I have been thriving in the cult of Peloton since 2015, and this paper, written for an MBA marketing class, could easily be titled “A Love Letter to Peloton.” In fact, I think those were the professor’s exact words next to the 85 he gave me. But even now, in the wake of Foley stepping down and all the turmoil Peloton seems to be swirling in as a company, I still think it is positively brilliant.

The year was 2010, and boutique fitness studios, featuring indoor cycling or barre or other singular workout classes, were all the rage in New York City. At the time, John Foley was president of e-commerce at Barnes & Noble, and he and his wife, Jill, were fans of boutique cycling classes, but because the class size was limited, they weren’t always guaranteed a spot in the class. The business of reserving a spin bike at a convenient time with the most popular instructor wasn’t scalable, and this got Foley thinking. What if there was a way to offer this kind of high energy boutique fitness experience to 500 people, 1,000 people or even 50,000* people? Foley was convinced that there was way to replicate this experience through distributed technology, and he was right. His big idea launched the connected fitness platform known as Peloton, and it completely disrupted the $30 billion fitness industry.

The business of starting the business.

Foley graduated from Georgia Tech with a degree in industrial engineering and Harvard Business School with an MBA, but he knew very little about starting a business from scratch. He enlisted help from his friend Hisao Kushi, former chief operating officer at Evite, and in 2012, Peloton became a company on paper. Co-founder Tom Cortese brought the vision for the prototype bike, and Yony Feng designed the software platform. A fifth co-founder, Graham Stanton, acted as an advisor. In the beginning, the team thought they could build the software as an app and brand an off-the-shelf stationary bike from a supplier, but because existing fitness equipment was poorly made, it wouldn’t measure up to the strategic vision of Foley and his partners. A cheap, ready-made bike with a dongle to connect an iPad would eventually have the wrong dongle, and the hardware would quickly become obsolete. They had to design and build a bike with an integrated tablet, so in 2013, they enlisted a manufacturer in Taiwan to build the first prototypes of the bike.

Their vision “to empower people to improve their lives through fitness by making it entertaining, approachable, effective and convenient” was on its way to becoming a reality, but for the reality of needing money to make it happen. Venture capitalists failed to see the potential that was plain to Foley and his partners. This was a new platform – the first of its kind – so there was no market data to share. The VCs couldn’t see a pattern for growth, so it was a hard pass from the 3,000 institutions that Foley approached. Instead, he raised $400,000 in seed money from friends and family to get started, and in 2013, the company launched a Kickstarter campaign, raising more than $300,000 in 30 days.

There’s Marketing, and then there’s marketing.

The $700,000, plus money from 100 angel investors, allowed the company to move forward with product development and initial marketing efforts (lower case m). They were able to buy video equipment to film content, place ads on Facebook and open a pop-up store in the Mall at Short Hills in Millburn, New Jersey. The company made the Marketing (upper case M) decision to position themselves in affluent areas, usually near an Apple or Tesla store. Their strategy was to target the demographic most likely to invest in a $2,000 bike. If they could sell one bike per day, they would consider it a win. Very quickly, they were winning, selling five bikes per day.

By 2014, with momentum on their side and an infusion of $10.5 million in institutional cash by Tiger Global, Peloton moved into their new studio on 23rd Street in Manhattan. They hired 10 world-class instructors and built out a television production studio with equipment to live-stream classes to home riders. They also expanded their retail locations, allowing potential buyers to “try before they buy,” another dimension to Peloton’s Marketing (big M) strategy. It was working, as demand for the bikes was increasing, and by 2015, the company was profitable enough that they could reinvest in the business. It expanded its original logo into a polished visual identity with upscale packaging, branded merchandise for sale and slick graphics on their website and point of sale. They also stepped up their marketing (lower case m) game with paid television advertising and a referral program where members received $100 store credit when someone used their referral code to purchase a bike.

P stands for Peloton (and product, price, place and promotion).

