What other companies can learn from Peloton’s path
Peloton was born in the digital era and hit mainstream this decade with the right product at the right time. But nothing stays gold forever. With an unexpected drop in demand and ballooning costs, Peloton is now rushing to evolve in a turnaround effort.
The road ahead will not be easy. Peloton’s 2021 shareholder return of -76 percent was the lowest of NASDAQ’s 300 Index. In early 2022, they announced a new CEO, laid off 2,800 employees, introduced a new bundled pricing model, raised subscription prices, and doubled down on hardware investments despite demand declines. Are these the right solutions? Peloton may not have time to find out. Activists are still calling for a sale or another change in leadership following a bleak earnings report and a $750 million loan in May to improve cash flow.
While Peloton’s success remains to be seen, there are already clear lessons for every company to heed while developing their long-term digital strategies.
From having a digital vision, to developing products and experiences that drive customer engagement, to managing data, technology, people and operations, Peloton is proof positive that every company needs an evolving, nimble digital vision with a focus on remaining agile. This starts with an understanding that they are never done – companies must keep iterating, or the market will simply move on without them.
Here is what companies can glean from Peloton’s experience and the path to being digital that is essential for resilience and long-term success.
Peloton has a clear sense of how digital fuels growth, and there is alignment across teams to apply a digital-first mindset.
Peloton has a compelling digital vision to “use technology and design to connect the world through fitness” and “bring immersive and challenging workouts into people’s lives in a more accessible, affordable and efficient way.”
Execution, however, has not been without its challenges—from issues with supply chain and costs to product functionality. The company recently reversed course on a planned U.S. manufacturing plant that would have strayed from their core mission. So, are they a software company? A content studio? A hardware manufacturer? It’s unclear today. Misalignment between digital-centric decision making and overall business goals has plagued Peloton over the last year-plus. In their March letter to shareholders, CEO Barry McCarthy says that time is over: “You won’t see us investing in or owning something that doesn’t serve our connected fitness strategy.”
However, Peloton has been able to rally through challenges before, showing its ability and agility to pivot and evolve to help realize their vision on the path to being digital.
A clear vision and digital mindset is critical for any company – whether your roots are in 1920 or 2020. It’s also essential to maintain focus on your core mission and guide decision-making on where to or not to invest.
Failures and mistakes are inevitable, but are only a death knell if you fail to use your learnings to spark change. Peloton is on their way to making important changes, beginning with new leadership and products, and every company should heed their experience.
Online and offline experiences are fluid and connected. Goals are oriented around product improvement vs. project completion.
Peloton earned a deeply engaged and loyal following through excellent user experience and exceptional content.
However, challenges are ahead. As the world reopens, many are eager to return to in-person communities in boutique and traditional gyms. Peloton boasts stores and studios in prime locations, but the future of the in-studio experience is in question. Moreover, issues with their hardware products – from Bikes to Treads – still linger even as they invest further in hardware with the Peloton Guide and Rower, in addition to disappointing sales for Peloton-branded apparel. While the new pricing model that bundles the bike with subscription and adds flexibility for cancelation may help some resistant consumers take the plunge, Peloton will need counter consumer trepidation about making an investment in hardware that may become obsolete if the company fails. At the same time, they must work to enhance and evolve the consistency and quality of experience between analog and digital.
Pricing also remains a challenge. While high costs have impacted market penetration, Peloton’s novel (and more affordable) bundling approach was followed up by a broad subscription increase in Q2 2022.
Peloton’s struggles to align best-in-class content and software with middle-of-the-road hardware and connect the at-home and in-store experiences make clear the challenges of any company seeking to enhance the full customer journey. It’s possible this pricing adjustment will help stabilize revenue streams; however, Netflix has shown that there is a breaking point for what consumers will withstand.
Customer data and feedback drives product development and enhancement on an ongoing basis.
Peloton started out as a customer-obsessed business, but lost focus. Complaints about product functionality and concerns over the in-person vs. digital experience went unaddressed for too long. While Peloton has an official Field Testing Community that seeks feedback, it’s also essential to act and iterate quickly based on customer needs.
Looking ahead, Peloton’s new strategy will put greater focus on “the NPV of the subscriber” rather than hardware profits. They will need to back up that focus in all facets of the business to maintain their less than 1% subscriber churn rate.
