How Peloton Built The Foundation For Enduring Success (B) : by Len Sherman

CU295
PUBLISHED ON
APRIL 5, 2021
How Peloton Built the Foundation for Enduring

Success (B)
BY LEN SHERMAN *
Introduction
As Peloton closed the books on FY 2020, founder and CEO John Foley had good reason to be
proud of the company he first envisioned nearly a decade earlier. It had racked up its sixth
consecutive year of triple-digit growth, posting $1.8 billion in annual revenue, while achieving
strong positive operating cash flow and its first profitable quarter. The company extended its
global reach by expanding to Europe, with stores in Germany and German-language fitness
classes produced by its London production studio. Global subscriptions swelled to over one
million loyal customers, contributing to growing high-margin subscription revenue (see
Exhibit 1). As a testament to its success, by mid-2020 Peloton was recording higher gross-profit
margins, higher customer-satisfaction ratings, and higher customer-retention rates than
Apple, Tesla, or Netflix (see Exhibit 2).
Foley believed his company was well-positioned to sustain its early success into its second
decade, noting, “We're just getting started; we have massive global ambitions. I think if we do
[our job] well, this will be one of the special companies of our generation.”1 But success breeds
imitation, and connected fitness newcomers such as Echelon, Mirror, Tonal, Tempo, and
Hydrow emerged, determined to tap into the market opportunity Peloton created, while
established players NordicTrack and SoulCycle had also entered the arena. Moreover, Apple
eventually announced a suite of streaming fitness classes and health-monitoring products for
its mobile and wearable devices. The battle for connected fitness category leadership was on,
which would test both the robustness and resilience of Peloton’s business model.
Company History
The inspiration to create what has come to be known as the connected fitness category came
to Foley in 2011. An exercise enthusiast, he found it increasingly difficult to combine attending
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local fitness studio classes with his daily parental and professional responsibilities. Foley’s
solution envisioned making his exercise regimen more convenient, frequent, and affordable
by bringing “fantastic, high-energy, instructor-led group fitness into the home, to be
experienced on my time, any time I wanted. And my hunch was that if I could make it possible,
others would want it as well.”2 To implement this vision, Foley created Peloton with the intent
to “build what we believed to be the best indoor bike on the market, recruit the best instructors
in the world, and engineer a state-of-the-art software platform to tie it all together.”3
The road from Foley’s vision to Peloton’s global category leadership was fraught with
challenges that severely tested the company’s management team. i By mid-2012, Foley had
recruited four ex-colleagues to join him as cofounders and raised $400,000 in angel-investor
funding to launch the company. With this quick but limited capital in hand, Peloton’s
management team set off to address a number of matters, starting with choosing the right
design spec for the bicycle that would become an iconic symbol of the company’s brand (see
Exhibit 3). Foley’s initial instinct was to launch the bicycle as a minimum viable product,
adapting an existing bike with added electronics, sensors, and a mounting bracket to
accommodate a customer’s own tablet computer. This would allow Peloton to bring a
modestly-priced product to market quickly, while focusing the company’s limited funds on
software development for the computerized brains of the bike. But Peloton eventually
concluded there wasn't a bike—or tablet—on the market that adequately met the company’s
needs and instead chose to develop its own bicycle, monitor, and operating system from the
ground up.
This was the first of several key decisions during Peloton’s early development, in which the
company decided it would be better off developing its own products, services, and internal
capabilities, rather than relying on third-party providers or partners (see Exhibit 4).
In addition to creating a custom-designed bike, Peloton’s vertical integration approach also
extended to these strategic moves:
 Recruiting and training its own instructors, rather than partnering with existing fitness
boutiques
 Deploying its own state-of-the-art video production facilities and creating its
own fitness boutiques, as opposed to tapping into existing studios
 Developing its own global store network and e-commerce channel, instead of
selling through established retailers
 Backward-integrating into company-owned bicycle manufacturing after
initially relying exclusively on contract manufacturers
i
As documented more fully in “How Peloton Built the Foundation for Enduring Success (A),” published by
Columbia Business School, Fall 2020, CaseWorks case #210404A.
How Peloton Built the Foundation for

Enduring Success (B) | Page 2
BY LEN SHERMAN*
 Developing its own white-glove delivery/installation service, rather than
depending on third-party logistics providers
This sequence of strategic decisions increased Peloton’s management complexity and capital
requirements, which Foley acknowledged had severely stressed the company during its early
development.4 Foley was turned down by 400 VCs during his nearly three-year search for
capital before landing the company’s first institutional funding round in April 2014.5 But over
the next five years, as evidence mounted that Peloton was delivering a superior product and
customer experience to a growing base of enthusiastic and loyal subscribers, the company was
able to raise nearly $1 billion in private capital (see Exhibit 5).
In its public offering prospectus filed in August 2019, Peloton described the scope of its
vertically integrated operations as follows (see Exhibit 6): “We are a technology, media,
software, product, experience, fitness, design, retail, apparel, logistics company.” While the
company’s heavy investment in expanding its product range, store openings, studio and video
production facilities, subscription plans, workout categories, and global operations spurred
rapid growth, it did so at the expense of profitability. The company’s FY 2019 (ending June 30,
2019) revenue had doubled to $915 million, but its operating loss exceeded $200 million, and
negative cash flow from operations and investments exceeded $400 million.6
In 2019, as Peloton approached its late-September IPO, many investment analysts were leery
about yet another high-growth, money-losing public offering.7 At that time, Lyft had already
lost over 40% of its IPO listing price just six months earlier. Uber’s IPO hadn’t fared much
better, listing at the bottom of its proposed IPO price range in May, and losing an additional
25% of its market value by late September. And just 10 days before Peloton’s IPO, money-
losing WeWork postponed and subsequently withdrew its public offering, despite lofty
expectations that the company could have been valued at more than $100 billion post-IPO.8 In
fact, none of the companies that raised more than $1 billion prior to going public in 2019 (e.g.,
Slack, Pinterest, Uber, and Lyft) traded above their IPO listing price by the end of the year.9
Not surprisingly then, Peloton faced a chilly reception when it commenced trading on
September 26, 2019, beginning a turbulent first year as a public company (see Exhibit 7). Shares
of Peloton opened 6.9% below the company’s IPO listing price of $29 and tumbled 11% by the
end of first-day trading, marking the third-worst debut for a large-cap IPO in more than a
decade.10 The company’s stock price remained below its IPO price for nearly two months. Yet
Peloton’s fortunes began to turn on November 5, 2019, when the company issued its first post-
IPO quarterly (Q1) earnings statement, reporting the company had doubled its year-on-year
revenue and subscriber growth while narrowing its losses. Over the next 18 trading days,
Peloton’s stock price soared 62%, ending well above its IPO listing price and outperforming
S&P 500 stock-price gains since its IPO by 37%.
But just as Peloton seemed to be on a roll, on December 2, 2019, the company hit a speed bump
when it began airing a widely panned Christmas television ad. In the 30-second spot, a young
mom is shown gaining confidence throughout the year after her husband buys her a Peloton
bike for Christmas. The commercial depicts the woman recording her new fitness regime in
Page 3 | How Peloton Built the Foundation

