Peloton Is Not Netflix

Another crisis at Peloton. CEO Barry McCarthy is suddenly gone. Possibly, the strategy Mr. McCarthy created, to apparently turn Peloton into Netflix, is gone with him. Mr. McCarthy was seen as a technology business pro, someone who had experience in lower-price, subscription-based businesses like Netflix. 

But, anyone who follows Netflix knows that the streaming subscription business is a business of scavenger brands. Streaming businesses strategy is to scavenge for new customers. Scavenger brands are all about growth by acquisition of new customers. Streaming brands are just voracious vultures for viewership while they take their current customers for granted. And, this was what Mr. McCarthy started to implement. Create ways in which we can grow digitally capturing new customers for Peloton’s app.

When newly minted CEO, McCarthy first spoke with analysts, he Peloton needed a turnaround plan. He said that a turnaround plan is hard work. He said that in turnaround situations there are always a lot of surprises. He said the turnaround would take a lot of time. If he was hoping for support, he did not receive any kudos. Analysts and investors were not impressed.  Maybe this is because most of what Mr. McCarthy said were not elements for a turnaround plan but elements for a conventional growth plan. There is a big difference.

A conventional growth strategy is not appropriate for a brand in urgent need of a turnaround, which was Peloton’s situation. A growth strategy is very different than a survival and revival strategy, which was what Peloton needed. A conventional growth strategy is for a brand that is on a sustainable upswing. Peloton was not upswinging or even swinging. A conventional growth strategy is a longer term outlook. Typical growth plans are either a 3-5 year mid-term plan or a 5-10 year long-term plan. A conventional growth strategy is for going forward, full speed ahead. It is designed to accelerate quality revenue growth. Peloton did not have the luxury of time.

Sure, Mr. McCarthy aimed to stop the bleeding by cutting costs. And, some of this cost-cutting has finally resulted in a quarter of free cash flow. But, as Peloton is learning, you cannot cost-cut your way to enduring profitable growth.

Further, Mr. McCarthy’s focus on acquisition à la Netflix worried some analysts who believed expansion via acquisition would cost a great deal of money that Peloton did not have. Going after new customers is expensive. It costs at least 4-6 times as much to attract a new customer than it does to maintain a current customer. Data show that with the plethora of devices, social media and apps, acquisition costs continue to rise. And, using cheaper fees to attract new customers will attract the wrong kind of customers. These will be customers who love the deal rather than the brand. By attracting deal-focused customers, Peloton’s churn rate may rise. (Just recently, Peloton canceled one of its deal-loyal customer acquisition tactics.) And, as we have just learned, the equipment rental program also has a large churn number.

Focus on acquisition created the “subscriber acquisition funnel.” A “funnel” strategy of acquisitions is a flawed approach: just ask the automotive companies whose focus continues to be “conquest” new users to the brand.

Anyway, Motley Fool Money states that Mr. McCarthy’s turnaround is “difficult to assess… just don’t see it happening.” Rather than a turnaround, Motley Fool Money says Peloton is in stabilization, like a patient in ICU who is still very sick but in stable condition. “Stable is one thing. Turnaround leading to growth is another. … Peloton is not there yet.”

After 2 ½ years of Mr. McCarthy, guess what? Peloton is not Netflix. According to Peloton observers, the acquisition strategy has been a money loser.

Peloton is not, and never was, a scavenger, subscription-driven brand.  Peloton was, and still is, a community of individuals who are like-minded others. Peloton actually loves its core customers while Netflix is continually focused on new acquisitions. Scavenger brands tend to forget about you, once you sign up for the service. Not so at Peloton. Even in the sorely-info-lacking, investor relations lingo-filled third quarter earnings call, Peloton executives reminded analysts about the power of Peloton’s community.

Peloton was at birth, and throughout its formative years, a brand that generated a community of dedicated users who believed in Peloton’s vision of “discovering a best version of themselves through the power of sweat anytime, anywhere.” Peloton was a connected, bonded community of unique individuals who were empowered and inspired to grow stronger together. True, it was a more affluent group of individuals who could afford the bike. But, even The New Yorker, in an article on a Peloton event, was impressed by the numbers of Peloton passionate acolytes, their connections to each other and to the Peloton instructors. Let’s not forget that prior to Covid-19, Peloton was growing by attracting people to its fitness mission. Peloton can modernize that mission for today.

Whoever choses to be the next peloton CEO will probably have preferred strategies to implement. Also, any new CEO will need to decide whether Peloton is a brand in need of a turnaround or a brand ready for a growth strategy.

Regardless, after watching Peloton over the past six years, here are some brand-building recommendations.

1. Stop The Excessive Price Marketing

Peloton communications have been price-focused, not brand-focused. Peloton has been luring customers with incentives. This has serious implications for brand loyalty. Brand loyalty cannot be bought with bribes. True, the communications show lots of different people on Peloton cycles and treads or people taking off-equipment, mat classes. But, the main message point is that the cycles, row machines and treads are now cheaper. Making the brand’s experience cheaper does not build brand strength. Reminding people that a brand is affordable is important. But, emphasizing price alone damages brands. Peloton’s communications should say “Great brand at a great price” instead of this is a great deal. Unfortunately, Peloton’s recent messaging has not emphasized the “great brand”.  The message has been “We are on sale. This is a great deal.”

