Fitbit – Find Your Fit
The San Francisco-based wearable fitness-tracking device maker's efficient business and operating model in organization, focus, hardware, and software.
Fitbit provides various product lineups from well-known wrist-bands to clip-type devices. The main functions these products deliver are tracking user’s activities and showing the statistics and summaries of the activities such as steps, distances, speeds, calories active minutes, and even sleeping patterns. The market forecast is fairly optimistic. According to market research institutes such as Gartner and IDC, wearable devices market will grow very fast, and Fitbit will take advantage of the inflowing wave of the industry. The company is now a public company after its IPO in June 18th 2015 at the price $20, and is traded in NYSE. The current stock price is $33.18, as of Dec. 4th.
<Exhibit 1> General Introduction of Fitbit platform
Fitbit’s main source of revenue is Hardware sales. In 2014, Fitbit’s market share in 2014 was 70%, significantly outperforming Jawbone, the second-largest player in wearable fitness tracker product category. They also generate revenue from their Software sales, which is a yearly-basis premium service that provides five distinctive features – other people’s benchmarks, food report, activity report, sleep report, and fitbit trainer function. Their business model is generating hardware sales as a main source of revenue, and using software as both additional revenue and retention, with affordable premium services. The company introduced Fitbit Premium service, which is a $49.99 yearly-fee basis service. This premium service provides in-depth analysis on one’s physical activities. For example, you can compare your physical status with other people in your age group, and its trainer function challenges people to go beyond their personal limits to be healthier and well-shaped. In 2014, paid active users of the service were 6.7mil, and it is expected to rise to 9.5mil for Mar. 2015. Also, their accumulated customer base and data are helping them develop improved features and services for customers, which will be the key to further success and retention of customers in the fitness service industry.
< Exhibit 2 > Sales Unit Volume / Revenue / Paid Active User figure
First, Fitbit is very effective in terms of sales unit per employee. The company has achieved 10.9 million unit sales with only 469 employees as of December 2014, which means each employee sold 23,241 devices in 2014. Considering that Samsung has more than 150,000 employees worldwide, and Fitbit’s direct competitor Jawbone also has more than 400 employees but recorded only 27% of Fitbit’s sales, Fitbit shows quite an efficient operating model as a device manufacturer. Also, as the number of paid users is significantly increasing from the year 2012 to 2015, the limited number of employees are generating higher values than just product sales.
< Exhibit 3 > Wearable Fitness Tracker Market Share
Second, Fitbit concentrates on their strength, showing consistency on wrist-band shaped design and analysis on huge customer base. Initial Fitbit product showed some problems to people’s skin, but now the company has learned a lot about people’s wearing behaviors so the field claim rate dramatically improved compared to the customer claim rate of the initial product. The efficiency comes from the fact that the company keeps focusing on wrist-band shaped designs, which generates not only expertise as a wrist-band manufacturer, but also provides accumulated customers’ behavior data for further improvement, and their data is the largest in the world regarding customer base.
Third, the company developed an efficient hardware lineup. And the company also shares many basic but essential tracking features, such as Bluetooth technology to connect with smartphone, micro-usb charging hole, simple display and tracking module based on GPS and other activity sensors such as accelerometer. Sharing the core features and components among their various products, while differentiating with design, material and additional new features by product, the company is pursuing operational efficiency in its hardware lineup.
< Exhibit 4 > Fitbit Hardware Lineup Feature Table
Last but not least, is its efficient software. The company’s software not only raises retention rate of customers with its customized premium service, but also efficiently aligned with various products. Similar to the company’s hardware operating model, all these products share basic functions and provide the same application for all products. Introducing an all-in-one application for Fitbit’s diverse products is an efficient model for the software engineers because they do not need to develop all the different applications for the different products. By simply figuring out which type of product is being used, the application can be optimized to the user’s product and provide necessary tracking and analyzing services. Therefore, the company provides only one application from mobile appstores for analyzing and showing the user’s performance.
< Exhibit 5 > Product Selection Page in the same Fitbit Application
Aligning the company’s business model with its operating model seems crystal clear – the company’s efficient operating model enables Fitbit to 1) reduce hardware development costs and gain procurement power with optimized components for minimized SKUs 2) save application development and operation resources by using same application, and use these for creating new products like premium service 3) gaining learning curve for wrist-wearing band type product and analysis of accumulated data and 5) finally lead to customers’ retention and increase of sales.
< References >
http://www.edgar-online.com – Fitbit Form S-1 Registration Statement (for the firm’s Initial Public Offering)
http://www.advisor.marketscope.com/SP/msa/reports.pdf?reportURL=/EQ/pdf/sr/3/33812l10.pdf (S&P Capital IQ Stock Report, November 28, 2015)
Student comments on Fitbit – Find Your Fit
Great job Ryan! I have always been impressed by Fitbit and their ability to leverage their core strength (software) to capitalize on the ever-emerging fitness market in the U.S. I wonder what will be the next step for them as the technology continues to improve. In addition, as Under Armour and some of the traditional fitness brands begin to break into the industry, I wonder if Fitbit will continue to succeed on its own or be forced to merge with a competitor or partner with some to succeed.
Thank you very much for your comment, Daniel!