for Enduring Success (B)
BY LEN SHERMAN*
video selfies day after day: getting up early to exercise or jumping on the bike right after work.
At the end of the commercial, she shows her husband a video of her exercise journey and
thanks him for his thoughtful, life-changing gift.
But to many viewers, the already-rail-thin cyclist seemed terrified during what was perceived
as an exercise ordeal, suggesting a desperate effort to please her husband, prompting
widespread Twitter outrage11 and mocking parody videos.12 The adverse reaction to the ad
wound up wiping out $1.5 billion of Peloton’s market capitalization within three days and sent
the company’s stock plunging 27% by the end of the year.13
Peloton suffered another blow on February 5, 2020, when its Q2 earnings disappointed
analysts with slowing growth and widening quarter-over-quarter losses, sending the stock
sliding by 15% within three days. 14 And then the company fell victim to the broad-based
COVID-19 pandemic market sell-off, sending its stock to an all-time low of $19.51 on March
12.
But for the balance of its first year as a public company, Peloton enjoyed a remarkable rebound
buoyed by growing demand for its in-home exercise products during the pandemic’s initial
stay-at-home mandates. The company posted exceptionally strong fiscal second-half and year-
end results (see Exhibit 8). Peloton’s stock price closed over $100 on September 29, 2020, four
times higher than its debut as a public company one year earlier and outpacing the value
growth of S&P 500 stocks over this period by a factor of 3.5.
The dynamic stock price movements Peloton experienced—for better and worse—were mostly
driven by external factors largely beyond the company’s control: an initially hostile IPO
environment, the viral adverse reaction to Peloton’s 2019 holiday ad, and the unusual market
conditions arising from the pandemic. On its first anniversary as a public company, Peloton
looked forward to fulfilling its founder’s aspiration to become “one of the special companies
of our generation,” exploiting a compelling value proposition, the loyal and growing customer
community, and a strong business model that would prove resilient to growing competition.
Consumer Value Proposition

At the heart of every successful business venture is a value proposition that helps consumers
solve a problem more cost effectively than available alternatives. As Clayton Christensen
observed in his research on consumer behavior, “When we buy a product, we essentially ‘hire’
it to help us do a job. If it does the job well, the next time we’re confronted with the same job,
we tend to hire that product again. And if it does a crummy job, we ‘fire’ it and look for an
alternative.”15 In Peloton’s case, the job to be done was giving consumers more control over
fitting exercise into their busy schedules, and the company’s value proposition enabled
consumers to accomplish this job more flexibly, enjoyably, faster, and cheaper than attending
fitness classes in physical facilities. Peloton proved that despite its high initial equipment price,
the company could deliver a lower life-cycle cost solution.

BY LEN SHERMAN*
To illustrate Peloton’s consumer value proposition, consider the choice faced by a hypothetical
city-based working couple, each of whom attended local fitness clubs fifteen minutes from
their home, three to four times per week. Their monthly costs could likely run $400 or more,
considering that fitness clubs such as Equinox that offered workout classes as part of their
membership fee generally cost $150 to $250 per month, and boutique studios like SoulCycle
and Barry’s Bootcamp charged about $25 to $35 per session. If this couple substituted the
purchase of a Peloton bike ($1,895) and household connected fitness membership ($39/month)
for their fitness studio attendance, they could recoup their equipment acquisition investment
in less than six months, while lowering their total household fitness activity costs by more than
$11,000 over a three-year period. As shown in Exhibit 9, Peloton bikes and treadmills could
provide attractive breakeven economics even when substituting for far more modest monthly
club-membership fees.ii
Exercising at home also offered significant time savings by avoiding the need to travel to and
from fitness studios, which, in this example, could save the couple 12 to 15 hours per month
(see Exhibit 9). Peloton’s additional benefit of providing considerably more flexibility in
scheduling workouts made the company’s value proposition even more compelling.
Enhancing Value Through Personalization and Community Building

To attract and retain customers, Peloton also had to deliver a social, motivational, and
competitive experience equal to or better than attending in-person fitness classes. They
achieved this by exploiting technology-enabled personalization and effective social media
techniques.
For users seeking the motivation of competing against fellow exercisers, riders were invited to
race each other and watch their progress in real time. Each user was measured by their power
output (a function of speed and resistance) and ranked on a leaderboard throughout live or
prerecorded fitness sessions. Users could choose to filter their leaderboard view to see only
themselves (against a personal best if desired), or against their age, gender, or fitness-ranking
bracket.
Alternatively, for those looking for a noncompetitive vibe, simply double-tapping Peloton’s
tablet screen cleared all personal performance tracking and leaderboard metrics, leaving only
a view of the instructor. For an even more serene experience, users could also choose from
about a hundred scenic rides—immersive videos that let riders pedal along virtual coastlines,
mountain paths, country lanes, or city streets at their own pace, accompanied by a wide choice
of background-music genres.
The average cost of a gym membership in the United States is $58 per month, but most lower priced gyms
ii
do not include instructor-led classes as part of monthly fees. See Kyle Hoffman, “41 New Fitness and Gym
Membership Statistics for 2020 [Infographic],” Noob Gains (blog), March 27, 2020,
https://noobgains.com/gym-membership-statistics/.

