The pandemic has given Peloton (PTON 2.85%) a severe case of whiplash. The connected fitness company went from being unable to keep up with demand for its pricey stationary bikes to being overloaded with inventory it can't sell. Sales have plummeted, cash is being burned at an alarming rate, and a new outsider CEO has been brought in to right the ship.

Peloton is trying a lot of different things. It's now selling its products through Amazon, letting the e-commerce giant handle shipping and allowing customers to self-assemble their products. It's testing out pre-owned bike sales and toying with its prices on new products. And it's rolled out a rental service that allows customers to rent bikes on a month-to-month basis without any long-term commitments.

The company is also cutting costs. Peloton has fully outsourced manufacturing, shifted to third-party deliveries in the U.S., and reduced its inventory commitments. The company has also announced layoffs of around 760 employees in an effort to knock down operating expenses.

Ultimately, Peloton's long-term goal is to build a massive and profitable subscription business. CEO Barry McCarthy has set the target at 100 million members, which is 14 times the current member count. Owners of Peloton's bikes and treadmills must subscribe to the All-Access membership to access the company's content and enable real-time performance tracking, while those without Peloton equipment can subscribe to a cheaper plan for access to thousands of video classes. The company's definition of a member only includes those using Peloton equipment.

Here's the problem

The immediate problem Peloton is facing is that it's struggling to sell enough bikes and treadmills. Sales of connected fitness products crashed 55% year over year in the fiscal fourth quarter to just $295.6 million. Demand has dropped off a cliff as people get back into the habit of going to the gym and attending workout classes.

Peloton has a deeper problem: Those who have already bought equipment are now starting to use it much less. Peloton recorded a small decline in members in the fourth quarter compared to the previous quarter, and the number of connected fitness subscriptions was essentially flat. Peloton counts someone as a member only if they've been active in the past 12 months.

The total number of workouts done by members plunged 20% year over year, and the average number of monthly workouts per connected fitness subscription dropped 21%. Average net monthly connected fitness churn nearly doubled both sequentially and year over year, a sign that an increasing number of Peloton owners have stopped using their equipment and dropped the subscription.

Peloton raised the price of its All-Access subscription in June, which may have been the push some subscribers needed to drop a service they had stopped using. Unlike the Planet Fitness business model of charging monthly fees low enough that most people won't bother cancelling even if they rarely visit the gym, Peloton's All-Access membership now costs $44 per month in the U.S. That's a lot pay for something you don't use.

The subscription business itself is quite profitable for Peloton, but the cost to acquire a subscription customer is high. Peloton dumped over $1 billion into sales and marketing in fiscal 2022, gaining roughly 600,000 connected fitness subscribers in the process. That's in the vicinity of $1,500 per net connected fitness subscription addition. Even in good times, the company never made much money selling hardware, so the company needs subscribers to stick around for quite a while for the math to work out.

The phenomenon of people buying home gym equipment and later abandoning it is not new. The Peloton business model only works if its customers keep using their equipment long enough for the subscription revenue to offset the cost of acquiring that customer. With member usage dropping sharply and churn nearly doubling in the fourth quarter, it's clear that Peloton's problems go far beyond demand for its bikes.