Peloton (PTON -1.43%) is the world's largest interactive fitness platform. By bringing cardio into customers' homes, Peloton was well positioned for a socially distanced world. However, while the pandemic helped increase adoption of its bikes, this was not a temporary shift, but an acceleration of the inevitable. Here are three big reasons why Peloton seems poised to stick around for the long haul.
1. Community keeps people coming back
A standard Peloton bike costs $1,895, but the value Peloton provides customers extends way beyond convenience and a fancy piece of hardware. Peloton has more than 17,000 available live and recorded classes, in which you can compete against friends, family, yourself, and celebrities. Even pro golfer Rory McIlroy has been encouraging other Peloton members to try and beat him in the class leaderboards.
The social component of Peloton's platform is building a network effect. Think of it like social media. Each user increases the value of the platform as a whole. As the user base grows, the next potential customer is more inclined to join because of all the people that are already on the platform. This network effect makes it cheaper for Peloton to acquire customers.
The best way to demonstrate this concept is by looking at sales and marketing expenses as a percentage of revenue. In the first quarter of 2019, Peloton spent 34% of its revenue on sales and marketing in order to acquire 52,000 connected fitness subscribers. Fast-forward one year, and Peloton added 243,000 connected fitness subscribers, but spent only 15.1% of its revenue on sales and marketing.
2. Competition is addictive
Studies have shown that competition, by nature, is addictive. Zero-sum competitions motivate participants to work harder to achieve a win. Whatever that driving factor may be, humans crave competition. Peloton recognized this.
In every class, Peloton shows a leaderboard as you're exercising. This subtle feature has created higher customer usage. Each class participant gets the chance to compete against the other members. The thrill of beating your old record or someone else's performance has helped contribute to a higher number of average workouts per month. This quarter, Peloton subscribers worked out on average 20.7 times per month. That's 77% more than the year prior.
The more customers use their Peloton, the more important it becomes to their daily routines. This increased usage has also led to lower churn -- percentage of customers that stopped using a product -- for subscriptions over time. In the same quarter that subscribers worked out 20.7 times per month, subscription churn was 0.65%. The year prior, churn was much higher at 0.90%.
3. Convenience still matters
"But what if there's a vaccine?" you might ask. While the pandemic proved to be a helpful catalyst for Peloton, it is not pandemic-dependent. Many investors have cited concerns that as gyms open back up, customers will stop buying Peloton bikes. The data suggests otherwise.
Gyms all over the country have been open since July, and in some cases even earlier. While gyms aren't quite operating at pre-pandemic levels, many gym-goers are returning to their fitness clubs. Yet in the same time frame when gyms began reopening -- between June 30 and Sept. 30 -- Peloton added more connected fitness subscribers than it had in any previous quarter.
As the world hopefully returns to a sense of normalcy, the same level of convenience that positioned Peloton so well to begin with should still be relevant to consumers. Pandemic or no pandemic, with Peloton seated at the crossroads of convenience, competition, and connection, it seems unlikely that Peloton's business model will miss a beat.