BY LEN SHERMAN*
Peloton also built a number of social engagement tools into its app. Users could view who was
also taking a class or choose which classes to take by following their friends to see when they
were working out. Users could also send a digital high five to encourage any user during a
session or enable a video chat feature to bike face-to-face with other users during a ride.
Before their first ride, users were asked to voluntarily join the Peloton community by inputting
demographic information and a unique screen name, enabling Peloton to track rider
performance and remember preferences. During classes, instructors used the data to give
shout-outs to riders for milestone rides, birthdays, or commendable performances.
In addition to its signature bicycle classes, Peloton also added instructor-led fitness sessions in
nine other categories, including running, walking, dance cardio, strength, yoga, stretching,
and meditation. These classes broadened the appeal of Peloton’s offering and enhanced the
consumer value of maintaining monthly subscriptions.
Peloton also strived to build strong rapport and loyalty amongst its user community outside
of fitness classes by relying heavily on its star cast of instructors, who regularly interacted with
the community and promoted the brand to their followers on Instagram, Twitter, and
Facebook. Collectively, Peloton’s instructors were reaching 4.3 million followers on Instagram,
more than four times the number of followers on Peloton's corporate account.16
As one popular instructor said, “After class I go right to my phone and interact on social media
. . . it provides members with another way of gaining information and connecting with
instructors." Another instructor shared her Instagram handle and implored riders to “Write
me, I’ll write you back!”17
Peloton instructors regularly re-shared Peloton members' stories on Instagram, responded to
questions on Twitter, and sent Facebook updates reminding followers of upcoming classes.
These interactions helped build a strong community connection between Peloton’s instructors
and members.
Along with the thousands of Peloton member groups that organically formed on Facebook
and Instagram, the company also added a feature on its app to help its members create their
own groups. If a user added a hashtag in their profile, they could see what classes other
similarly tagged members had taken and when they were working out. Users could then filter
Peloton's huge leaderboard—which might include tens of thousands of people—down to just
the people they knew or wanted to meet from a given group. At one point about 800,000
Peloton members had added more than 100,000 tags to build user communities such as
#WorkingMomsOfPeloton, #Pelo4Wine, #PelotonTeachers, and #PelotonCanada.18
These concerted efforts to personalize user experiences and forge a strong sense of community
helped Peloton build high levels of customer satisfaction, engagement, and loyalty:
 Peloton’s 2020 Net Promoter Score (NPS) of 94 was among the highest recorded
measures of customer satisfaction achieved by any company (see Exhibit 2).19

BY LEN SHERMAN*
 Peloton steadily increased customer engagement, growing its total number of
workouts per subscriber fourfold (see Exhibit 10).
 After two years, Peloton’s subscriber retention rates were two to four times
higher than those of traditional fitness clubs (see Exhibit 11).
Market Size and Composition

In the 2010s, consumers—particularly millennials—increasingly prioritized wellness in their
lives. As a Goldman Sachs report noted, “For millennials, wellness is a daily, active pursuit.
They’re exercising more, eating smarter, and smoking less than previous generations. They’re
using apps to track training data, and online information to find the healthiest foods. And this
is one space where they’re willing to spend money on compelling brands.”20
Expenditures on fitness products and services benefitted from these trends. Between 2008 and
2018, the number of US households with fitness club memberships grew by 37% to nearly 21%
of all households. In 2018, the number of health club memberships worldwide exceeded 183
million, with industry revenues of roughly $100 billion.21
The global COVID-19 pandemic shifted the fitness market’s dynamics to Peloton’s benefit.
Independent research firm CFRA projected that international fitness equipment expenditures
would increase by 8% per year to $160 billion by 2023, overtaking stagnant growth (3%) in
consumer spending of $126 billion on gyms, health clubs, and fitness studios over the same
period. Spending on fitness streaming services, apps, and software was projected to grow at a
faster rate over the following three years (10%) to $42 billion, giving Peloton a serviceable
available market (SAM) of $200 billion by 2023.22 CFRA stated, “We expect the psychological
fallout from social distancing to favor Peloton over the long haul. Even when mandatory stay-
at-home orders are lifted, we expect subscriptions to stay sticky, as COVID-19 will linger in
consumers’ psyches for years to come.”23
These analyses suggested Peloton still had considerable headroom to expand its penetration
of the large and growing global fitness equipment and streaming services market. The
company’s own analysis conservatively estimated that in its four served countries, the number
of connected fitness subscriptions represented only 7% of the households that expressed an
interest in purchasing one or more Peloton products at current pricing (see Exhibit 12).24
While one might question the achievability of Peloton’s big hairy audacious goal (BHAG) of
increasing its subscriber base from 1 million to 100 million in the unspecified future,25 Peloton
appeared well-positioned for continued rapid growth over the next few years.

BY LEN SHERMAN*
Growth Drivers
In its investor and analyst presentation on September 15, 2020, Peloton shared strategic
priorities expected to drive the company’s ambitious growth targets.
Product Innovation
Peloton shipped its first bicycle in January 2014, and for the next four years sold only this
single connected fitness product (along with mostly spin class video subscriptions) in the US.
In 2018, Peloton’s pace of innovation picked up considerably, as it added a treadmill to its
lineup, supported by running and boot camp classes. Over the next two years, Peloton steadily
increased the range and types of classes it offered (e.g., yoga, meditation, and outdoor exercise)
and made all its streaming video content available to consumers on mobile devices through a
new standalone subscription service. These product-line additions helped attract new
customers and increased the engagement (number of workouts per week) of its existing
customers. As evidence of Peloton’s broadening appeal, between 2017 and 2020, the number
of workouts per customer more than doubled, while non-cycling workouts grew from 6% to
36% of all fitness sessions.26
In September 2020, Peloton announced enhancements to its bicycle and treadmill products,
featuring bigger and brighter screens, better sound systems, digital controls, swiveling
monitors, and more external device integrations. At the same time, it lowered the price of its
legacy devices to provide more affordable entry points to the company’s platform and began
selling treadmills in its international markets. Foley promised more innovation was in the
pipeline, stating, “Please trust me when I say we have a lot more innovation . . . in our R&D
lab. We have some of the best mechanical engineers, electrical engineers, software engineers
working on really cool new stuff that is going to surprise people. . . . So we will bring new
products to market in the coming years.”27
Greater Affordability
Taking a page out of Apple’s strategy playbook, 28 Peloton reduced the price of its legacy
products when it introduced the latest and most advanced hardware devices. The price of the
original Peloton bike ($2,495) was lowered by 24% to $1,895, bringing the company-provided
monthly finance cost to $49 (39 months, 0% interest). The original treadmill price decreased
even more, from $4,295 to $2,495 ($64 per month when financed), which made it more
attractive to price-sensitive households.
In December 2019, Peloton also reduced the price of its digital subscription from $19.49 to
$12.99 per month. This app gave consumers who hadn’t purchased a connected fitness product
access to all of Peloton’s archived classes on any television or mobile device, streaming
through Apple TV, Amazon Fire TV, Roku, and other interfaces.
From 2014 to 2019, Peloton’s fastest bike-sales growth was in households earning less than
$100,000 per year, and the company’s price cuts were expected to further expand its affordable
market reach.29

