Peloton (NASDAQ:PTON) stock has had quite the run in 2020. Shares are up over 460% year to date, the company was just added to the Nasdaq 100, and revenue has grown in the triple-digits the last few quarters.
With the stock soaring, investors are pricing in a lot of future growth for this business. One way Peloton is planning to meet these lofty expectations is with a revised pricing strategy that came with the announcement of the Bike+ earlier this fall. Should investors be excited about this change? Let's take a look.
What is the Bike+?
On Sept. 9, 2020, Peloton released the Bike+, the second product in its cycling portfolio. The hardware will cost $2,495 (or $64 a month for 39 months) and is supposed to be a premium offering compared to the standard Peloton Bike. The value proposition for the Bike+ is the "superior" four-speaker sound system and a large, rotating screen that enables users to easily transition from cycling to strength, yoga, or other floor-based exercises. It also should unlock some demand from price-insensitive customers, hopefully being more profitable.
As a part of this launch, the company decided to lower the price of the standard Peloton Bike to $1,895 (or $49 a month for 39 months) in order to make the product accessible to more consumers. Yes, I know $1,900 is not a bargain, but any price decline should in theory elevate overall demand.
Why it makes sense for Peloton
With people already paying close to $2,000 for Peloton's flagship product, it was only a matter of time before the company started flexing its pricing power muscle. If consumers are willing to spend an extra $500 for something slightly better just because it is associated with the Peloton brand, why stop them? This strategy has worked wonderfully for lifestyle brands, and could be something Peloton leans into over the next few years.
A 20% price hike comes with a bit of demand risk, especially for something that costs $2,500, but so far it looks like Bike+ is knocking it out of the park. Delivery wait times still sit at 10 weeks or longer, and executives mentioned on the latest conference call that initial sales outpaced internal estimates. While some of these wait times may be due to COVID-19 supply chain issues (and probably don't help much with the customer experience), it shows the love customers have for the Peloton brand, an impressive feat given all the competing products on the market.
An underrated part of this launch, which was mentioned briefly on the latest earnings call, is how current customers are treating the Bike+. Peloton offers a trade-in program for customers who want to upgrade their offering, with the idea being you only need one bike per household. However, Peloton has found that a "disproportionate number" of existing customers who upgraded to the Bike+ have kept their old hardware. If this trend continues, any fears over Peloton not having an upgrade cycle should be alleviated, at least with its price-insensitive customers.
One argument against Peloton has been that in order to fulfill its rich valuation, it will need to greatly expand its customer base, which it will struggle to do because of how expensive its products are. However, if it continues to show strong levels of pricing power and demand for multiple products from its core audience, a giant customer base may not be needed, or even preferred. Rabid Peloton fans could spend thousands of dollars a year on products because of how the brand makes them feel.
Overall, investors should be happy about Peloton's new pricing strategy. The consumer discretionary company will need to work out its supply chain and does not have the established brand awareness of other lifestyle brands, but a lot of indicators point to it being well on its way.