Business Cycle

Business Cycle

John Foley is the CEO and cofounder of Peloton, a fitness startup whose US$2,000 stationary bicycles and high-energy classes have gained a cult following since its founding in 2012. Peloton is a rare New York–based “unicorn” — in August it raised $550 million at a $4 billion valuation. It has thrived by focusing on every aspect of its business so that it can provide an immersive customer experience: software, hardware, world-class instructors, an expanding retail footprint, and its own logistics network. Peloton has sold hundreds of thousands of bicycles and counts a community of 1 million users. In 2017, its revenues ($400 million) more than doubled from the previous year. Foley, a cycling enthusiast, is a tech industry veteran with stints as CEO of Evite and president of barnesandnoble.com. In an interview with strategy+business at his midtown Manhattan office in November, Foley discussed Peloton’s counterintuitive business model, the challenges of scaling a unique culture, and the prospects for growth outside the United States.

S+B: You’re a hardware company. You’re in the software business. You’re in the content business. You have a growing retail footprint. And you’re a fitness company. How do you describe Peloton to yourself, to investors, and to the people who work here?
FOLEY: People might think of us as a stationary bike company or a treadmill company, but we’re absolutely not. Peloton is an innovation company at the nexus of fitness, technology, and media that owns the member experience from end to end — which is why you could realistically call us a hardware, software, content, logistics, and retail company, all at the same time. We believe that being vertically integrated is part of the secret to our success.

S+B: How did you get to that formulation that you just gave me? Was that present at the beginning, in 2012?
FOLEY: It’s evolved. In the early days, we knew we wanted to be a software company. Software is in our core DNA. We have a couple hundred of the best software engineers in the world here in this building. We looked at hardware in the category, and we said maybe we could build software for somebody else’s bike. But there hadn’t been much innovation or capital put into the fitness equipment category, so the bikes were kind of unimpressive. So we decided that we should build our own bike.

Then you think about maybe integrating with somebody else’s tablet. But I kept picturing that Holiday Inn where they have the clock radio with the iPhone 4 dongle in it, which is six years old and hasn’t played music in five years. We couldn’t allow Peloton bikes to be obsolete because Apple creates a new product with a different dongle, so I said, “We have to make the tablet.” Very quickly, we were in the hardware and software business. On the content front, we didn’t have great classes. We didn’t have a studio. I approached SoulCycle and Flywheel about having them be content partners of ours. And we weren’t able to partner. So we said, “OK, we’re going to have to create our own studio.”

S+B: And how did you end up with retail spaces?
FOLEY: At first, we were so focused on tech and product that we didn’t have anybody in sales and marketing. We launched a website at pelotoncycle.com and did a little bit of marketing on Facebook, but it was largely crickets. We’d sell five bikes a week. So we started doing a survey of where we could have a retail store, and in late 2013, we found a fantastic opportunity in the Mall at Short Hills in New Jersey. It was a four-month lease between November and February, which happened to be the four best months for selling Peloton bikes, even to this day. We took $10,000 and retrofitted what was a [fashion designer] Reed Krakoff space. When people walked in, they’d be like, “Wow, this is a pretty impressive retail store,” but it was really drafting off the high-end build-out of the tenant that was there before us.

S+B: So you started with software and backed into hardware and backed into content, and then backed into retail?
FOLEY: Right. And then we backed into logistics. We are obsessed with becoming the first company with a 100 Net Promoter Score [NPS]. Our model showed that we needed to sell one bike a day from our initial retail store to make it work. And this is a $2,000 product that no one’s ever heard of. Within a week or two, we started selling five bikes a day. But the biggest detractor in the early days was in and around the delivery experience. The delivery guys weren’t on time. They weren’t on brand. They didn’t educate customers on the product or the software. And, as a result, the customers weren’t going to recommend Peloton to their friends. And that was very frustrating to me because I knew if we did it ourselves, we could delight our [customers]. I went to our board and suggested that we take this in-house. “Let’s lease a van, let’s hire a team, let’s paint Peloton on the side and have our Peloton people who are highly trained deliver the bikes.” We tested it in a couple of zip codes in New Jersey.

Fast-forward to this year, and, with a score consistently in the 80s and 90s, we believe we are among the consumer brands with the highest NPS score in the world. Our CSAT, which is customer satisfaction measurement, for the deliveries that we do is a 5.0 out of 5.0. And we are now delivering 70 percent of our bikes and treads globally ourselves. We know what our Net Promoter Score is for our retail stores, our deliveries, our overall brand and overall experience, and our digital product. So we make sure we’re really understanding each part of the business. In the post-purchase survey, when we ask people how they heard about us, “a friend recommended it” surpassed “television” three or four months ago.