You’re right. Under Armour and other players keep searching for the opportunity to dive into the industry. However, it is hard to be successful in the industry in the short period of time because, 1) in the high-end segment, Apple Watch came out but not attracting as many customers as it used to capture with iPod and iPhone, 2) in the low-end segment, Chinese makers like Xiaomi provides value-for-money products less than $20 dollars… 3) And players like Fitbit has been in the business for a while, accumulating significant amount of data. So I think it would be hard to differentiate as a new player in the market. However, one opportunity side for UnderArmour is introducing the fancy or functional hardware with its strong brand, like an upgraded Nike Fuelband with cool design, that fits to UnderArmour’s other product lines.
I am so into many kinds of sports, so let’s keep discussing about things… 🙂
Nice article Ryan. Clearly illustrates how using a uniform software platform and focusing on consistently in the wrist bands’ design allows the firm to scale and thus get more data, which further makes it value proposition stronger. However with the entry of other startups and larger companies such as Jawbone, Basis and Nike in the wearables market what can be a way forward for Fitbit to maintain its market leader position considering that the other players are offering greater customization on the software as well as the hardware side?
Thank you so much for the comment, Sidharth! What you mentioned is the fundamental question and doubt of the business like Fitbit and other startups with only small number of successful products. Personally, I think Fitbit should pursue strategies as below.
– According to the Michael Porter, the prominent professor in HBS, there are four stages in the development of Internet of Things – Monitoring, Control, Optimization, and Autonomy. I think most newly launched products in the market are starting from the first stage, playing role as a data collecting and gathering information through precise sensors. After accumulating relevant data, companies can provide more services, providing better user experience and more customized services. I think Fitbit is in the second stage, introducing more customized services like premium service, simultaneously trying to go to the third stage, which requires more complex algorithms that is optimized for each user of the service. And the differentiation may be possible if Fitbit successfully introduce their own algorithm to the market.
– This is the tricky part and I know this part very well. (I’ve worked as a high-tech product manager previously.) It is hard to differentiate with hardware features because there is nothing “superior” feature for wrist-band sized products. There are four focuses – fashion, sports, medical, and infortainment – and the winner would bring something powerful from these categories. For example, if a company can bring up “Hermes band” focusing on fashion part, or if a company successes in incorporating a important medical function into this tiny wrist-band, then it would boost the sales. As a hardware standpoint, I think general products like Apple Watch and Fitbit would take certain portion in their price level, while other specified products come up and get customized needs of customers.
If I am a Fitbit, I would try my best, but I would talk to other large tech giants such as Amazon or Google about the M&A. Still, hardware is very attractive area for many software companies, especially B2C companies because hardware is one of direct access points to the actual customers.
Ryan – great article! Very interesting to read about FitBit’s expertise in software, coupled with consistent hardware. I was wondering – are you concerned that the value proposition as a stand alone service is strong enough? It appears to me that FitBit, jawbone, etc face intense competition from native wearables that integrate more tightly with customers existing lifestyles.
Hi Emma, thank you so much for your comment!
I had the same thought that you have. Because Wearable products are not that popular among people, they are willing to stick to native wearables like products in jewelry and watch categories. Actually it is very easy way to do market sizing because companies can set their goal like “taking 1% share of the entire watch category”, simply comparing the size of the conventional market. However, I think now it is the time for players in the wearable industry to collaborate more frequently with companies in different industry, just like TagHeuer smartwatch with Google and Intel. Wearable industry is divided into four major categories – Fashion, Medical, Fitness, and Infotainment – so collaborating with players in different categories can be an option to take.
As my last comment, I think the success of wearables is relying on the success of the next generation Apple Watch. If Apple Watch 2 can’t attract enough people again, then I think nobody can guarantee the success of wearables in the near future. 🙂
Great post, Ryan!
I bought and used a FitBit a couple years ago, but quickly got tired of tracking my steps once I had a good sense of how to estimate this data on my own. This is what leads me to question FitBit’s sustainability going forward. They’ve got a great software play to keep users hooked and of course their hardware has strong reviews and is considered the best in the market, but given competitors are popping up left and right in this niche market, I wonder if FitBit will be able hold its own. It worries me that they make their money from hardware for the most part — with Apple’s iWatch slowly growing adoption, I wonder if that will soon be considered a threat to FitBit? There are so many apps available in the Apple Store and I wonder if FitBit’s own software platform can withstand the test of time. Will be interesting to see how they continue to innovate in an increasingly competitive market going forward!
Hi Ritika, thank you for your comment and sharing your own experience of using Fitbit!!
I think the customer base of Apple Watch and Fitbit became different – due to the difference of retail price. Compared to Fitbit’s $99-$149 price range of products, Apple Watch’s price starts from $299 to $699 and even more for a few exclusive models. For me, Apple’s product positioning seems “Affordable luxury”, while Fitbit’s product positioning seems “Value for money”. In the short term, Fitbit can be a beneficiary of Apple Watch because it attracts many people to the wearable devices and even absorb a few of them to pick Fitbit, the lower-priced one.
I think in the long term, I am worried about Fitbit’s future, as exactly what you mentioned. Personally, I think the best way for Fitbit to survive is do partnership or collaboration with other large companies such as Amazon or Google, that do not have hardware lineup like Fitbit. M&A with those companies can be an attractive option. Until then, Fitbit may have to survive with its accumulated customer base and optimized hardware lineups.