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Peloton’s Latest Strategy to Save the Company Is What No Company Should Ever Do

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It’s been a rough few months for Peloton’s new CEO, Barry McCarthy. Since he took over the troubled company from its founder, John Foley, in February, its stock has continued to fall. It’s now down 38 percent during his time in the role. Not only that, activist shareholder Blackwells has published a presentation faulting McCarthy for not turning the company around quickly enough.

Perhaps sensing the pressure, McCarthy has announced his first big move to boost revenue — by raising the price of subscriptions. The company will now charge $44 a month for a subscription that previously cost $39 in the U.S. In a statement about the price increase, the company points out that this is the first time it has done so in eight years. 

At the same time, Peloton is also lowering the price of its Bike by $300 and its Bike Plus by $500. Never mind that just a few months ago, Peloton raised its prices. Well actually, it stopped delivering and setting them up for free, and instead added $250 to $300 to the cost of its Bike and Tread products. 

Now, it’s still charging you the delivery fee on the entry-level Bike, but lowering the cost of the hardware itself, which brings the price to $1,495. Presumably, the idea is to lower the barrier to entry by lowering the cost of the hardware, in hopes of making it up on the backend in subscription fees.

That’s a great idea except for the part where no one who wasn’t buying a Peloton Bike for $1,495 in January is going to buy one now for the same price. Meanwhile, you’re expecting your current customers to make up for your poor planning and revenue problems.

The thing about raising subscription prices is that customers hate it. It’s one thing to pay more for something when a new feature is announced, or there is some additional value. When you have to pay more today than you did yesterday, but you don’t feel as though you’re getting anything more, there comes a point when you’re probably going to decide it’s not worth it.

To be fair, Peloton points out that the number of classes it offers today is far greater than it was in 2014. That’s certainly true, but if you have to try and convince people that you’re giving them more value by putting up a chart, you’re probably losing the argument. Most people are just going to feel like you’re getting greedy.

This move was, of course, inevitable. McCarthy spent most of his career counting the stacks of subscription dollars at Spotify and before that, Netflix. It’s not really a surprise that the company is following a similar playbook. 

Besides, subscriptions are a great business model. There are few things more desirable as a business than convincing your customers to hand over $10, $20, or $40 a month for basically the rest of their lives. 

Except Netflix raises prices because there are almost no new customers to sign up for its service. It’s already the default option for most households when it comes to streaming services. It has reached market saturation in the U.S., and the only way for it to continue to grow is to charge its existing customers more. 

Also, Peloton isn’t Netflix.

Sure, the connected fitness company has a strong brand and a loyal following, but it’s a high-end luxury product. It had a great run during the pandemic as people were looking for an alternative when gyms were closed and everyone was staying inside. Its main problem is that it didn’t occur to anyone that there was a finite number of people willing to spend that much money on a stationary bike, especially once they started going outside again.

Also, Netflix is pretty easy to quit as long as you’re fine missing out on the next season of Ozark. On the other hand, if you’ve paid $2,000 for a piece of fitness equipment that requires you to also pay a monthly fee to access its best feature, the classes, it’s a little harder to stop paying the monthly subscription. If you do, you might as well have bought a far less expensive bike. 

Which is sort of the problem. The last thing Peloton can afford to do is alienate its current customers. Sure, it might be inevitable that the company is going to raise subscription prices. It might make sense on paper, and the company certainly needs all the help it can get. The thing is, Peloton didn’t get into this mess because of its customers. Making customers pay more to help get it out is something no company should ever do.

Source : Inc.com

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