In the beginning, Peloton positioned itself as “more than a bike,” and that applied to the culture as much as the product. It was also likely a hint at the vertical buildout that was to come. The first Kickstarter bike was strategically priced at $1,200 because Foley believed they could sell the bike at cost and rely on the $39 monthly subscription for revenue. However, the optics of that price point proved to be bad for business because it seemed too cheap, so they raised the price to $1,500 and then $2,000. As a direct-to-consumer brand, Peloton relies on inside sales, e-tailing and retailing to sell its products, but there’s also huge demand for the bike, and with huge demand comes huge opportunity on the resale market. In some cases, owners are selling their bikes for more than they paid for them and then upgrading to a newer model. Peloton’s connected fitness products are mostly made in Taiwan, but the company also has several other manufacturing partners and has recently acquired Precor, a commercial fitness manufacturer, to bring some production to the United States. In the beginning, marketing efforts were modest with some paid social media ads and a referral program, but as the company has grown, so too, has the marketing budget. For the period ended December 31, 2020, the sales and marketing budget was $177 million spent across multiple channels, promoting the brand in general, as well as specific product offerings.

Peloton’s secret sauce is CRM, the software and the community.

By 2016, the financial community was starting to notice Peloton, and new outside capital allowed the company to invest heavily in software development and customer relationship management (CRM). The customer experience has always been at the forefront of Peloton’s strategy (big M), and it sits at the heart of Peloton’s value proposition. Foley’s vision of being able to take a spin class with the best instructor whenever he wanted to was baked into the bike, but it offered so much more. The connected platform that Peloton built is an aggregator of data – big data. Every class taken by a member is stored in a database, along with the member’s metrics for that class (how hard they worked) and their rating of the class – thumbs up, thumbs down, did you like the instructor and the music, how was the streaming, how hard was the class? Peloton uses all this information to tweak its offerings – class type, length and music, and they use the data to reward members with positive reinforcement. The touch screen knows when it’s a rider’s milestone ride, and so do the instructors. When the rider is taking a live class, there’s a chance they will receive a shoutout from the instructor, a real-time affirmation of their achievement. Milestones are also rewarded with a special badge. The touchscreen includes a member profile page where riders can track their progress, view their ride count and see how many badges they’ve acquired. In 2019, Peloton upgraded the tablet interface so that whenever they logged onto the bike, members viewed a personalized home screen. Like Netflix, Peloton uses data to populate this personalized home screen with suggested classes based on the user’s riding history. In addition, it shows a list of friends who are riding at that moment and what ride they are taking. Another way in which the software engages the riders is through the live leaderboard where riders can compete with other riders and give them virtual high fives.

Music is a critical component of the Peloton experience. With this in mind, the company endeavored to reach licensing deals with music publishers, creating their own in-house music streaming platform that the instructors use to create their class playlists. Even so, in 2019, they were sued by the National Music Publishers’ Association for copyright infringement of songs by artists like Lady Gaga and Beyonce. Although Peloton had negotiated in good faith, they are required to have sync licenses – different from the performing rights that most gyms are required to secure – because Peloton streams classes online. Unlike performing rights, sync licenses can be controlled by multiple publishers, adding a layer of complication to getting full rights to a song. A settlement was reached in early 2020, and since then, Peloton has created partnerships with Lady Gaga, Beyonce, The Beatles and others – the same artists they were being sued over. Peloton also added integration with Spotify and Apple Music, so when a member hears a song they like during a ride, they click the heart next to the song, and it automatically appears in their Spotify or Apple Music library. Peloton has become a desirable, visible platform for the artists, and it has leveraged this partnership to enhance their members’ experience with artist series class offerings.