S+B: The social aspect of the business — instructors being in touch with members, members being in touch with one another, nurturing a sense of community — how do you see that evolving when you’re going from 1 million members to 10, 15, or 20 million members?
FOLEY: Jenn Sherman, our first instructor, is one of our leading instructors. The riders feel that she knows their name and their kids’ names, and talks to them on social media, wishes their kids happy birthday, and good luck in surgery tomorrow. All of these are really deeply personal things. But, as a human being, she cannot do that for 20 million people by herself. Users can acknowledge one another when they hit certain milestones, such as riding 20 days in a row. Somebody was having his 100th ride in an on-demand class and wasn’t getting a shout-out, so I gave the person a high five to acknowledge it. Clearly, this type of activity can scale if it is community based. In an ideal world, an instructor like Jenn Sherman could do something programmatically with videos where part of the job is going through 100 or 500 short-ride videos and interacting with riders.

S+B: The process you described of hardware, software, retail, logistics — isn’t that sort of the opposite of the standard VC-backed company? The beauty of forming and scaling a company is that you can get all these products and services off the shelf and you don’t need your own coders or your own delivery people.
FOLEY: It was a headwind for raising money. It felt very capital intensive and high operational risk and slower scale because [Peloton] is not a pure software company. The VCs didn’t instantly see that this was a good idea. But these investments we’ve made are going to be massive moats. These stores — we’ve got 60 stores and we’ll be going to 120 stores in 12 months — are going to be a fantastic opportunity for us to own the category. Sports Authority went bankrupt. Sport Chalet went bankrupt. Sears went bankrupt. I believe that if Peloton does as well as we want in the next two years, Dick’s Sporting Goods is no longer going to sell fitness equipment. I believe that three years from now, if you want to go check out a treadmill, if you want to check out several other types of fitness equipment, you’re going to go to a Peloton store and you’re going to engage with our brand, and learn what the deal is with the bike, how you finance it, how you can buy the bike and the tread together. I believe that from a logistics perspective, that strategic mode of us being in your home, helping you understand the product and delivering these experiences, is going to be even more of a fantastic moat when we start to get deeper into fitness as a service.

S+B: Fitness as a service?
FOLEY: Say a husband and wife sign up for a $200-a-month package. They don’t buy the bike. The package is: You’ll get the best bike or treadmill, you don’t pay anything down but instead lease it for $100 a person, and, every two to three years, you’re going to get the latest and greatest model. Just like your BMW X5 lease, in which every three years you get a new upgraded BMW. You will always have the best instructors and best software. You always have the best community. And you can cancel your gym membership and be in the best shape of your life. If we can get this under $200 for the household, we believe that that is going to be a massive opportunity. While there’s no specific timeline for this, we have a chicken-in-every-pot strategy over time.

S+B: One of the outcomes of building a national logistics network and a network of showrooms is that you’re becoming more decentralized. How does that change the way you manage? 
FOLEY: We’re figuring it out. In today’s world, with videoconferences, it’s a little easier than it was 20 years ago. In October, I was at the opening of our second headquarters down in Plano, Texas. We have a couple hundred people there and we’re going to go to 500 people: sales and member experience and logistics, scheduling, and ancillary back-office operational roles. In a couple of hours, I’m going to London, and I will see that team tomorrow. We’re over 1,200 people now, but as we go to 12,000 people, I think about how I can be a good enough CEO to manage a global workforce. I think I’m that guy, but not every entrepreneur becomes the CEO.

S+B: Culture really informs the customer experience and the business model. Your website has 300-plus job openings. When you’re growing that rapidly, how do you institutionalize the culture and ensure that you effectively on-board 100 people 2,000 miles from here who don’t know you, who have never set foot in headquarters, who may have never used the product?
FOLEY: I would say that I am the chief culture officer. That is the most important thing on my mind: How do you make sure that that 100th person you hire next week feels connected and carries the torch on the culture? It’s much easier said than done. I read every book on Google. We bring in fantastic people, including from Instagram and Facebook. Facebook and Google are the two high-water marks in scaling a fun dot-com culture from nothing to scores of thousands of employees. And if Peloton can be that type of story, I’ll be happy.

S+B: How do you define the employee experience here, given where you are? For lots of startups, the default is to give employees snacks and stock. It’s obviously something deeper than that now.
FOLEY: For me, it is a life obsession of what the answer to this question is, and I’ll give you 100 different answers.

S+B: We’ll take two.
FOLEY: What you define as great culture is different [from my definition]. I like music playing on my floor and you might not care at all about that. One person might want the Aeron chair and another might not care about that. IPAs on tap, kombucha on tap, all that gratuitous stuff that only matters on the margin. Pre-IPO currency doesn’t hurt. Above-market cash comp doesn’t hurt. Progressive HR. A “no asshole” policy. Unlimited vacation policy. But I think culture also is dramatically impacted by architecture. In November 2018, we signed a 300,000-square-foot headquarters in midtown that I think will be the greatest place to work in New York City, architecturally. The energy in the space with the high ceilings — I’m a student of price per cubic foot, not price per square foot — is great. On the first floor, I’m going to sit in the middle, not by a window, not by anything. I’m just going to sit there and say we’re open and this is how we roll. Just little things like that, there’s a hundred of them.