In May, Peloton announced that they would sell through third-party retailers for the first time, a move that would increase prospective customer interaction and awareness of their product offerings. Most Peloton customers stayed loyal throughout the pandemic, but with prices rising and gyms reopening, the blended in-person and online experience should be a top priority.
Loyalty is fleeting, and if you aren’t close to your customer, you give oxygen to competitors.
Companies can speed up their improvements by going directly to the source – their customers – to ask for feedback and gain insight into needs and wishes. But it’s not enough to ask, you need to then ACT by applying their feedback and in some cases co-creating new or enhancing existing products alongside them.
Cloud-based, real-time data is a catalyst for change and influences faster decision-making.
For Peloton, “intuition drives testing and data drives decision-making.” That’s an ideal mindset when it comes to data and technology.
Members can see and feel that data drives new or existing class investment, music deals, key integrations like the Apple Watch, and personalized fitness recommendations and coaching.
It's imperative that Peloton aligns on the goals for this data and how it is used to most effectively leverage insights to continue building better technology (and performance) outcomes.
Born digital, Peloton had the benefit of designing everything with data in mind. Most legacy companies aren’t so fortunate. It’s still all too common for data to live in disparate platforms, disconnected, stale and unusable.
One of the most important steps to create a digital operating model is arming leaders across the organization with the data they need to make smarter and faster decisions. This starts with making sure data lives in the cloud and is connected, complete, accurate and accessible.
Peloton is an example of having strong data at the root of the company – but not having the right decisions coming from leadership.
Company operations and infrastructure are agile and flexible, with algorithmic decision making that repositions operations from overhead to essential differentiator.
In a recent earnings report, Peloton is upfront about “overinvesting in certain areas” as they scaled “too quickly.” Overinvestment included $1 billion in excess inventory, an $800 million acquisition whose value failed to realize, and New York office space expansion in the middle of a pandemic.
As a result, in Q4 2021, Peloton slashed its full-year sales forecast by $1 billion, showing the reality of how implementing algorithmic decision making can support organizations. That said, they are flexible and agile enough to learn and change. Looking forward, Peloton will likely seek to renegotiate $0.03/stream music costs while holding tight to one of their key differentiators – their content creators.
Every company has faced disruption to planned investment or processes over the past two years. Leaders should be looking at every asset, investment, department and system plan with an eye toward the long-term and future relevance. Where possible, working to automate repeatable tasks and decisions can have outsized impacts on efficiency and flexibility. It doesn’t happen overnight, but with the right approach to operations and infrastructure, companies can more intentionally scale business over time to avoid layoffs and poor investments.
Company operations should be an asset to the organization, with strong infrastructure, systems and controls that are still flexible and agile to pivot or shift course when needed.
Interdisciplinary, decentralized teams put the customer vs. boss at the center of strategy and execution.
Peloton has attracted exceptional talent at every level and appears to be taking steps to reorient around the customer and the digital experience.
As the new CEO, Barry McCarthy (formerly of Spotify and Netflix) promises to infuse fresh thinking and relationships into the company strategy.
However, hiring a digital-focused CEO is not a silver bullet. Teams must also be organized by product vs. function and empowered to make data-driven decisions to improve and iterate on the product and experience. It’s critical to get the right talent together at the right time working toward the right goal. The company is still reckoning with its actions on this front following the February 2022 restructuring.
Not every organization will require a leadership change, but in any scenario, digital cannot be relegated to a figurehead C-Suite position in an organization.
Every employee across the company must understand their role and responsibility in leading or executing the digital vision.
Good ideas can come from anywhere in the organization, and team structure matters. Companies can have exceptional talent, but if the team is not cross-functional and set up to tackle issues holistically, they will fail.
Customers on the Leaderboard are cheering Peloton on and eagerly observing what’s next for the company’s future. However, investors are calling for more change now. Peloton’s agility has enabled them to build their community and evolve the company’s offerings, but their next moves will be vital to spark stronger results and truly begin a new chapter, one they need to avoid being the next Kodak or Blockbuster.
No matter what is ahead, it’s a cautionary tale for all organizations that being digital is not a check the box or a “one and done” approach. It must be an ongoing strategy and mindset that requires iteration and evolution to meet customer needs.
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