Something that Peloton may or may not have anticipated was the resounding enthusiasm from the community of bike owners. People who met each other virtually on the leaderboard, started meeting each other in person at the studio in New York. Home rider invasions (HRIs) became so popular that Peloton officially branded an annual event in May 2016 where riders flew into New York from all over the country for a cocktail party with Foley and the celebrity instructors they had grown to love. They took cycling classes in the studio that weekend and participated in workshops led by the instructors. It was like the Comic Con of the fitness world. Affinity for the company and the culture it created extended beyond HRI. Members started a Peloton Facebook page in 2015 which is now run by the company, but from that initial social media interaction sprang other Peloton pages: Peloton instructor pages, Peloton Moms, Peloton Fitter Over 50, Peloton Weight Loss Group, Power Zone Pack, Wake Up the Sun and hundreds of others. There’s also a podcast called The Clip Out (produced and hosted by members), a Peloton Reddit group and a Clubhouse group. These are members connecting outside of the company, holding each other accountable and keeping each other engaged with the company and the product.

The competition, part one.

As a first mover in a category that didn’t yet exist, Foley and his co-founders had a competitive advantage from day one. Likely competitors would have been two well-established cycling studios, Flywheel and Soul Cycle. In fact, in the early days of formation, Peloton approached both studios with a co-branding proposal, thinking connected fitness might be a natural brand extension for either company, but they were not interested. Fast forward to 2018 when Peloton sued Flywheel for patent infringement. Flywheel was bringing its own bike to market – one that incorporated Peloton’s leaderboard technology, and the case was settled in early 2020 in Peloton’s favor. Flywheel filed for bankruptcy in September 2020 and closed all of its 42 studios. Soul Cycle and parent company Equinox launched its own bike in March 2020 with a price point slightly higher than Peloton’s and an app that features only on-demand classes.

Reaching new limits, high and wide.

In 2017, Peloton added “Beyond the Ride” content such as yoga, core and arm workouts, and stretching classes, a precursor to the 2018 launch of Peloton Digital. The iOS app allowed anyone with an account to access content anywhere. The app was free to bike owners but wasn’t limited to Peloton members. Anyone could download the app for $19.99 per month. The app was a way for Peloton to reach a new, less affluent market segment. Around the same time, Peloton introduced the Tread and began taking pre-orders for a fall 2018 delivery. This vertical expansion was exciting for existing members who were extremely satisfied with the bike and the user experience and were more than willing to add another Peloton product to their home gyms. The Tread offering also expanded Peloton’s user base.

Global expansion added to Peloton’s user base, too. In 2018, they began shipping to Canada and the United Kingdom, and in 2019, they expanded to Germany. This expansion was strategic in that the U.S., U.K. and Germany are the three largest fitness markets in the world. Four new instructors were added to the roster, and they started filming classes out of a London studio. The German classes were the first foreign language offering for Peloton, and most classes are subtitled for English-speaking members. Several retail stores were opened in all three countries, and marketing dollars were allocated to an integrated campaign to promote the brand.

By 2018, Peloton was starting to flex its marketing (little m) muscle. With new overseas markets and more products to sell, Peloton increased their marketing budget to $70 million. Part of that money was spent on an Olympic sponsorship. Peloton went for gold, so to speak, flying bikes and one of its most popular instructors to PyeongChang, South Korea, to broadcast live cycling classes on the Today Show. By second quarter 2020, they were spending north of $160 million on sales and marketing efforts, including a promotion with ESPN. But all of that came to an abrupt halt in March 2020.

The environmental factor no one could have predicted.

Marketing plans usually don’t include a pandemic in their SWOT analysis under the threat category, but here it was. After a successful initial public offering in September 2019, and a brisk holiday sales period, 2020 was starting out to be a pivotal year for the company. It had begun scaling the business, increasing manufacturing and logistics to meet demand, and stepping up customer engagement. They introduced new offerings including resistance bands and strength programs, as well as bike bootcamps, barre, Pilates, fit family workouts and cardio dance party. They had just introduced the new Bike+ and a smaller Tread, fulfilling the goal of providing a “better/best” product offering. Peloton was thriving. And then the COVID-19 pandemic brought the world to a stop. And Peloton continued to thrive in a slightly different way for drastically different reasons. People were sheltering in place — they couldn’t go to the gym, so they bought a Peloton instead. Revenues for the period ended June 30 were $607 million, up 172 percent year over year. As lockdown continued, demand for product didn’t wane. Fortunately, the company had been actively planning for aggressive expansion in 2020 and 2021, so the company was able to divert resources to handle the demand, at least for the short term. Even as New York City was on lockdown, along with Peloton’s brand-new production studio scheduled to open in April, the company continued to offer new live programming to its members by building mini production studios in the instructors’ homes. In addition to the “Live from Home” content being offered to help the members stay healthy and connected, the company lowered the price of the app to $12.99 per month and offered the app free for 90 days so that more people could use fitness to help get through the stress caused by the COVID-19.

