In early March, Peloton Interactive (PTON 1.99%) announced a new offering, dubbed the One Peloton Club, which essentially combines the cost of a Bike or Bike+ and all-access membership into one, simple monthly subscription. New customers must live within 30 miles of a Peloton showroom, and it's currently being tested in California, Colorado, Florida, Georgia, Illinois, Maryland, Massachusetts, Minnesota, Texas, and Virginia.
While the total monthly fee will range between $60 and $100, depending on product and location, management's objective is to spur demand that has fallen off a cliff for the business. This consumer discretionary stock has shed 83% of its value over the past 12 months, so any progress with this new strategy could be well-received by Wall Street.
As the new pricing model possibly expands to other markets, shareholders should focus on two important metrics to measure its success: connected-fitness subscribers and monthly churn. Here's why.
Image source: Peloton Interactive.
It's all about reducing friction for customers
The obvious goal of this pricing strategy is to boost connected-fitness subscribers -- that is, those who own a piece of equipment. This number stood at 2.77 million as of Dec. 31. Getting Peloton's machinery into as many households as possible is the name of the game, something that the pricing bundle should help achieve. It's all about reducing the purchasing friction for consumers.
Probably the biggest issue for prospective Peloton customers is the steep price tag for its interactive fitness equipment. But once consumers make the decision and decide to purchase -- shelling out $1,195 for the starting Bike before delivery and setup costs -- they seem to be very committed. Peloton's connected-fitness monthly churn, a measure of cancellations net of reactivations, was 0.79% in the fiscal quarter that ended Dec. 31. That's impressive.
The last thing Peloton wants is for monthly churn to skyrocket, which would put a strain on the company's logistics network, something that has been an issue when demand skyrocketed during the depths of the pandemic. Peloton recently hired Andrew Rendich as its new Chief Supply Chain Officer to help with these issues.
If these two metrics trend in the right direction (more connected-fitness subscribers and low monthly churn), I think Peloton's potential revenue opportunity is much higher than it was prior to management introducing the pricing change. That's because it will drive greater subscription revenue over the long term.
In the latest quarter, the company grew subscription sales 73% year over year to $337.5 million. And this carries a gross margin of 67.9%, much better than equipment gross margin of 6.4% last quarter. Getting more users is key so that Peloton can continue monetizing them over time. This should increase the chances of achieving profitability later on.
NASDAQ: PTON
Key Data Points
There are possible challenges
However, lowering friction for potential customers works both ways. For example, what happens if a lot of these connected-fitness subscribers decide to cancel their memberships during the hot summer months because they decide to exercise more outside, only to join back during the cold winters, when they spend more time indoors?
While Peloton charges for delivery and setup, it offers free pick-up if someone cancels. It remains to be seen how this will play out, but management is seriously hoping that once users get a taste of the Peloton experience, they'll be hooked. Investors are wishing for the same.
Peloton's new CEO, Barry McCarthy, has mentioned that the business will take a data-driven, experimental approach going forward. By first testing this new, bundled pricing strategy in select markets, Peloton will be able to gauge customer response, glean better insights, and see the effect on the supply chain -- and this will better inform the next steps.
Shareholders who believe in the turnaround story will want to keep a close eye on Peloton's progress going forward. If things work out as planned, the company's addressable market will surely expand.
