How Peloton Makes Money: Inside Their (Revolutionary?) Business Model

Peloton is a tech company offering hardware products aimed at the health and fitness community.
Peloton sells stationary bikes and treadmills with a digitally-interactive interface for users.
Peloton makes money by charging for its hardware and subscription fees to its platform.

John Foley founded Peloton in 2012, headquartered in New York. The company experienced huge growth during the pandemic, with people choosing to work out at home after the closure of fitness facilities around the globe.

The company offers an interactive experience for its users, with riders or runners following an on-screen course that gives them the impression of training outdoors. Famously, President Joe Biden owns a Peloton and uses the bike to stay fit.

What does Peloton do?

Peloton was listed on the Nasdaq stock exchange in 2019 under the ticker $PTON shortly before the onset of the pandemic.

As a result, the company's share price experienced huge growth in 2020 and 2021. However, these gains are fading fast, and Peloton's stock price dipped under its pre-pandemic levels in 2022.

Peloton saves 1.4-million subscribers. Recently, it reduced the prices of its hardware while increasing its subscriptions. The company adopted this strategy to cater to its existing customer base in the face of waning hardware sales and new signups to the platform.

How does Peloton work?

Peloton operates a model of selling its equipment to users and charging them for a subscription service to its platform. Each year, its users post more than 58-million workouts using its machines and interactive online platform.

Users receive a screen attached to their treadmill or bike. The screen takes the user through a track or course circuit, giving the user the experience of riding or running outdoors. Users can choose from a huge range of workouts and workout themes.

How Peloton makes money

Peloton makes money by charging its customers for its "Connected Fitness Products" and a subscription model, enabling users to access the workouts on its platform. The company also sells apparel through its website. Let's look at the Peloton business model in detail.

Connected Fitness Products

Peloton sells its workout bikes and treadmills for cash or in installments. Its products cost up to $2,500, depending on the package chosen by the user.

Both the bike and the treadmill come with a large interactive screen attached to the front of the equipment.

The screen provides an interactive experience. The rider or runner can select a course and enjoy a visual experience when working out instead of staring at their living room wall.

Subscription

Its products are nothing more than glorified treadmills and stationary bikes without the subscription service. It's the interactive experience that makes the company interesting to its users.

Recently, due to waning demand for its hardware, Peloton increased the monthly cost of its subscription service.

It appears that the consumer is price-sensitive to this increase, with many users choosing to leave the platform.

Accessories & Apparel

Peloton also sells accessories and add-ons for its hardware and workout apparel for its customers. The company offers its fitness wear under the "Peloton Apparel" brand. Some popular apparel products include leggings and t-shirts and hats, and gym bags.

The apparel business is a small segment of the business model, accounting for just 1% of total sales for the company.

However, it's the fastest-growing segment of the business, with over 50% y-o-y growth. Customers can also choose from add-on apparel packages, such as headphones and shoes.

Future growth engine

Peloton experienced a massive drop in its share price in 2022, removing all of the pandemic gains in its stock.

As the world opened up and people started going back to their gym or outdoor workout experiences, the company experienced a huge drop in demand for its bikes and treadmills.

As a result, the company is pivoting away from hardware sales to focus on its subscription model. The company also raised its subscription fees to account for the drop in hardware sales, angering its user base.

The increase in subscription fees from $39 per month to $55 per month shows Peloton's commitment to developing its subscription service side of the business.