BY LEN SHERMAN*
Geographic Expansion
In fall 2018, Peloton began international operations in Canada and the UK, followed by
operations in Germany in 2019. While Peloton didn’t break out its revenues by country, data
analyzed by Bank of America indicated consumer visits to each of Peloton’s country-specific
websites increased significantly since the launch of its international operations, which is
historically a strong predictor of subscriber growth (see Exhibit 13).30
In 2020, Peloton CEO Foley promised that “In the coming years, we will launch new markets
and new geographies and we look forward to that, [plus] new languages. We’re very excited
about being the global digital fitness platform and technology platform for the world.”31
Competition
Peloton’s market launch ushered in a transformative change in consumer preferences, from
facility-based to at-home workouts, accelerated by the impacts of the COVID-19 pandemic.
Not surprisingly, after widespread business closures were imposed in the United States in
March 2020, gyms and fitness boutiques suffered devastating losses, precipitating
bankruptcies filed by the New York and Boston Sports Clubs, Gold’s Gym, 24-Hour Fitness,
Flywheel, and others.32
Following Peloton’s success, competitors rushed to capitalize on the growing market for
connected fitness products and services (see Exhibit 14). Since the outbreak of the pandemic,
US VCs invested more than $200 million in fitness startups Hydrow, Tempo, and Tonal. In
addition, Lululemon acquired Mirror for $500 million in June 2020, and three months later,
Apple announced its own digital subscription service for online workout classes.33
While competitors still lagged behind Peloton’s subscriber base (and the scale and scope of its
archived fitness classes), many began offering similar products at lower price points or
different types of fitness equipment, which challenged Peloton’s leadership position.
However, in 2020, Peloton still maintained a wide lead in consumer interest, as measured by
site visits to competitors’ websites (see Exhibit 15).
Business Outlook
By any measure, Peloton had achieved strong financial and operating performance from 2016
to 2020 (see Exhibits 16 through 19), as demonstrated by these indicators:
 Annual revenue growth in excess of 100% since 2014, expected to continue,
according to company guidance for FY 2021
 Exceptionally high subscription retention rates, averaging over 90% per year
 High and growing margins for both hardware and subscriptions
 Revenue mix shift towards higher-margin subscriptions
 Decreasing sales and marketing costs as a percent of revenue

BY LEN SHERMAN*
 Decreasing costs of customer acquisition
 High ratio of customer lifetime value to customer acquisition costiii
 Full-year positive operating cash flow in FY 2020 and first-ever quarterly
positive net income in Q4 2020
 Strong balance sheet, with more than $2 billion in assets and an asset-to-liability
ratio of 2.8 in FY 2020
Having sensed a “massive global opportunity” 34 to expand its leadership in the growing
connected fitness category, Peloton planned to invest heavily in new products and content
modalities, along with new software to enhance its members’ experience, additional
manufacturing capacity, and an expanded international market presence. For FY 2021, Peloton
projected a doubling of its revenues, subscribers, and EBITDA, continuing to build on the
company’s track record for innovation, premium pricing, and high levels of customer
retention, strengthening its foundation for long-term profitable growth.
Some analysts, however, expressed bearish doubts, pointing to a number of potential risks
Peloton could face in the years after 2020, including the following:iv
 Shift in post-pandemic consumer preferences back toward gym memberships
 Aggressive pricing by gyms and fitness studios to rebuild membership
 Increased competition for connected fitness products from new and established
players, driving down prices and margins
 Increased subscriber-acquisition costs as the connected fitness products (CFP)
market approaches saturation
 Increased content creation costs as competition for “celebrity” instructors bids
up compensation
 Low-priced, digital-only Peloton subscriptions may diminish demand for its
connected fitness hardware
iii
This ratio measures the ratio of the long-term (profit) value to Peloton for each new customer per dollar
of the cost spent to acquire each new customer. For an explanation on how to compute the ratio, see this
post: Babak Azad, “Peloton—A Marvel at Customer Acquisition, Brand-Building, and Its Untapped
Opportunities,” Babak Azad website, August 2019, https://www.babakazad.com/peloton-a-marvel-at-
customer-acquisition-brand-building-and-its-untapped-opportunities/, accessed November 2, 2020.
iv
For more examples, see these articles: Kari McMahon, “Peloton’s Market Cap Just Reached a Record $32
Billion—But a New Survey and Wall Street’s Solo Bearish Analyst Warn Its Valuation Should Be Less
Than Half of That. Here’s Why Investors Should Be Cautious,” Business Insider, October 7, 2020,
https://www.businessinsider.com/investing-outlook-bmo-capital-markets-analyst-survey-peloton-
overvalued-expensive-2020-10; David Trainer, “Peloton Is Unfit for Fiduciaries,” Forbes, October 5, 2020,
https://www.forbes.com/sites/greatspeculations/2020/10/05/peloton-is-unfit-for-fiduciaries/#60dd8fb959ed

BY LEN SHERMAN*
Nonetheless, Foley remained steadfastly bullish on Peloton’s outlook. On a call with investors
and analysts on September 15, 2020, he reiterated its business strengths in the following terms:
 Massive global opportunity
 Powerful unit economics
 Deep moats
 World-class team
 Super-engaged community
 Strong balance sheet
 Tight, focused plan
When handicapping the company’s prospects to ultimately reach its BHAG of attracting 100
million subscribers with a perfect NPS score of 100, Foley said, “We like our chances.”35

