Peloton’s growth plan will annoy its loyal customers

Twenty-three years ago, Fred Reichheld wrote in the book “The Loyalty Effect: The Hidden Force Behind Growth, Profits, and Lasting Value” (no affiliate link) that firms should be wary of aggressive customer acquisition initiatives. He warned firms that:

Winning more and more new customers could slowly put you out of business” (page 89).

This is a piece of advice that Peloton should have read!

 

Peloton is an American based company which makes and sells exercise equipment. It positions itself as “A private indoor cycling studio in your home”. Its main product is an exercise bike which, at the time of writing, is selling for around £2,000 pounds. Once in possession of the bike, customers subscribe to a plan of digital classes, which they can stream live or on demand; plus, a range of exercise metrics. At the time of writing, the plan costs £39.

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Peloton was in the news, recently, because of its “The Gift That Gives Back” ad campaign, which features a wife receiving a Peloton bike for Christmas from her husband, recording video diaries of herself using the bike until the following Christmas, when she declared that she “didn’t realize how much this would change me.” The advert was deemed sexist, attracted a huge backlash, and resulted in a $1.5bn tumble in Peloton’s value. The downfall was not aided by Peloton’s terrible apology, which was very well dissected by Josh Bernoff in this blog post.

 

Recently, the company announced that, as part of its expansion plan, it would start selling the online lessons on their own, for a third of the price of the current subscription plan. It means that price-conscious customers can start following the same exercise programme as Peloton owners, on competitors’ bikes. The rationale is that the new customers will get a streamlined service, and will want to upgrade to the full service as they become more familiar with the brand. Though, as financial analysis company Citron Research says, this is a flawed strategy:

“Imagine if Netflix decided to increase its subscriber base by giving away its content to DirecTV subscribers for $3 a month rather than $12.99 and justified it by claiming they hoped to build enough brand loyalty that customers would eventually become Netflix subscribers (…) Would anybody buy that strategy?”

 

Based on this assessment, Citron Research is predicting an 80% fall in the value for Peloton’s shares. Ouch!

 

In addition to the challenges of up-selling the more expensive subscription to the new customers, this initiative is likely to make the current customers very unhappy, too. It’s not just that they may, themselves, switch to the lower priced subscription if they don’t care about the metrics. It’s also that they may start questioning why they spent so much money on a piece of equipment which, apparently, is comparable to other exercise bicycles already on the market. There is a significant risk that these loyal customers will feel betrayed!

 

In the paper “When Customer Love Turns into Lasting Hate: The Effects of Relationship Strength and Time on Customer Revenge and Avoidance”, researchers Yany Grégoire, Thomas M. Tripp and Renaud Legoux, showed the downside of disappointing loyal customers. As I discussed in this blog post, when loyal customers feel betrayed by a brand, they are more likely than non-loyal customers to seek revenge (for instance, by telling others about the problems that they experienced and warning them off buying the product).

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Loyal customers who feel betrayed are also more likely than non-loyal ones to cut interactions with the firm and to resist marketing contact.

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Finally, the authors also showed that the revenge and avoidance behaviours, following perceived betrayal, were likely to last longer among the loyal customers, than the non-loyal ones.

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There is, of course, the possibility that current Peloton customers are that rare breed of loyal customers, with really high behavioural as well as attitudinal loyalty who can be extremely forgiving. They will rationalise this move and downplay the problem, much like Apple’s loyal customers downplayed the problem with the iPhone 4 antenna (do you remember antenna gate?).

 

But, if they aren’t, then the future is not looking good for Peloton.

 

What do you think of Peloton’s decision to provide a content-only product?

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