Peloton Still Can’t Convince Subscribers to Pay

As Peloton has been exploring various strategies in its quest to regain the success it achieved during the pandemic, the story of the brand has been inconsistent.

In the latest quarterly report released on Thursday (Nov 2), Peloton’s rental service stood out as an area of growth potential, as CEO Barry McCarthy highlighted in a communication to shareholders.

During the quarter, Peloton had 54,000 rental subscribers in the U.S. and Canada and aims to reach 75,000 subscriptions by year-end. Notably, rentals made up over 33% of bike sales in that quarter.

During the earnings call, McCarthy disclosed that he has intentionally limited the program’s growth because it takes about 18 to 20 months for the company to become profitable with rentals. In the next year, Peloton plans to determine the required working capital for its expansion.

The company is also reportedly preparing to reintroduce its Tread+, which had been recalled in 2021 due to a incident resulting in a child’s death and several reported injuries. Priced at $5,995, McCarthy acknowledged that sales might encounter difficulties in the current economic environment, but he remains optimistic that it could lead to a substantial sales boost.

“If we’re successful, that will be a big driver of incremental cash flow and revenue for us. Remember, we have all of that inventory in warehouse already and fully paid for and have sent before I walked in the door,” he said.

“In terms of lululemon, that’s live. And we are benefiting from it as we speak,” McCarthy said.

On Sept. 27, Peloton announced a five-year strategic partnership with lululemon. Lululemon Studio Members have access to Peloton classes, and next spring Peloton will become the third-party digital fitness content provider for lululemon Studio.

McCarthy also said that on Oct. 17, Peloton expanded into Austria, its fifth international market. Amazon will offer Peloton Bike, Bike+, and select accessories, while sports retailer Sport-Tiedje will provide the Peloton Tread and other products.

While Peloton expects growth in all its international markets in fiscal year 2024, it is particularly focused on expanding membership in the U.K. and Germany. European members exhibit engagement, retention, and net promoter scores (NPS) similar to those in the U.S. and Canada.

Peloton expects Peloton for Business to be a growth driver in 2024.

The Negatives

“The bad news is we were less successful at engaging and retaining free users and converting them to paying memberships than we expected,” McCarthy said in a statement.

Higher-than-expected membership churn continues. The quarter ended with 2.96 million connected fitness subscriptions, down by about 30,000 from the previous quarter, and a churn rate of 1.5%, surpassing projections.

Early this year, Peloton launched a new tiered pricing system for its app as a crucial component of its growth strategy, which included a free tier. The idea was that users would develop an attachment to Peloton’s content and upgrade to a paid membership. However, this expected outcome has not materialized thus far.

“With limited marketing support, we saw more than 1 million consumers download the free version of our app. Our brand relaunch was successful in continuing to resonate with our core demographic, and it also attracted more male, Gen Z, Black, and Latinx groups than before the relaunch. That’s the good news,” he said.

In response, the company shifted its marketing budget toward promoting its paid subscription service, resulting in a higher percentage of premium-paying subscribers than initially expected. They also focused on improving the user experience, making it easier to find classes.

The quarter ended with 763,000 paying Peloton app subscribers, a decrease of 65,000 compared to the prior quarter. The churn rate for the paid app subscription stood at 6.3%, which was lower than the company’s initial expectations.

User engagement with Peloton’s content, measured by the time spent on the platform, increased by 6%. Users are now taking longer classes and exploring a wider variety of class types, the company reported.

Peloton by the Numbers

In the third quarter of 2023, Peloton reported total revenue of $595.5 million, with a breakdown of $180.6 million from the connected fitness segment and $415 million from subscription revenue, falling within the company’s guidance range. The gross margin was higher than expected at 47.9%, with significant cost reductions in landed and delivery expenses due to supply chain improvements.

Total operating expenses, including restructuring and impairment expenses, amounted to $417.6 million, with reduced general and administrative expenses and increased sales and marketing expenses. Peloton recognized $41.9 million in impairment and restructuring expenses during the quarter, comprising both cash and non-cash charges.