Spinning and Winning: How Peloton is revolutionizing fitness, technology, and everything in between

Peloton (noun) – the main group of riders in a bicycle race[1]… “riders in a peloton work together, conserve energy, and perform better because of one another”[2]

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Introduction: In 2012, John Foley and three co-founders started on a journey to “create a new concept in fitness” that would “create a world-class indoor cycling experience on your time, and in the comfort of your own home”.[3] Just three years later, news outlets like Biz Journal and Bloomberg Businessweek are speculating on the IPO of the young and fresh-faced Peloton (who just received their second round of funding of $75 million from PE fund Catterton) and what the future looks like for this Fitness, Tech, & Media company.

Peloton sells its state-of-the-art indoor bikes (complete with 22-inch screen, about the size of 4 iPads) to customers for at-home use, but they are no ordinary pieces of fitness equipment! Unlike your typical stationary bike, riders clip into their Peloton and can access both live streaming and an extensive library of on-demand spin classes, broadcast from Peloton’s brick and mortar cycling (AKA spinning) studio in Manhattan’s Flatiron district. In addition, Peloton operates twelve retail showrooms across the U.S., a number they hope to double by the end of 2016.

Competition, value proposition, & business model: Foley chose to found Peloton’s flagship studio and headquarters in “Silicon Alley” knowing that New York City is the “media mecca of the world”. A skeptic of Peloton’s decision to launch in 2012, in New York City no less, might point to an immensely crowded and competitive boutique fitness market, lead by industry beast SoulCycle, which is soon expected to IPO for almost $1 billion.[4] However since January 2014, Peloton has sold and installed approximately 20,000 bikes in homes in twenty-two countries, separating itself in both value proposition to its customers as well as its operating and business models.[5] Bikes cost riders a lofty price of $1,995 and Peloton charges a $39 per month via a subscription model, which costs the customer approximately $2,500 in the first year of use but only $468 (12 months x $39) in years after.[6] Peloton is expected to book $50 million in revenue in 2015, a five fold increase from its 2014 revenues.[7] In founding Peloton, Foley sought to capitalize on several realities:

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• The at-home fitness competition comprised DVD’s by mail such as the Insanity and P90X programs, effective programs but “out of date” according to Foley, who saw an opportunity to innovate in both the hardware and software of at-home fitness equipment.[8]
• As SoulCycle and Flywheel devotes raise families and have less time to operate according to studio schedules and step away from their homes, an at-home experience provides increasing value to a fitness devotee still seeking an addictive, high-quality, interactive experience.
• “We are more than just a class, a cycling studio, and a bike. We deliver a fully engaging experience with the technology to make every workout effective, and the social connection to make every workout addicting.”[9]

Peloton riders who purchase and use the bike at home benefit from the “interactivity” element that allows riders to track their metrics against other riders in remote locations (using a leaderboard), even video chat with other riders if they chose! The platform offers “thousands of on-demand classes”, which include varying lengths (15-, 20-, 30-, 45-, and 60- minute) as well as ride themes (Metrics, Rhythm) and music themes (Adele vs. Sia, Live DJ). In 2015, Men’s Health awarded Peloton “Best Cardio Machine” of the year calling it “the best cardio machine on the planet”.

So what makes Peloton different, why are they succeeding to date, and why does Foley believe that they are fundamentally unique from competitors and changing the industry?

Alignment of their Operating and Business Models:

• A service-oriented business: Despite the high price-point of roughly $2,000 for a Peloton bike, Foley has been very transparent that Peloton sells their bikes at cost and this is not where they make their money. To this point, it appears that Peloton is selling a product, a stationary bike, to its customers. In reality, Peloton is much more focused on the service it delivers to its consumers (its value proposition and strategy). Similar to companies like Netflix that operates on a subscriber-based model and Keurig that earns its money through selling K-cups rather than actual coffee machines, Peloton is transparent that, “the hardware, while key, is not where the money will be made… cash will come through subscriptions”.[10] Peloton has put its money where its mouth is, investing heavily in its engineering teams to support its software and platform. While spin studios like SoulCycle and Flywheel invest heavily in their corporate offices and instructor talent, Peloton’s model requires it to operate differently in terms of who they hire and what they need to operate. (of their 90-person back-office team, 17 are engineers and another 15+ work in Operations, Customer Experience, & Production) and operating a 24-7 service model around its platform, to ensure high-quality rider experience.

• Rider experience and scalability: Peloton considered early on having a fake set with actors to record classes for at-home riders, but quickly realized that streaming live classes with the “visual stimulation of the dark setting” was critical to making riders feel like they were in the class: said a founder, “the authenticity was important to us”. Furthermore, Peloton’s ability to stream to unlimited riders in 50 states and across the world will only allow it to successfully scale and improve its bottom line in future quarters. Unlike traditional spin studios that are limited to earning revenue on 40-60 riders per class, Peloton will never face this challenge and can bring their service to a wider audience.

Looking ahead: With scalability on its side as well as potential for network effects (each marginal user on the platform creates more value for other riders and increases barriers to entry for other market movers), things are looking up for Peloton. With potential to be a leader in fitness (competing in both the at-home & boutique studio spaces), technology (a major disrupter), and media, I would say that they have pulled ahead of the pack, at least for now.

Footnotes:

[1] http://www.merriam-webster.com/dictionary/peloton  [2] https://www.pelotoncycle.com/company/ [3] https://www.pelotoncycle.com/company/ [4] http://www.bloomberg.com/features/2015-peloton-spin-cycling/ [5] http://www.bloomberg.com/features/2015-peloton-spin-cycling/ [6] Given the average $30~[6] price point of leading boutique fitness industry classes, after the first year, a Peloton customer only needs to hop on his/her at-home bike 15 or so times before they begin to make their money back versus going to a class at an actual studio. [7] http://www.bloomberg.com/features/2015-peloton-spin-cycling/ [8] http://www.ft.com/intl/cms/s/0/bc6ff286-5794-11e5-9846-de406ccb37f2.html?siteedition=intl#axzz3tsjO8PnY [9] https://www.pelotoncycle.com/company/ [10] http://www.ft.com/intl/cms/s/0/bc6ff286-5794-11e5-9846-de406ccb37f2.html?siteedition=intl#axzz3tsjO8PnY

Other Sources: 

http://www.bizjournals.com/newyork/news/2015/12/02/peloton-pedals-toward-ipo-grab-75m-private-equity.html

http://www.racked.com/2014/10/1/7574819/peloton-stationary-bike-spin-class-home-fitness-equipment