What is the change in strategy?
Peloton has reduced the price of its Bike to $1,495 down $400. Peloton believes it will be net positive, meaning it will sell more units overall at the lower price and therefore increase total addressable market (TAM). The lower price point is offensive because it grows TAM for the Peloton bike, but also defensive as it restricts competitors from gaining traction.
Comparison to Apple
Apple is known to hold its premium by launching a new iPhone every year at an ever increasing price point. It then reduces the previous model, typically by around $100. This extends the life of the older model and due to economies of scale maintains a high margin.
Apple also operates a good, better, best pricing model. You can buy the latest model, last years model, or a two year old model. In fact, Apple has extended this significantly, offering five different models. Within the model you can select another layer of good, better, best based on the size of the screen but also the memory variant required.
Peloton somewhat replicates this strategy by offering two models (better and best) at different price points within each model.
Peloton’s strategy differs from Apple because it reduced the Bike’s price without launching a new model. This has driven a significant wedge between the two models of $1000 dollars. It’s a questionable strategy, as it may dilute sales of the more premium Bike+ model.
How will this affect overall revenues?
Predicting customer behaviour is always difficult but the new price point will attract new customers to the platform. But just how many? Peloton will hope that it converts more customers than before, justifying the price drop and moving overall sales volume forward. But Peloton’s 1Q22 guidance doesn’t reflect confidence at just $800m versus $937m from the previous quarter.
Long-term subscription revenue makes up for the short-term loss in revenue
Peloton’s other source of revenue will be subscription revenues and this will help long-term as it hopes to keep members loyal for a significant period. That’s a smart strategy as subscription revenues are more profitable than hardware. By lowering the price it’s expanding its market reach providing a long-term benefit.
Profitability
Peloton shared in its 4Q21 earnings that the cost of producing the Bike has dropped significantly.
Question: Is the Bike price reduction been driven by manufacturing efficiencies?
Answer: 70-80% improvement in the cost of the Bike and Bike+. At $1,495 entry price point it will be worth sacrificing gross profit for revenue and driving growth. Conversion will uplift and it’s the appropriate trade off for long-term profitability.
Peloton knows that it needs to continue growing especially as short-term supply constraints have eased. Peloton is seeing delivery times of just 1-4 weeks so it makes sense to invest in growth.
Peloton customers have high net promotor scores, indicating they are likely to recommend the product to friends or family. This word of mouth marketing is hugely valuable, so getting your product out there to more homes keeps the fly wheel spinning (love that pun).
Defending against competitors
As I mentioned earlier, whilst Peloton believes this is offensive, driving growth, it also defends against competitors. I believe the above products loosely compete with Peloton. They are perhaps worthy substitutes, but given Peloton’s vastly superior content library and brand awareness I feel the comparison is thin at best. Peloton delivers a far better experience, similar to comparing Tesla to Ford. They’re both car manufacturers, but Tesla is light years ahead of its dinosaur competitors. If you’re in the market for a home fitness bike, Peloton really is the only choice at this new price point.
Summary
Peloton’s lower price is both offensive as it continues to grow and defensive as it stifles competitors
Peloton’s strategy of reducing pricing without announcing another model seems odd, driving a wedge between the two models
Guidance provides little confidence that Peloton’s revenues will be boosted by the price drop, at least in the short term
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