Peloton was founded by John Foley who had a vision of bringing high energy boutique fitness classes into people’s homes.  The strategy was rock solid with a laser focused customer segmentation.  That is until Covid came along and Peloton got greedy and abandoned their strategy.  Today some of you may actually still use one but most sit idle and function primarily as an expensive clothes rack.

On the Right Track

The $2000+ Peloton bike came complete with a monthly subscription to Peloton fitness classes.   Promotional materials targeted well heeled, urban professionals who valued the convenience and status of being fit.  Celebrity instructors streamed on the screen creating a luxury, aspirational brand.  Marketing emphasized exclusivity with ads featuring affluent homes and successful, perfectly sculpted users that resulted in a cult-like following and enabled Peloton’s successful IPO in September 2019.

Sticks in the spokes

The initial strategy was brilliant and Peloton stayed focused exclusively on the luxury segment until everything changed in 2020.  When Covid hit, gyms closed and the home fitness market exploded, and Peloton wanted in on this new market action. To appeal to a broader customer base the company rapidly pivoted and adjusted their segmentation strategy to capture a wider, albeit more price sensitive, market.   To appeal to this new group of users, Peloton changed everything. They introduced a lower priced, entry level bike complete with financing starting at $49/month. They also created a digital only subscription that didn’t require the purchase of any Peloton hardware and expanded their fitness content to include more entry level classes.

Demand during Covid skyrocketed and Peloton struggled to keep up with demand for bikes so they invested $420 million in fitness manufacturer, Precor.   Revenue skyrocketed from $915 million to over 4 billion in 2021 while the subscriber base grew from 1.1 million to just under 6 million.  Bikes were pedaled out the door at an unbelievable rate pumping up the $25 IPO stock price to $167/ share.  And then the wheels came off.

When Covid vaccines hit, people ventured outside, gyms opened again, and Peloton’s appeal waned.  Overestimating the sustainability of post pandemic demand saddled Peloton with a massive inventory of bikes.  Their lack of strategic forethought caught up with them and Peloton lost their premium position when they simultaneously developed bikes for the mass-market and luxury segments under the same brand name.   Additionally, lower priced competitors created their own digital fitness apps eroding Peloton’s differentiation.  With mounting losses, the stock price collapsed, forcing Peloton to make drastic changes.  Founder John Foley was replaced, 20% of Peloton’s work force was laid off and manufacturing shifted back to being outsourced.  In a drive to increase online fitness class subscriptions, Pelotons are now significantly cheaper and rather than being an exclusive direct to consumer seller they sell through retailers like Amazon.

What can we learn from Peloton:

• Segmentation strategy requires discipline and focus:  Trying to serve a luxury market and a mass market with one brand is all but impossible.
• Believing crisis behaviour will translate into normal behaviour was naïve: Peloton believed their growth would be sustained post Covid, mistaking pandemic expansion for permanent expansion.
• Avoid taking on fixed costs in a euphoric state:  Bad decisions are often made when things are going extremely well. Peloton made acquisitions and committed to plant expansions during the height of the Covid home fitness frenzy.
• A subscription based business and a hardware sales company are two very different entities each requiring a unique set of skills:  Peloton wasn’t a manufacturer and apparently never learned key skills such as inventory management, as was evidenced by the substantial inventories at insolvency.

In early 2022, people headed back to work leaving their Pelotons to collect dust.  The Peloton story is by no means complete, but it demonstrates how even a brilliant segmentation strategy requires constant supervision and refinement as market conditions evolve.  Peloton’s ongoing challenge will be to find a sustainable market position that balances growth, profitability, and competitive differentiation.  Does your strategy do that?