BY LEN SHERMAN*
Exhibits
Exhibit 1
Peloton FY 2020 Performance Highlights
Note: all figures reflect FY 2020 metrics as of June 30, 2020, with the exception of market
capitalization.
Source: Peloton, Q4 2020 Shareholder Letter, June 30, 2020, from Peloton investor relations website,
https://investor.onepeloton.com/static-files/0160c736-f0d2-400a-8a20-6f6fc3f85659

BY LEN SHERMAN*
Exhibit 2
Comparative Business Performance
Note: All data is the most recent available as of September 15, 2020.
Sources: Gross profit margins: derived from company financial reports for most recent FY 2020 YTD
data. NPS scores: Peloton, Investor and Analyst Session, September 15, 2020, from Peloton
investor relations website, https://investor.onepeloton.com/static-files/5155a9dc-1da8-4d6a-b232-
3c231b8983b6, accessed November 2, 2020; Customer Guru, “Net Promoter Score Benchmarks by
Industry,” NPS Benchmarks, https://customer.guru/net-promoter-score/benchmarks, accessed
November 2, 2020. Annual customer retention rate: Peloton, Q4 2020 Shareholder Letter, June 30,
2020, from Peloton investor relations website, https://investor.onepeloton.com/static-files/0160c736-
f0d2-400a-8a20-6f6fc3f85659; Aqsqa Qadir, “Apple Loyalty Plunges 15 Percent in 2019,” Digital
Information World (blog), July 21, 2019, https://www.digitalinformationworld.com/2019/07/historic-
iphone-upgrade-loyalty-2011-2019.html; Kathryn Roethel Rieck, “Netflix Has Unparalleled Customer
Retention. Can Disney or Apple Shake It?” Second Measure (blog), September 18, 2019,
https://secondmeasure.com/datapoints/netflix-disney-plus-apple-customer-retention/; Matt Pressman,
“Tesla Has the Highest Customer Loyalty of All Car Brands,” CleanTechnica, January 9, 2019,
https://cleantechnica.com/2019/01/09/tesla-has-the-highest-customer-loyalty-of-all-car-brands/

BY LEN SHERMAN*
Exhibit 3
Key Questions That Guided Peloton’s Early Development
Source: Case writer analysis

BY LEN SHERMAN*
Exhibit 4
Peloton Timeline and Milestones
Source: Business-press reports, Peloton press releases and financial statements, and case writer
analysis

BY LEN SHERMAN*
Exhibit 5
Peloton’s Funding Rounds
Date Type Lead Investors Amount

($, millions)
October 2011 Ideation None; John Foley self-funded $0
February 2012 Seed Friends & Family $0.4
December 2012 Series A Angel investors $3.5
July 2013 Crowdfunding Kickstarter $0.3
April 2014 Series B Tiger Global Management $10.5
April 2015 Series C Tiger Global Management $30
December 2015 Series D L Catterton $75
May 2017 Series E Fidelity Investments $325
August 2018 Series F TCV $550
September 2019 IPO Underwriters: JP Morgan, Goldman Sachs $1,160
Source: Alex Wilhelm, “As Peloton Preps for an IPO, a Look Back at Its Funding History,” Crunchbase
News, February 12, 2019, https://news.crunchbase.com/news/as-peloton-preps-for-an-ipo-a-look-
back-at-its-funding-history/

BY LEN SHERMAN*
Exhibit 6
Peloton’s Business Scope
Source: Peloton Interactive, Form S-1 Registration Statement (filed August 27, 2019), from US
Securities and Exchange Commission website, https://www.sec.gov/Archives/
edgar/data/1639825/000119312519230923/d738839ds1.htm, accessed November 2, 2020

BY LEN SHERMAN*
Exhibit 7
Peloton’s (PTON) First Year Stock Price vs. the S&P 500
$100
All time high $97.73
Strong Q4 earnings,
2X annual revenue
growth and first
profitable quarter
$80
Peloton Stock Price
Panned ad sends Steady climb after strong

stock price down Q3 earnings and
$60 25% by year end evidence of pandemic
demand growth
Strong Q1 earnings
spurs steady stock
Disappointing Q2
Peloton
price growth
earnings send stock
below IPO price
$40
Down 11% Pandemic sell-off;
first day to all-time low
$29 IPO $25.76
Listing Price
S&P 500
$20
Note: S&P values indexed to first day Peloton stock price.

Source: Yahoo Finance, Peloton press releases, and business reports

BY LEN SHERMAN*
Exhibit 8
Peloton’s Quarterly P&L (2019–2020)
Source: Peloton, Q4 2020 Shareholder Letter, June 30, 2020, from Peloton investor relations website,

BY LEN SHERMAN*
Exhibit 9
Economics of Peloton Ownership vs. a Fitness Club Membership
Source: Case writer analysis

BY LEN SHERMAN*
Exhibit 10
Growth in Peloton’s User Engagement
Note: Peloton’s average number of quarterly workouts per subscriber grew from 6.1 in Q1 2017 to
24.7 in Q4 2020.
Source: Peloton, Investor and Analyst Session, September 15, 2020, from Peloton investor relations
website, https://investor.onepeloton.com/static-files/5155a9dc-1da8-4d6a-b232-3c231b8983b6,
accessed November 2, 2020

BY LEN SHERMAN*
Exhibit 11
Comparative Retention Rates
Attrition Rates by Type and Tenure

100%
80%
60%
40%
20%
0%
After11 Yr. After 22 Yrs. After 33 Yrs.
Peloton Fitness Clubs
Note: Comparative fitness clubs data is based on surveys of nearly 1.5 million members from 456
clubs in North America from 2012–2015. Group fitness clubs such as SoulCycle and Barry’s Bootcamp
exhibit slightly higher retention rates than the traditional fitness clubs shown in this exhibit. See
“Valuable Lessons Learned for the Fitness Studio Owner,” Resources, Precor website,
https://www.precor.com/en-us/resources/valuable-lessons-learned-fitness-studio-owner, accessed
November 2, 2020.
Sources: Peloton, Investor and Analyst Session, September 15, 2020, from Peloton investor
relations website, https://investor.onepeloton.com/static-files/5155a9dc-1da8-4d6a-b232-
3c231b8983b6, accessed November 2, 2020. “One Million Strong: A Study in Retention,” Resources,
Precor website, https://www.precor.com/en-us/resources/one-million-strong-study-retention, accessed
November 2, 2020