Peloton steps up for the greater good.

Peloton has always been responsive to the collective community and social issues that are important to them. During the time of COVID lockdowns, Peloton responded to the needs of its members by pledging $1 million to cover subscriptions of members who might have lost their jobs as a result of the pandemic. The company donated 100 bikes to frontline workers and $500,000 to the Food Bank for New York City. In response to the marches for social justice taking place all over the country, Peloton pledged $100 million to promote racial equity and address systemic racism.

A logistical nightmare.

The good news: by the end of December 2020, demand for products was stronger than ever, with revenues topping $1 billion for the three-month period ended December 31. The bad news: Peloton was facing a social media/public relations crisis because the pandemic had disrupted their supply chain and logistics. Manufacturing wasn’t as much of an issue as logistics. The bikes and treadmills were being shipped from Taiwan via container freight, but once the ships arrived, the containers were stuck at the Port of Los Angeles because of record cargo volumes. Delays have caused headaches for Peloton, heartache for people waiting on a bike or a treadmill, and lots of negative chatter on social media. In the company’s earnings call on February 4, 2021, John Foley apologized for the excessive delays and pledge $100 million to fixing the problem with air and expedited ocean freight. Earlier in December, the company announced that it was purchasing Precor, a manufacturer of commercial fitness equipment, which should not only help with production, but it will allow for domestic production to side-step the challenges the company has been facing with overseas shipments.

The competition, part two.

If Peloton brought legitimacy to at-home fitness, the pandemic sealed the deal. Will anyone ever want to work out in a sweaty gym again? Many companies are betting that they won’t. Besides Soul Cycle’s at-home bike and app, there are many competitors hoping to take a bite out of Peloton’s market share. Mirror streams on-demand fitness classes and was recently acquired by Lulu Lemon. Echelon and Nordic Track both offer bikes and treadmills with connected platforms. Hydrow is an internet-connected rowing machine. Tonal uses electromagnetic weights for strength training and offers live and on-demand classes. Apple has joined the party with the Apple Fitness app, and just last week, Beachbody announced its intentions to go public and acquire Myx, an internet-connected bike. It seems that COVID has turned the fitness category into the wild west. Where cost is concerned, most of the hardware is comparable in price, as is the monthly subscription cost. Where Peloton maintains its competitive edge can be found in the math. Peloton offers much more to its members than any of its competitors, and when you factor in the “stickiness” of the platform – the fact that members take an average of 20 classes per month, it comes out to $11 per class (including the cost of the bike). Once the bike is paid for (with 0 percent financing), it breaks down to $1.95 per class, a much better value than the $35 boutique fitness class that John Foley used to pay for.

The true measure of success.

As of December 31, 2020, Peloton had almost 2 million connected fitness subscribers and a churn rate of less than 1%. Even with the logistical challenges it is facing now, getting product into the hands of people who want it, Peloton’s net promoter score is 94 – a world-class ranking that’s higher than even Apple or Netflix. Retention has been at 95% since 2016. But even more than the metrics, Peloton continues to surprise and delight its members, bringing innovation to the platform and giving the company a sustainable competitive advantage over the competition. Peloton is the prospector and will continue to strike gold with its ever-growing and fiercely loyal customer base.

*John Foley’s idea of having 50,000 riders in one spin class became a reality on November 26, 2020, when more than 50,000 riders clipped in at the same time for a 45-minute Turkey Burn ride before they sat down to their Thanksgiving feast.

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