What happened

As an abbreviated trading week winds down today, shares of Peloton Interactive (PTON 1.87%) are taking the weekend off early, down 3.2% as of 11:30 a.m. ET on Thursday.

You might want to blame Peloton for that -- but in fact, I think the company has made a correct call.

Kid crying after falling off bicycle.

Image source: Getty Images.

So what

As Bloomberg reported this morning, Peloton is preparing to cut prices on its bikes and treadmills, while raising prices on its subscriptions. The company's stationary bikes will cost roughly 20% less than before, while treadmills are getting a 6% discount. In contrast, monthly subscription fees for exercise classes using the equipment will rise 12% in Canada, and 13% in the U.S. (to $39 per month).  

Peloton described the move as an effort to make its equipment more affordable, and thereby expand its market share. But I think there's something even savvier going on here.

Yes, lowering the initial cost of access to Peloton's services should help increase market share. The bigger story here, though, is that the Peloton business with the longer tail and the better margins -- monthly recurring revenue from exercise subscriptions -- is going up in price.

Over the long term, that's probably more important to Peloton's revenue and profits.

Now what

Over the last five years, Peloton has increased sales of connected fitness products 17-fold, from $184 million in 2017, to $3.2 billion in 2021. Impressive as that growth has been, however, subscription revenue (which earns gross profit margins twice those of equipment sales) outpaced it, rising 27-fold over the same period of time.

Yes, at present, equipment sales still dwarf subscription revenue, $3.2 billion to just $872 million. But it's the subscription money that's growing faster, and after this new price hike, high-margin subscription revenue should grow faster than ever.

For Peloton shareholders, this is good news.