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INTERVIEW: Peloton CFO on Why Churn and Marketing Costs Can Stay Low

John Jannarone

By John Jannarone

Peloton Interactive, Inc. expects its remarkably low monthly churn rates to remain subdued as it encourages active use and for marketing expenses to remain manageable as word-of-mouth recommendations lead to new memberships, according to Chief Financial Officer Jill Woodworth.

“The number we are most focused on is member retention,” Ms. Woodworth told IPO Edge in an interview shortly after shares of the fitness-media company began trading for the first time on Thursday. “And that number is correlated with the number of workouts.”

Peloton is distinguished from many other unicorns that have gone public recently because of its extremely sticky relationship with members. As IPO Edge explained in this recent analysis, the company has consistently averaged a churn rate of well below 1% per month, far less than other companies in the industry such as Planet Fitness, Inc. Such member loyalty is a key reason why investors were so hungry for the shares heading into the IPO this week.

Ms. Woodworth pointed out that the cohorts of members who joined in 2016 and 2017 are working out more, not less than they did when they first began. And the most recent cohort of members who joined in 2019 are working out even more than the older cohorts.

The key to encouraging more frequent workouts is adding and modifying media content. “We produce 950 new classes every month,” Ms. Woodworth said. “We also get to respond to what members want and can change things within 24 hours.”

At the same time, the company has no plans to change the monthly subscription fee of $39 per month. That should help ensure the cost is within reach of a wide demographic, she said.

Ms. Woodworth pointed out that there’s only upside to more frequent use of the bikes and treadmills for Peloton. Traditional gyms, by contrast, can face increased overhead when a physical space becomes too crowded.

Of course, members can only exercise so much within any timeframe, and the average member currently works out about 12 times per month. Ms. Woodworth acknowledges that members need not work out every single day, but keeping a high average is the key to retention.

Another important factor for investors is Peloton’s customer acquisition cost. Unlike many new tech companies, Peloton can essentially cover the marketing cost needed to attract each new customer with the upfront equipment purchase.

“A large percentage of our sales are driven by a friend or family member,” Ms. Woodwoth said. “That will put downward pressure on customer acquisition costs over time and equipment sales will continue to offset a majority of those expenses.”

The ability to cover marketing costs will help the company achieve economies of scale and reach profitability over time, she said.

Asked about equipment upgrades, Ms. Woodworth said Peloton has no intention of creating product cycles like Apple to drive profits. “The bikes are built to last for decades,” she said. “We don’t intend to have a regular cadence of product introduction.”

One piece of equipment that may need to be replaced every several years is monitor attached to a bike or treadmill. Ms. Woodworth pointed out that Peloton just offered a replacement monitor to the company’s first group of members, but it was at cost and not designed to generate profit to the company.

 

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