BY LEN SHERMAN*
Exhibit 12
Peloton’s Serviceable Accessible Market (as of 8/31/20)
Source: Peloton, Investor and Analyst Session, September 15, 2020, from Peloton investor relations
website, https://investor.onepeloton.com/static-files/5155a9dc-1da8-4d6a-b232-3c231b8983b6,
accessed November 2, 2020

BY LEN SHERMAN*
Exhibit 13
Peloton’s International Sales Growth
Monthly Total Visits to Peloton’s Non-US Websites
UK
Canada
Germany
Peloton’s Added Subscriptions vs. Total Website Visits
Peloton Web
Traffic (LHS)
Subscription
Additions (RHS)
Source: “F1Q Data Update: Peloton,” BofA Global Research, October 5, 2020, via Thomson ONE,
accessed October 15, 2020

BY LEN SHERMAN*
Exhibit 14
Connected Fitness Product Competitors (as of 10/17/20)
Number of
Connected Monthly Media
Product Launch Subscribers Number of
Fitness Equipment Price Subscription Library
Type Date (in Instructors
Company Price Size
thousands)
Bike $1,895–$2,495
Peloton 2012 $39 1,100 34 >14,000
Treadmill $2,495–$4,295
Bike $1,599–$1,999
Elliptical $1,299–$3,999
NordicTrack/
Mirror 2013 $1,495 $39 700 43 1,500
Fit
Rower $799–$1,699
Treadmill $2,249–$3,999
SoulCycle Bike 2019 $2,500 $40 NA 24 NA
Bike $840–$1,640
Echelon Mirror 2018 $1,495 $40 NA
Rower $999
Mirror Mirror 2016 $1,495 $39 NA 8 NA

Hydrow Rower 2017 $2,199 $38 NA 9 NA
Body
Tempo 2020 $1,995 $39 NA 6 NA
Strength
Body
Tonal 2018 $2,995 $49 NA 5 NA
Strength
All types,
but no
Apple 2020 NA $10 NA NA NA
equipment
included
Source: Company websites and press releases

BY LEN SHERMAN*
Exhibit 15
Website Visits for Connected Fitness Companies
Monthly Total Visits to Selected Company Websites
Peloton
Echelon
SoulCycle,
NordicTrack,
Flywheel
Monthly Total Visits to Selected Company Websites
Peloton
Mirror
Hydrow
Tonal
Source: “F1Q Data Update: Peloton,” BofA Global Research, October 5, 2020, via Thomson ONE,
accessed October 15, 2020

BY LEN SHERMAN*
Exhibit 16
Peloton’s Operating Metrics and Non-GAAP Financial Metrics
Fiscal Year Ending June 30
2017 2018 2019 2020

Connected Fitness Subscriptions 107,708 245,667 511,200 1,091,100
Average Net Monthly Subscription Churn 0.70% 0.64% 0.65% 0.62%
Total Workouts (in Millions) 6.2 17.9 52.2 164.5
Average Monthly Workouts per Subscription 7.2 8.2 11.5 17.9
Connected Fitness Product Gross Profit (in Millions) $70.0 $153.6 $306.1 $628.7
Connected Fitness Product Gross Margin 38.1% 44.1% 42.0% 43.0%
Subscription Gross Profit (in Millions) $3.2 $34.8 $77.4 $208.0
Subscription Gross Margin 9.8% 43.3% 42.7% 57.2%
Net Income (in Millions) ($71.1) ($47.9) ($195.6) ($71.6)
Adjusted EBITDA (in Millions) -$51.8 -$30.4 -$71.3 $117.7
Adjusted EBITDA Margin -23.7% -7.0% -7.8% 6.4%
Sources: Peloton Interactive, Form S-1 Registration Statement (filed August 27, 2019), from US
edgar/data/1639825/000119312519230923/d738839ds1.htm, accessed July 6, 2020.
Peloton, Q4 2020 Shareholder Letter, June 30, 2020, from Peloton investor relations website,
https://investor.onepeloton.com/static-files/0160c736-f0d2-400a-8a20-6f6fc3f85659, accessed
July 6, 2020

BY LEN SHERMAN*
Exhibit 17
Peloton’s Income Statements

(in Millions)
2017 2018 2019 2020
Revenue
Connected fitness products $186.1 $354.8 $733.9 $1,462.2
Subscription $32.5 $80.3 $181.1 $363.7
Total $218.6 $435.1 $915.0 $1,825.9
Cost of revenue
Connected fitness products $115.4 $199.9 $427.8 $833.5
Subscription $29.3 $45.5 $103.7 $155.7
Total $144.7 $245.4 $531.4 $989.1
Gross profit $73.9 $189.7 $383.6 $836.7
Operating expenses
Research and development $13.0 $23.4 $54.8 $89.0
Sales and marketing $86.0 $151.4 $324.0 $477.0
General and administrative $45.6 $62.4 $207.0 $351.6
Total operating expenses $144.6 $237.2 $588.5 $917.6
Operating income (loss) ($70.7) ($47.5) ($202.3) ($80.8)
Other (expense) income ($0.3) ($0.3) $6.7 $12.4
Net income ($71.0) ($47.8) ($195.6) ($71.6)
Non-GAAP measure
Adjusted EBITDA* ($51.8) ($30.4) ($71.3) $117.7
*Adjusted EBITDA is defined as net income (loss) adjusted to exclude: other income, net;
provision for income taxes; depreciation and amortization expense; stock-based compensation
expense; transaction costs; certain litigation expenses, consisting of legal settlements and
related fees for specific proceedings that arise outside of the ordinary course of our business.
edgar/data/1639825/000119312519230923/d738839ds1.htm. Peloton, Q4 2020 Shareholder
Letter, June 30, 2020, from Peloton investor relations website,

