Peloton and its stock have been through quite a workout lately and are sweating the market reaction to their new pricing strategy.
The home fitness company, has been all over the headlines recently–first for crushing expectations on Black Friday:
“Peloton Interactive Inc. gained almost 10%, hitting a record of $35.23 per share after KeyBanc said the company was seeing strong traffic on Black Friday.”
...then for a TV ad in poor taste:
“The company said it’s “disappointed in how some have misinterpreted this commercial” but said it has received an “outpouring of support ... from those who understand what we were trying to communicate.””
...and finally for pricing changes:
“Peloton Interactive Inc. shares tumbled after a report said it lowered the price of its digital subscription app for workouts in an effort to appeal to more users.
A membership for the digital-only subscription now costs $12.99 a month, compared with $19.49 previously, Peloton said, confirming an earlier report in The Verge. Peloton, which makes a stationary exercise bike and treadmill with an affixed iPad-like device for following workout classes, didn’t change the $39-a-month price for a subscription linked to its proprietary equipment.“
Pricing Pessimists Prevail
After a Black Friday bump taking its stock to a high of $36.84 on 2-Dec, Peloton’s stock has lost well over 10% of its value (as of 16-Dec close price of $31.38) on the news that it lowered pricing on its digital-only subscription. Note that Peloton has two subscription products – one is attached to the bike or treadmill, and the other is a digital-only subscription for anyone who downloads their app on iPhone, Android, iPad, etc.
So, with an $8+ billion market cap, the $800+ million question is – was the street right, or did Peloton make the right move?
Pricing Strategy vs Tactics
I haven’t spoken with Peloton, but I am very familiar with both the digital and bike products. As a user, I thought it was interesting that the bike subscription, at $39/month, is much higher than the apps original pricing of $19/month, but it made sense to me. Why? Lock-in.
You bought the bike for $2,250. You moved furniture to find a place for it. You waited around to get it delivered and set up. Will you turn it into a paperweight to save $39? No. Nobody will. Not to mention, that when compared to the cost of a popular spin class like Soulcyle or Flywheel, averaging over $30/class, even casual "spinners" can quickly justify the cost.
Peloton also offers a multi-year financing option for the bike purchase which is another key factor contributing to lock-in. Loyal customers working hard on improving their health and sharing progress on social media and via traditional word of mouth are key to Peloton’s continued growth and is at the heart of its 94% customer retention rate.
App users–and more competition
As for the app-only subscribers on the other hand–not only are they three clicks away from unsubscribing in the App Store at any moment, the app itself is surrounded by competition charging $10 or $15 per month. So while the bike is a constant reminder of your “commitment” to fitness and is your ticket into the bike-owner community, that commitment level is way lower on the digital-only subscription–and you have far more choices.
Furthermore, the app is generally used by 1 person, while the bike subscription can be used by as many as you want; I would guess the average is a bit over 2 (husband, wife, condo buildings with lots of users).
But if $19 was working in the app–why change it? That’s where the strategy comes in.
Digital-only subscribers make up nearly 16% of total subscriptions, up from about 10% when Peloton went public several months ago in August. Lowering the price of the digital subscription will make it more competitive with similar gym or floor-based exercise apps that are not tied to equipment purchases. It will also offer an incentive for those that may be on the fence as far as buying a Peloton bike to try out the experience of the classes, the community, etc — which makes good pricing strategy sense. Additionally, the user demographics are shifting for Peloton as the company noted in its earnings report “the fastest-growing market segments are people under age 35 or with household incomes under $75,000.” Providing a lower-priced, digital-only subscription will help in large part to grow this segment, creating brand loyalty with the hopes of locking in many of these users in the future with the purchase of the at-home equipment.
Not lowering the bike-owner subscription also makes great pricing strategy sense, as it reassures the pricing psychology of those in the “Connected Fitness Subscriber” community, who wear their bike-owner status as a badge of honor.
What is your pricing for?
Some companies try to extract the maximum they can from their customers. (I’m looking at you Comcast, Verizon and Apple). There’s nothing wrong with it – in fact, some might say it would be wrong to do otherwise. They are mature industries, premium products, and extracting value makes sense.
Other companies are looking to grow (Uber, Lyft, etc). These companies offer amazing first-time buyer incentives and low pricing to increase their recurring user community.
Peloton’s pricing strategy leverages the psychology of customers’ desire to join an exclusive club of super-serious fitness-minded folks, that will help drive them to their fitness goals.
This is a very compelling proposition for those with a real desire to cycle their way to better health and fitness compared to alternatives such as paying for a local spin class, gym membership, or a competing app.
Knowing why your customers buy, where and how your new customers hear about you, and knowing why they stay committed, are at the heart of any pricing strategy.
Kudos to Peloton for knowing their customers, market segments, and their brand.
Do you have the right tools to price your products and subscriptions optimally?