Peloton is testing a new pricing model in an attempt to win over customers

New Peloton chief executive Barry McCarthy has only been at the helm of the related fitness company for about a month, but he’s already testing ways to win new customers and boost the business’s profitability.

Peloton confirmed to CNBC that it will begin trialling a new pricing system on Friday, whereby customers pay a single monthly fee for both their training equipment and access to on-demand Peloton fitness classes. If the user chooses to cancel the order, Peloton will pick up the bike for an additional shipping fee, according to the company.

The test will be administered over a specified period of time in Texas, Florida, Minnesota, and Denver for a monthly fee of $60 to $100 per month. Customers will only be able to choose this option at regular Peloton stores or at its fitness studios, not online.

Peloton spokeswoman Amelise Lane said Peloton has set up a limited-time pilot in select markets in the United States to explore different pricing models and options for new entrants.

“This is consistent with Peloton’s belief that intuition drives testing and data drives decision making as the company sets the course for the next phase of its evolution and growth,” Lane said in an emailed statement.

The company is trying to win over skeptical investors. One Wall Street analyst has already wondered if the new data plan could affect Peloton’s brand and finances. Shares are down about 79% in the last 12 months. The stock traded below its IPO price of $29 in recent weeks and closed at $23.44 on Wednesday. It fell 3% in early trading on Thursday.

Peloton members who also own some of the company’s equipment pay a $39 monthly fee to access training sessions, including cycling, meditation, yoga and running. Digital-only members pay $12.99 per month.

Large upfront costs are associated with the company’s equipment. The original Bike Peloton is currently $1,745 including shipping and installation, while its Bike+ retails for $2,495. Last August, the company slashed the price of its bike by about 20% to $1,495 before shipping, hoping to lure more consumers with a cheaper option. It also offers funding through Affirm.

McCarthy has also already made it clear that prices could drop even further as he seeks to expand Peloton’s user base in the wake of the Covid pandemic.

The former Netflix and Spotify chief executive who replaced Peloton co-founder John Foley as CEO has been tasked with bringing Peloton back to profitability as the company grapples with falling demand for home workout products and rising supply chain costs.

“I think we have a huge opportunity to change the business model and significantly increase [total addressable market] for new members by lowering the cost of entry and experimenting with the ratio between monthly recurring income and upfront income,” McCarthy said in an interview with CNBC’s Jim Cramer last month.

While the bundled pricing strategy is only a test and it’s not clear if and when Peloton will consistently implement the idea, BMO Capital Markets analyst Simeon Siegel raised the question of the damage it could cause to Peloton’s financials and its brand image.

“For a company that has had logistical issues, they now actually allow people to return their equipment at a moment’s notice,” Siegel said. “In fact, they are more immersed in the game with delivery and logistics. Instead of leaving her.”

In addition, Siegel said that Peloton, to her credit, managed to keep the churn rate at such a low level because people don’t want to abandon the service after they make such a significant purchase of one of its bikes or treadmills. Average monthly net churn of fitness users in Peloton was 0.79% in the last period.

“But if it becomes easy to cancel and easy to bring back, what will that do with churn?” Siegel said. “Is Peloton becoming a winter experience for customers who rent a bike for four months each year and then return it when the weather is nice? It becomes a very valuable customer.”

One user also asked reddit thread about pricing test if Peloton changes the membership fee for people who already own the company’s equipment as a result.

As of December 31, Peloton had 2.93 million connected fitness subscribers. In total, he has over 6.6 million members, including those who pay only for access to his training sessions.

In another attempt to attract customers, Peloton recently extended the free trial of its Bike, Bike+ and Tread trainers from 30 days to 100 days.

The company also has new cardio products, including a weight training device called the Peloton Guide and a rowing machine. By creating a set of connected fitness models, Peloton aims to take on more serious competition from competitors such as Hydrow, Tonal and Lululemon’s Mirror. The company hopes that people who already own a bike or protector will buy more items from the Peloton ecosystem, including their own clothing.

When McCarthy took over as CEO, he wrote in a memo to employees that Peloton must find ways to spur growth. “And it will require us to take risks, be ready to fail quickly, learn quickly, adapt and evolve quickly, wash and repeat,” he said.

The Wall Street Journal first reported on price tests.

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