S+B: I would imagine the problems you have, many of which are related to very rapid growth, are high-class problems. But what is a problem you are grappling with that is a function of the way you’ve chosen to scale?
FOLEY: Our business model is such that right now, we have healthy margins, and that allows people to be less tight on their budgeting than they might be otherwise. I see that we will spend $5,000 or $10,000 or $20,000 or $50,000 every once in a while in a way that wasn’t as scrappy as I would have liked. But sometimes you’ve just got to let those things go because you can’t sit on everything. We’re going to spend over 1.5 times what we did during the holidays last year — our biggest marketing push ever — so you’ve got to be comfortable spending money.

S+B: We’ve been seeing your ads on television. Haven’t you been told that TV is yesterday’s medium?
FOLEY: TV’s awesome. There’s been an exodus from television and toward digital, with many of the big brands moving 20 or 30 percent of their budget from television. In the early days, we did very well on digital. I think we were one of the five earliest advertisers on some of the big digital platforms because we quickly got on board during the earliest days of their ad-targeting platform. And it worked because no one was on it, so the dollars were efficient. Today, the dollars in digital are incredibly inefficient, because that’s where everyone is. We’re trying to introduce a new concept — the stationary bike experience at home — so that’s why we go to the top of the funnel. Now we have multichannel marketing where you have different parts of the funnel. The top of the funnel is television; lower in the funnel, we have retargeting digital; then we have stores and direct mail. They all work in concert. We have Ph.D.s in mathematics from MIT sitting on multichannel attribution models in the cloud, understanding where every dollar is spent and how it’s efficient and how [the channels] work together, doing all kinds of correlations and covariant studies. Our team just knows where to find people and how to understand whether that marketing dollar was efficient from a conversion perspective.

S+B: You made your first acquisition in June, Neurotic Media. What is that about?
FOLEY: It’s interesting. I was at an event this morning and I said, “We’re a media company and a technology company and a fitness company.” Somebody came up to me afterward and said, “You should add a fourth. You guys are a music company.” And I said, “You’re right, we are a music company.” We’re innovating around music in ways that no other company in our space is thinking about today, and we needed a rock-solid source of truth for all the songs we’d ever want to license for our service.

Neurotic Media is a digital music aggregator, a streaming and download source — basically a rich database of all the world’s music. Labels work with Neurotic to provide up-to-the-minute releases so Neurotic can, in turn, serve its clients who use music without them having to build their own platform. It’s worth noting that many music labels use Neurotic to power some of their own features and services.

Neurotic’s technology gives us the foundation and infrastructure to allow us to build really cool music features for our members while at the same time ensuring that Peloton is the best partner it can be to artists, labels, and music publishers. “There was a great song in your ride — do you want to add it to a playlist so you can stream it later in your music app? Do you want to send it to a friend?” There are many of those types of innovations that are going to be really impressive and allow us to be an even better music discovery platform than we are today.

S+B: Can you talk a little bit about diversity, both on the employee end and on the customer end?
FOLEY: Internally, we are massively committed to diversity. I think it matters for a strong culture and a strong company, for all the reasons that you think about. Diversity of thought and diversity of background and diversity of people as a team working together is stronger than a homogenous team. There are three or four different big areas of opportunity that we’re focused on. We did add an African-American woman to our board last year. We just hired a female CFO. As a tech organization, we do better than the other tech companies that we benchmark ourselves against, but the benchmark is so low. I’ll tell you this: 1 percent of Google technologists are African-American. We have, I think, 3 or 4 percent, but to me that’s still paltry and not good enough.

We are doing everything we can to democratize access to great fitness and allow everyone around the world, eventually, in any socioeconomic class to participate in these high-energy, fantastic, fun, motivating workout experiences. We have relaunched our digital business with a lot more content beyond cycling, including running, boot camp, yoga, and more. In addition to iOS, our classes just launched on the Web and Android devices, so you can take our classes on your hardware or without any hardware. You can go for runs outside. You don’t need to buy our bike. You don’t need to buy our treadmill.

The second way [to democratize access] is through financing. You can get a Peloton bike for $58 a month with nothing down. So we are intent and committed to making sure that we can change the lives of people in every socioeconomic class.

S+B: You closed a large venture round in August — $550 million — in part to fuel international expansion. What percentage of your business is U.S.-based now, and how is that changing over time?
FOLEY: We’re 98 percent domestic, although this holiday season we expect Canada and the U.K. to really take off. The U.K. is a crazed country for cycling, and we think that’s a massive market, and the early read is that the sales are going to be through the roof.

The world is getting healthier and fitter, and the days of smoking cigarettes and eating Cheetos and drinking Coca-Cola for people around the world are behind us, largely. So we think that the global fitness opportunity is massive.

Published at Wed, 09 Jan 2019 06:00:00 +0000