BY LEN SHERMAN*
Exhibit 18
Peloton’s Balance Sheets
(in Millions)
ASSETS 2018 2019 2020
Current assets
Cash and equivalents $150.6 $162.1 $1,035.5
Marketable securities $0.0 $216.0 $719.5
Accounts receivable $9.4 $18.5 $34.6
Inventories $25.3 $136.6 $244.5
Prepaid expenses and other current $18.4 $48.4 $124.5
Total current assets $203.8 $581.7 $2,158.6
Property and equipment $36.2 $249.7 $242.3
Intangible assets $24.5 $19.5 $16.0
Goodwill $4.2 $4.3 $39.1
Right-of-use assets $0.0 $0.0 $492.5
Other assets $2.6 $9.3 $33.3
Total assets $271.2 $864.5 $2,981.8
LIABILITIES
Current liabilities
Accounts payable $28.1 $92.2 $135.8
Accrued expenses $51.4 $104.5 $225.9
Customer deposits/
$88.5 $90.8 $363.6
deferred revenue
Current portion of lease liabilities $2.2 $3.3 $46.9
Total current liabilities $170.2 $290.8 $772.2
Deferred rent $9.4 $23.7 $0.0
Build-to-suit liability $0.0 $147.1 $0.0
Long-term lease liabilities $0.0 $0.0 $508.2
Other non-current liabilities $1.0 $0.4 $23.4
TOTAL LIABILITIES $180.5 $462.0 $1,303.8
STOCKHOLDER EQUITY ($315.6) ($538.6) $1,678.0
Redeemable convertible preferred stock $406.3 $941.1 $0.0
Common stock paid-in capital $20.5 $90.7 2361.8
Accumulated other income $0.0 $0.2 $10.1
Accumulated deficit ($336.1) ($629.5) ($693.9)
TOTAL LIABILITIES, REDEEMABLE
CONVERTIBLE PREFERRED STOCK, $271.2 $864.5 $2,981.8
AND STOCKHOLDER'S EQUITY

BY LEN SHERMAN*
Exhibit 19
Peloton’s Cash Flow Statements
(in Millions)
2017 2018 2019 2020
OPERATING CASH FLOWS
Net loss ($71.1) ($47.9) ($195.6) ($71.6)
Cash flow adjustments
Depreciation and amortization $3.7 $6.6 $21.7 $40.2
Stock-based compensation $10.3 $8.5 $89.5 $88.8
Other non-cash operating items $0.3 $1.0 ($1.4) $54.1
Changes in operating assets and liabilities
Accounts receivable ($3.6) ($4.1) ($9.1) $11.3
Inventories ($5.0) ($9.6) ($111.3) ($96.8)
Other operating assets ($2.1) ($21.7) ($35.8) ($55.2)
Accounts payable and accrued expenses $22.1 $41.0 $117.3 $133.4
Customer deposits and deferred revenue $19.0 $63.0 $2.2 $272.3
Other operating liabilities $7.8 $1.9 $13.8 ($0.1)
Net cash from operating activities ($18.6) $49.7 ($108.6) 376.4
INVESTING CASH FLOWS
Purchases of marketable securities $0.0 $0.0 ($249.8) ($1,199.6)
Maturities of marketable securities $0.0 $0.0 $36.0 $435.4
Sales of marketable securities $0.0 $0.0 $0.0 $224.3
Business acquisitions $0.0 ($28.7) ($0.1) ($45.0)
Purchases of property, plant and equipment ($10.2) ($28.0) ($83.0) ($156.4)
Net cash used in investing activities ($10.2) ($56.7) ($297.5) ($741.3)
FINANCING CASH FLOWS

Net IPO proceeds $0.0 $0.0 $0.0 $1,195.7
Repurchase of convertible preferred stock ($170.0) $0.0 ($130.3) $0.0
Proceeds from issuance of convertible preferred
$315.6 $0.0 $539.1 $0.0
stock
Proceeds from exercise of stock options $0.7 $7.4 $9.3 $37.4
Other financing activities ($2.7) ($4.3) ($0.9) $7.0
Net cash provided by investing activities $143.6 $3.1 $417.2 $1,240.2
CASH AND EQUIVALENTS AT END OF PERIOD $155.5 $151.6 $163.0 $1,037.0

BY LEN SHERMAN*
Endnotes
1 Guy Raz, “Live Episode! Peloton: John Foley,”April 29, 2019, How I Built This with Guy
Raz, produced by NPR, podcast, https://www.npr.org/2019/04/05/710439824/live-episode-
peloton-john-foley.
2 Peloton Interactive, Form S-1 Registration Statement (filed August 27, 2019), p.90, from
US Securities and Exchange Commission website, https://www.sec.gov/Archives/

edgar/data/1639825/000119312519230923/d738839ds1.htm, accessed July 6, 2020.
3 Peloton Interactive, Form S-1 Registration Statement.
4 Kate Clark, “Peloton's Founder Had a Hard Time Raising VC—Now His Company Is
Worth $4.1B,” PitchBook, August 3, 2018, https://pitchbook.com/news/articles/the-founder-of-

peloton-had-a-hard-time-raising-vcand-now-his-companys-worth-4b.
5 Raz, “Live Episode! Peloton: John Foley.”
6 Peloton Interactive, Form S-1 Registration Statement.
7 New Constructs, “Peloton’s IPO Is More Overpriced Than Its Products,” September 23, 2019,
https://www.newconstructs.com/wpcontent/uploads/2019/09/Danger_Zone_PTON_2019 -
9-23.pdf, accessed November 2, 2020.
8 Connie Loizos, “Goldman Sachs’s CEO Just Called WeWork’s Pulled IPO—Which
Goldman Was Underwriting—Proof That the Market Works,” TechCrunch, January 21,
2020, https://techcrunch.com/2020/01/21/goldman-sachss-ceo-just-called-weworks-pulled-
ipo-which-goldman-was-underwriting-proof-that-the-market-works/.
9 Felix Salmon, “The 55 Minotaur Companies,” Axois, February 22, 2019,
https://www.axios.com/minotaurs-startup-company-billion-list-76ec56cc-682d-4d9c-8aa5-
6bab9b6d4c80.html.
10 Daniel Strauss, “Peloton Slides in First Day of Trading, Marking 3rd-Worst Mega-IPO
Debut Since Financial Crisis (PTON),” Business Insider, September 26, 2019,
https://markets.businessinsider.com/news/stocks/peloton-ipo-stock-price-3rd-worst-
megaipo-debut-since-2008-2019-9-1028557089#.
11 Zoe Tidman, “Peloton’s Market Value Plunges by £1bn After Backlash to ‘Sexist’
Christmas Advert,” Independent, December 5, 2019,

