Make Strategic Pricing Decisions That Work
By Ed Lee
This article was originally published in grIP Senior Advisor Edward Lee's HelloAdvisr blog.
This post was going to be different.
Then Apple happened. We’ll come back to that in a second.
Last year, Peloton made some new price changes and updates to its product range. The changes themselves are interesting, but what is more valuable is how thoughtful these changes are.
As a company, strategic pricing was nothing new. Early on, when they launched the original Peloton bike they priced it at $1,200. They learned that this did not cross the customer’s psychological red-line for quality – and part of Peloton’s strategy was to be a premium brand.
So they increase the price. A lot. 50% higher to $1,995.
Eventually, they’d get prices for their bike to $2,245 (another 12.5% increase).
So what makes the Peloton price design interesting?
Pricing Is Thoughtfully Designed
Proactive and strategic with pricing
With the pandemic in 2020, Peloton was in no shortage of demand. Far from it. In fact, customers placing new orders can expect to get their bike in December. But they’re looking ahead to expand their base. They looked toward strategic pricing, so they decreased their price by 15% from $2,245 to $1,895 for their base Peloton Bike.
Create differentiation
Peloton is a premium bike and brand. Their new Peloton Bike+ continues to support that strategy at a price point of $2,495. But with the price change of its base bike, they were able to increase the price distance to $600 – creating greater differentiation between the two products. Had they kept the base bike at its old price, the distance would be $200, and potentially a weaker price fence between products.
Leave future pricing options open
One thing Peloton did not touch (for now) is their membership products. Pricing for the all-access membership (which is needed to make either the Bike or the Treadmill valuable) remains at $39 and their digital-only product stays at $12.99. Peloton could have done a complete pricing refresh, as some companies will do to avoid doing this again in the future. Instead, Peloton left open the possibility for future strategic pricing changes.
There’s Always Competition: The Elephant In The Room
Peloton has always operated in a highly competitive space both inside and outside the walls they compete – the room where a Peloton product sits.
They compete with the brick-and-mortar gyms; both local and national chains. Peloton also competes with the hybrid boutiques such as SoulCycle and Flywheel. Both brands offer in-person (pre-COVID) and in-home options similar to Peloton, and have powerful community and brand recognition in and outside the fitness space.
In fact, SoulCycle has been selling its studio non-digitally connected bikes to customers while gyms and fitness centers remain closed due to COVID.
Then Apple released its new Fitness+ digital service.
Priced at $9.99 per month (or $79.99 per year), it is on the surface, cheaper and based on descriptions (the service doesn’t launch until the end of Fall 2020), similar to other digital home fitness classes.
Yes, Apple has become a visible competitive threat, but to what extent?
I’d argue very little. Here are three reasons why.
#1. Different customers: While Fitness+ as a product appears similar to what Peloton offers (and in fact other fitness apps), their target audience is not the fitness-first user with a higher relative commitment and investment to fitness. It is for the lifestyle user that is using the short and accessible bridge from Apple hardware. Much like Apple+, this can fit into the ecosystem of services within a customer’s fitness repository.
#2. Different product strategy: Apple is expanding its services business and investing in growth (see Apple One), but Apple is still a hardware-first company. Services are designed to keep customers deeply tied to the ecosystem (and future product releases). Think of this as version 2 of the App Store and iTunes strategy. Peloton is not making much on their bikes, but the software and services are where their long-term opportunity lies. Much like the magic of the SoulCycle culture, instructors, and yes those candles – Peloton’s content library and ability to leverage behavior psychology so prevalent in high-ticket items and fitness will be their longer-term play.
#3. Different strategic goals: Both companies are at different stages of their lives. Their focuses are different. This is an example of companies who identify their objectives and stay laser-focused – despite the hyper-competitive industries they are in.
Peloton is continuing to dig in on its market position. The company is capitalizing on its accelerated growth – and shut down of many of its competitors – during the pandemic – unit economics be damned. Apple on the other hand is looking to nurture its next big winner – and future cash cow (maybe Apple Watch?).
Final Thoughts
Peloton has implemented pricing and product changes that on the face of it are straight-forward. Dig deeper and you can see strategic and tactical purposes for these decisions that Peloton’s leaders made. Treating it simply as a binary decision – price change up or downward – would miss the deeper strategy.
For entrepreneurs, this is a lesson of ways pricing can be used for strategic objectives. It is not isolated to the what (new product and price) of what we call the 5Ws of Pricing. This is looking at the why and how of what pricing is going to do to support the company and its goals.
Yes, the Apple news gave Peloton – and the industry – a jolt, Peloton was planning these changes since March 2020. Would the news have changed Peloton’s leadership to take a different course? It is hard to say for certain, but what is certain is that for any strategy that’s thoughtfully analyzed, crafted, and executed then as an organization you trust the work your team has put together. You monitor, assess, and maneuver.
You do not have to be a public company to build these capabilities. If these skills do not exist, then it is in the interest of the company to start building them now – otherwise you might find yourself reactionary and making decisions in a vacuum.
This article was originally published in grIP Senior Advisor Edward Lee's HelloAdvisr blog.