2. Connect With The Brand’s Purpose

Peloton’s communications have not connected with Peloton’s core mission. A brand must be in sync with its desired spirit. Mission statements express the brand’s intent, its purpose. Peloton’s original prospectus offered the following: “Peloton uses technology and design to connect the world through fitness, empowering people to be the best version of themselves anywhere, anytime.” Clearly the instructors are aligned. You understand this if you actually take classes. But, for a prospective customer, the brand’s purposeful message is unstated. There are probably a lot of people who would appreciate the opportunity to participate in Peloton’s world view. Peloton’s uplifting, positive, you-can-do-it message is not communicated to the uninitiated. It is a best-kept secret.

Peloton advertising sells its equipment with a price point included. Equipment is a feature of the brand. For a while, Peloton was using it advertising dollars to sell the home fitness category. Peloton was telling people that moving your body was great for you. The campaign used instructors telling customers that they should get off of their butts, listen to their inner voice and move. This did not sell Peloton memberships or hardware. In fact, Bowflex, another indoor fitness training offering, now in Chapter 11, communicated the exact same message as Peloton in its last-ditch-attempt-for-solvency-prior-to-bankruptcy TV advertising. Bowflex stated: the best you is inside, listen to that inner voice and move. Selling the category tends to work against you. Campbell’s tried it with “Soup is good food.” Customers agreed and bought Progresso instead.

Sadly, executives on the recent earnings call stated that one area of current and continuing McCarthy cost-cutting is marketing. The executives dish it up as marketing will be “very efficient.” 

This is a shame. For decades research has shown that a key benefit of advertising is customer reinforcement; reinforcement that you made the right decision with your purchase. This is highlighted in a recent Wall Street Journal article about Zillow house buyers who continue to receive post-purchase emails from Zillow. Those post-Zillow-house-purchasers feel as if they made the right choice after perusing what is on the market in the emails.

Describing Peloton’s business model in a Harvard Business Review article, the authors concluded that even though participants are in different locations, participants exercise “…with a virtual community of peers and instructors” and “… the brand’s meaning extends beyond what they would experience with the bike alone.” 

This is true. But in order to increase owners/subscribers, Peloton must share its meaning with prime prospects. Peloton’s meaning has to be meaningful to both users and like-minded others. As Peloton states on its website: “Millions of Members use our platform to connect, bond, inspire and grow stringer together.”  

3. Maximize The Paradox of Inclusive Individuality 

People want to be seen and respected as individuals. At the same time, people want to belong so something bigger than themselves. People want both independence and interdependence at the same time. People savor their uniqueness while wanting to share that uniqueness with like-minded others. People want to respond as individuals and they want to share as members of a community of common interests. “I am an individual with unique wants and needs. But I am not alone. I belong to communities of people who want the same things as I do.”

This is what Peloton does really well. This is what Peloton is: the epitome of Inclusive Individuality. And, yet, you would not know this unless you were actually part of the Peloton family. There is no relevant distinctive messaging around this critical connective social force. Peloton must manage its brand messaging differently, articulating that its brand experience promises to respect, encourage and strengthen individuality while belonging to a supportive family. Peloton is the ideal place where people are praised for who they uniquely are and what they can uniquely do while belonging to a group that shares their distinctiveness. Peloton’s messaging lacks this compelling, powerful promise of inclusive individuality. Going to a gym pales in comparison.

4. Ditch The Netflix Strategy: Love Your Core Customers

Streaming brands make one of marketing’s biggest mistakes. Streaming brands lust after the customer they do not have more than they love the customer they do have.  Streaming brands focus on growth only by attracting new customers. So, Wall Street penalizes them if new customer counts are too low. On the other hand, Wall Street wants growth. But, Wall Street also wants profit. And, as streaming brands are finding out, growth is expensive.

Streaming brands have not figured out that a brand cannot survive on customer acquisitions alone. To generate quality revenue growth, a brand needs to both attract new customers and build brand loyalty among their current customers. 

Current customers should be retained, respected and loved. Brand loyal customers are a brand’s most valuable assets. Brand loyal customers are less price sensitive; they are less willing to abandon your brand for a competitive brand; they are more forgiving when the brand makes a mistake; and, they are more willing to consider new products and services from the brand they love. 

Peloton has a very strong core customer base of about 3 million users: people who own the equipment and pay the $44 per month for all access. This core customer base has very low churn; they stick with the brand.

One podcast stock observer and analyst said that any private equity firm interested in buying Peloton should focus on this core customer base and forget about the app because the app continues to lose money. The core customer base is profitable. “focus on profitability not on the app growth.”

Peloton was on a roll prior to Covid-19. Ramping up during lock-down years generated errors. Poor decisions were probably rushed into implementation. However, this does not mean that Peloton is dying because coronavirus is over. Peloton has a unique, compelling vision and an incredibly compelling set of user benefits and emotional, social rewards. Whoever takes the reins at Peloton should not ignore the brand’s provenance and its fierce customer base.