How Peloton Makes Money

Founded in 2012, Peloton has rapidly taken the fitness world by storm. The company, founded in New York City, rivals popular group exercise companies like SoulCycle and Flywheel. Peloton has indeed become a big name in fitness with 1.4 million users, and the disruptor has seen phenomenal growth, albeit with widening losses. It reported $915 million in revenue for the 2019 fiscal year ending in June, compared to $435 million in 2018 and $218.6 million in 2017.

In August, the fitness behemoth publicly filed for an IPO. It will trade under the symbol PTON on the Nasdaq, and and the company plans to price the 40 million Class A common shares being offered between $26 and $29. It is looking to raise as much as $1.16 billion, and the share price translates to a valuation of $8.06 billion at the high end of the range.

Peloton raised $550 million at a valuation of $4 billion in its last funding round in August 2018, bringing the total equity raised to nearly $1 billion since its inception. Other backers include Comcast Corp.'s (CMCSA) NBCUniversal Media, Kleiner Perkins, Tiger Global Management, True Ventures, Wellington Management Company and Fidelity Investments.

Just how has Peloton become a multi-billion dollar company in the span of just a few years? Its co-founder and chief executive officer John Foley writes in the S-1 that “Peloton sells happiness,” but below we'll explore the business model of this fast-growing exercise outfit, as well as some of the other factors which may have contributed to its success.

Peloton's Business Model

Peloton's primary sources of revenue are its user memberships, allowing customers access to streaming live and on-demand exercise classes, and the premium exercise equipment itself. It has two types of memberships: Peloton membership, for those who own the company's equipment, and Digital membership, for those who want to only access the classes on an app. In 2014, the company launched its stationary bike product, including a 22-inch touchscreen tablet which allows for streaming as well as tracking of exercise goals and statistics, for around $2,000. In late 2018, it launched a treadmill priced at $3,995. While the initial cost of the equipment is steep, Peloton's team anticipated that users would recognize the value of owning their own equipment for an integrated experience at home when rival services charge by the individual class.

And they were right. In February, the company told CNBC it had sold 400,000 bikes, and according to Second Measure, it had 4% more active members than SoulCycle had active customers in the third quarter of 2018, a figure that jumped to 63% in the last quarter thanks to the holidays. In fact, analysts at Second Measure found that joining SoulCycle increases the chance that a customer will eventually own a Peloton and some cyclists are leaving SoulCycle for Peloton. "In the quarter prior to purchasing a bike, nearly 4% of soon-to-be Peloton customers were active SoulCyclers. But, one year later, riders were 44% less likely to still be spending at SoulCycle," said the consumer research company.

Wide Scope, Unlimited Potential

Early on, the ambitious scope of the company was a deterrent for potential funders, Peloton co-founder and CEO John Foley explained. Indeed, Peloton set itself up to exist in many different areas: content generation, hardware and software development, sales, and much more. The company received $3.9 million in initial funds for product development in 2012, according to AngelList.

Part of the key to Peloton's growing valuation is its aggressive expansion. The company expanded into the U.K. and Canada in 2018, and in May announced plans to launch in Germany by the end of 2019.

Perhaps even more important for the long-term prospects of the company, however, is the fact that Peloton executives do not see their outfit as simply an exercise program. Rather, Peloton styles itself as a tech company. According to Business Insider, Foley has said that "we see ourself more akin to an Apple, a Tesla, or a Nest or a GoPro--where it's a consumer product that has a foundation of sexy hardware technology and sexy software technology." With that mindset, Peloton has the capacity to expand in virtually any direction it would like; in the summer of 2018, the company acquired Neurotic Media, a music distributor, according to Axios. In December of 2018, it opened a yoga studio in New York City that serves as a place for it to produce streaming yoga content for its subscribers.

With all of this promise, it's no wonder that investors are clamoring for a chance to participate in an IPO.