https://www.independent.co.uk/news/business/peloton-bike-advert-share-price-market-
sexist-christmas-advert-a9233726.html.
12 Justin Chan, “Woman Goes Viral on Twitter for Spoof of Peloton Ad,” Yahoo!, December
5, 2019, https://www.yahoo.com/lifestyle/woman-goes-viral-on-twitter-for-spoof-of-
peloton-ad-234234482.html.
13 Len Sherman, “Peloton’s Ad Bombed. Now What?” Forbes, December 12, 2019,
https://www.forbes.com/sites/lensherman/2019/12/12/pelotons-ad-bombed-now-
what/#4bcda1fe661c.
14 Will Feuer, “Peloton Stock Plummets after the Company Reports Widening Loss,
Slowing Revenue,” CNBC, February 5, 2020, https://www.cnbc.com/2020/02/05/peloton-

pton-earnings-q2-2020-shows-widening-net-loss.html.

BY LEN SHERMAN*
15 Clayton M. Christensen, Taddy Hall, Karen Dillon, and David S. Duncan, “Know Your
Customers’ ‘Jobs to Be Done,’” Harvard Business Review, September 2016,
https://hbr.org/2016/09/know-your-customers-jobs-to-be-done.
16 Peloton, Investor and Analyst Session, September 15, 2020, p.52, from Peloton investor
relations website, https://investor.onepeloton.com/static-files/5155a9dc-1da8-4d6a-b232-

3c231b8983b6, accessed November 2, 2020.
17 Dan Whateley, “Some Peloton Fitness Instructors Have Become Instagram Stars and
Are Using Their Reach to Promote the Brand—and Themselves,” Business Insider,
February 26, 2020, https://www.businessinsider.com/how-peloton-influencer-instructors-
promote-its-brand-on-instagram-2020-2.
18 Peloton, Investor and Analyst Session, p. 11.
20 “Millennials: Coming of Age,” Infographic, Goldman Sachs, June 1, 2015,
https://www.goldmansachs.com/insights/archive/millennials/.
21 D. Mathivanan et al., “Biking Fast into the Future of Fitness,” Barclays, October 21,
2019, p.11, via Thomson ONE, accessed August 1, 2020.

22 Camilla Yanushevsky, “Peloton Interactive Inc. Stock Report,” CFRA, October 1, 2020,
p. 2, via Thomson ONE, accessed October 14, 2020.

23 Yanushevsky, “Peloton Interactive Inc. Stock Report.”
27 Tenacious Ventures, “Peloton Investor Day (Investor and Analyst Session),” September
15, 2020, video, https://vimeo.com/457857469.

28 Prasid Banerjee, “Apple’s Latest Feature Is Aggressive Pricing Strategy to Take On
Rivals,” Mint, September 12, 2019, https://www.livemint.com/companies/news/apple-s-

latest-feature-is-aggressive-pricing-strategy-to-take-on-rivals-1568226377458.html.
30 “F1Q Data Update: Peloton,” BofA Global Research, October 5, 2020, p. 2–3, via
Thomson ONE, accessed October 15, 2020.


32 Jordan Valinsky, “New York Sports Club Owner Files for Bankruptcy,” CNN Business,
September 14, 2020, https://www.cnn.com/2020/09/14/investing/new-york-sports-club-

bankruptcy/index.html.
33 Lucinda Shen, “Funding Pours into the At-Home Fitness Trend,” Fortune, September 17,
2020, https://fortune.com/2020/09/17/funding-pours-into-the-at-home-fitness-trend/.


BY LEN SHERMAN*

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How Peloton Built the Foundation for

Page 3 | How Peloton Built the Foundation

Consumer Value Proposition

How Peloton Built the Foundation for

Enhancing Value Through Personalization and Community Building

Page 5 | How Peloton Built the Foundation

How Peloton Built the Foundation for

Market Size and Composition

Page 7 | How Peloton Built the Foundation

How Peloton Built the Foundation for

Page 9 | How Peloton Built the Foundation

How Peloton Built the Foundation for

Page 11 | How Peloton Built the Foundation

How Peloton Built the Foundation for

Page 13 | How Peloton Built the Foundation

Source: Case writer analysis

How Peloton Built the Foundation for

Page 15 | How Peloton Built the Foundation

Date Type Lead Investors Amount

How Peloton Built the Foundation for

Page 17 | How Peloton Built the Foundation

Panned ad sends Steady climb after strong

Note: S&P values indexed to first day Peloton stock price.

How Peloton Built the Foundation for

Page 19 | How Peloton Built the Foundation

Source: Case writer analysis

How Peloton Built the Foundation for

Page 21 | How Peloton Built the Foundation

Attrition Rates by Type and Tenure

How Peloton Built the Foundation for

Page 23 | How Peloton Built the Foundation

Monthly Total Visits to Peloton’s Non-US Websites

Peloton’s Added Subscriptions vs. Total Website Visits

How Peloton Built the Foundation for

SoulCycle Bike 2019 $2,500 $40 NA 24 NA

Mirror Mirror 2016 $1,495 $39 NA 8 NA

Source: Company websites and press releases

Page 25 | How Peloton Built the Foundation

Monthly Total Visits to Selected Company Websites

Monthly Total Visits to Selected Company Websites

How Peloton Built the Foundation for

Fiscal Year Ending June 30

2017 2018 2019 2020

Page 27 | How Peloton Built the Foundation

Fiscal Year Ending June 30

How Peloton Built the Foundation for

Page 29 | How Peloton Built the Foundation

FINANCING CASH FLOWS

How Peloton Built the Foundation for

US Securities and Exchange Commission website, https://www.sec.gov/Archives/

Worth $4.1B,” PitchBook, August 3, 2018, https://pitchbook.com/news/articles/the-founder-of-

6 Peloton Interactive, Form S-1 Registration Statement.

Christmas Advert,” Independent, December 5, 2019,

Slowing Revenue,” CNBC, February 5, 2020, https://www.cnbc.com/2020/02/05/peloton-

Page 31 | How Peloton Built the Foundation