Peloton : Fitness Studios :: Netflix : Blockbuster

Imagine a spin class with a world-class instructor, but instead of schlepping yourself (and your bag) to the gym and dealing with 20 sweaty, smelly classmates, you get a high-intensity workout in the comfort of your own home. Peloton has made this fantasy a reality.

Existing Fitness Studio Business Model

In recent years, we have seen a proliferation of niche, high-quality fitness studios, with health club revenues topping $24 billion last year. Marquee brands include SoulCycle, Flywheel, Barry’s, and a host of others. Personalized fitness studios now make up more than 40% of the market, with over 20 million people in American belonging to a boutique or discipline-specific facility[i]. No company better epitomizes the trend to discipline-specific studios than SoulCycle. With 50% year-over-year growth, the company has grown to 50 studios and expects to IPO soon[ii]. SoulCycle’s strategy is to buy (or lease) expensive real estate in major urban centers and charge upwards of $30 for 40 minutes on a stationary bike[iii]. During the class, high tempo music blasts as an instructor motivates a room full of attendees. Unfortunately, classes are offered at specific times and often fill up quickly. Worse yet, if you do get in to a class you may end up in the back of room, where you cannot see the instructor. The Unbreakable Kimmy Schmidt captures this dilemma of being stuck in the back of the room best:

Digital Transformation Disrupts the Existing Model

To address the issues stated above, Peloton developed a stationary bike with a 22-inch, 1080p full HD tablet mounted to the handlebars that allows members to partake in a live stream of a class or select a variety of on-demand sessions. At the end of each session, the tablet provides you data on calories burned, distance traveled, overall revolutions per minute, and your ranking compared to other Peloton members in that specific class[iv]. By focusing on digital content and the user experience, Peloton increased the accessibility of spinning without sacrificing the energy of that crowded studio class session. Further evidence of the technological capabilities: Men’s Health named Peloton the Best Cardio Machine in its annual ranking of fitness programs[v].

What used to require a trip to the gym or studio can now be accomplished in your living room or in-home gym thanks to the digitalization of the studio class. In addition, you don’t have to compete for a class time or miss a class due to traffic – the Peloton bike is always available at your home and on your schedule. Despite a retail price of $1,995 and $39/month subscription, the company has sold 40,000 bikes and expects revenues to exceed $150 million this year.[vi]

A Better Business Model

In terms of business model, the Peloton is to Soulcycle what Netflix was to Blockbuster.  As opposed to spending money on real estate, hiring instructors, and maintaining a brick-and-mortar operation, Peloton employs a few instructors broadcasting live streams to members across the world. With minimal fixed costs, superior technology, and a recurring revenue subscription model, Peloton is clearly a superior business model. The most significant evidence of SoulCycle struggling to deal with Peloton is the fact that the company has continually delayed its IPO over the last 18 months, possibly due to market share loss.

Additional Steps for Peloton to Take

Peloton has recently raised $30 million in new financing, which will be important as it seeks to expand its product offering. However, the company has oddly used the proceeds to build out more brick-and-mortar stores (with a total of 20 “showrooms” nationally). A more prudent use of capital would be to leverage the existing technological infrastructure and brand equity in to other machines: treadmills and ellipticals. In terms of using digital to better its existing product, I expect the company to continue to invest in research & development to bring the cost down to a more mass-market level. As the first-mover who has truly figured out how to combine digital technology with exercise, Peloton will attract many copycats. In the end, competition will be good for consumers. I look forward to the day when we can all get a world-class workout experience in the comfort of our own home.

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Student comments on Peloton : Fitness Studios :: Netflix : Blockbuster

  1. Great post. As a Peloton user, the business model certainly resonates. To illustrate the benefits, I did a 30 minute ride this morning before school. Because it’s located 25 feet from my bedroom, I only needed to wake up 35-40 minutes earlier than usual. Also, because there weren’t any “live” classes (classes being broadcast live from the Peloton studio in NYC), I looked up an “on-demand” ride with my favorite instructor that had been previously recorded. Super convenient.

    With regards to the pricing, for those that are into indoor cycling, the payback period on the bike is actually reasonably quick (12-18 months). My understanding is the company sells the bike for close to cost and is relying on the monthly membership to generate profit and cash flow. This makes sense given the valuation difference between the two models (selling hardware vs. selling software). My outstanding question: how is the tablet, and the information being broadcasted, going to change over the years and how that will affect the legacy tablets? Technology is changing quickly, so how the company manages that with respect to pushing forward, but also acknowledging its existing user base has older technology, will be interesting.

  2. Awesome post, thanks for sharing. I have used Peloton before and very much enjoyed the experience. The sticker price of ~$2,000 seems somewhat prohibitive, and I wonder if the company has explored the feasibility of offering a financing option for less affluent customers. I doubt that Peloton will be able to disrupt Soulcyle in the same way that Netflix / streaming services were able to disrupt Blockbuster. In many cities around America, the millennial-driven exercise craze has flourished in part because it has become a form of socialization. Instead of grabbing coffee or a drink after work / class, friends will book an exercise class to spend time with each other. Given Peloton is an inherently solitary experience (at least from a physical perspective), I do not expect their customers to drop their SC classes entirely.

  3. Great post! The retail price of $1,995 seem like this business would have a high barrier to enter for customers and would have limited (exclusive) type of customers – only those who could afford a ~$2,000 bike. I wonder how Peloton marketed its products to its potential customers. Also, as you mentioned in your blog post, their use of financing seem odd so far and I wonder if their business model would really disrupt competitors like SoulCycle and if it would be a sustainable business in the long term.

  4. Thanks for the great post! I get a lot of targeted advertising for Peloton on Facebook, so I must be part of their target demographic. As big fan of the SoulCycle class experience, I wonder if Peloton is able to recreate this in a way that is as energizing/addictive/cultish for the target customer base. While I love the concept, to me this seems like a time when technology gets in the way of real human interaction. SoulCylce, Barry’s and other exercise studios are often a social experience that you do with friends and others, but to me this seems to lose part of that experience. I agree with one of the earlier comments, that technology may be a challenge for Peloton as they continue to develop this product. Exercise equipment should have a longer lifetime than my phone or tablet, so I wonder how Peloton will balance updating their hardware and staying relevant while also not making their current customer’s investment outdated. I wonder if in the future, we will just plug our own tablets into enabled connected exercise equipment to access a similar platform.

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