known fields. In fact, the brand confirmed in September 2021 that part of the rationale for acquiring Precor was to be able to "open the door" into hotels at an international level.
Peloton Boutique Studios
A trend that seems to be flourishing among “digital first” businesses is to expand their D2C efforts to physical locations (think Amazon purchasing Wholefoods). We would not be surprised if Peloton decided to expand their brand this way as it could have multiple benefits:
Improve their omnichannel strategy
Create further touchpoints with members
Expand into other segments of the fitness industry
Create additional “content creation” studios across the globe
Retailers
It seems that the future of retail, after Covid-19, is to elevate the customer experience to a whole level in which the visit to a given location will go beyond “purchasing intent” and more into “entertainment based” experiences.This opens up a realm of opportunity for retailers looking to drive traffic back into the stores
For instance, couldn't IKEA create a “Peloton themed” room inside their store, install a few Peloton bikes inside and have customers actually ride the bike there? In fact, Ikea already signed a deal with Adidas to create “home fitness” products so it would not be anything totally new for them.
Athleisure
Sports apparel is a line of business that has experienced remarkable growth for Peloton. According to numbers shared by Joe Pompliano, the brand reported $2.7 million in apparel revenues in 2017 and $14.7 million in 2019. The amazing thing is that he projects this figure to be capable of reaching $60 million by the end of 2021 (a growth of 308%), thanks in part to the momentum the "Peloton brand" generated in 2020.
While this would still contribute a small portion of Peloton´s overall revenues, it is a critical element to drive brand engagement from its loyal consumer base. Peloton´s top executives believe so as well, as reported on this Front Office Sports article:
“I think we’re going to surprise people in apparel…we’re building the best quality apparel in the world” (CEO John Foley)
“Just this year I hired eight more people because of our growth and I think the greater Peloton brand realized, ‘Oh, geez, we need to invest more in this apparel” (Vice president Jill Foley)
Mr. Pompliano shared the following conclusion in his article, with which we agree with:
(Apparel Revenue) still represents less than 2% of their overall business. But don’t be fooled; it matters. For the same reason Lululemon bought Mirror for $500M, the combination of tech-enabled fitness equipment and premium apparel is imperative to becoming the premier fitness brand of the future.
Virtual Fitness
Finally, we believe there is another great opportunity for Peloton around Virtual Fitness and in fact, it seems they will roll out such a service by the end of 2021. In another article of the blog we have already discussed the potential of “Active Video Gaming” and from a “community” standpoint, video games drive the creation of communities with close bonds.
This would enable Peloton to maintain an advantage over Ergatta or Zwift, a company that also experienced huge success during 2020, and even start acquiring younger generations of consumers, who might be more willing to start their fitness journey through gamified experiences.
Again, these are just some personal opinions and thoughts but it will be interesting to see how Peloton decides to take the brand forward from now on.
In the future, we hope to bring you updates to this business case keeping track of the strategic moves the brand makes and how they perform against their objectives of “winning the fitness category.” Keep in mind that, according to numbers reported in September, Peloton calculates it has a 7% penetration rate at the global level, so there is still plenty of room for growth. And, if we can afford it and the company decides to enter the market where we live, we hope to be able to count on a Peloton bike of our own so we can share the experience first hand!
We hope you enjoyed this review of Peloton´s business metrics, brand strength and our thoughts on potential growth opportunities. If you have any feedback or suggestions, please feel free to share it with us so we can incorporate in the future and make these posts more valuable for you.
Meanwhile, keep safe.