today is Sep 27, 2022

After thriving during 2020 thanks to soaring interest in its expensive stationary exercise bikes, Peloton Interactive ( PTON -3.47% ) has since seen its shares fall precipitously due to waning demand in a reopened and more normalized economy. The return of traditional gyms and fitness centers has added fuel to the fire, and Peloton stock is down 77% over the past 12 months.

The company's new CEO, Barry McCarthy, is hoping to turn things around . He's already shaking things up by testing a new pricing model in order to drum up demand his company desperately needs right now. Let's take a closer look at the details behind this move.  

Person riding a Peloton Bike.

Image source: Peloton.

Peloton's new pricing strategy  

News broke earlier this month that the connected-fitness company would introduce a new pricing option to increase its subscriber count, which stood at 2.77 million as of Dec. 31 (for those who own a piece of equipment). For a single fee of $60 to $100 per month, customers can now get a Peloton Bike and access to the workout catalog. To start, the company will test this offering in Texas, Florida, Minnesota, and Colorado, requiring customers to sign up for the program at one of its brick-and-mortar showrooms in these locations.  

Customers previously had to pay $1,495 for a Peloton Bike plus the $39 monthly subscription fee in two separate transactions. While many people chose to finance their equipment purchase, therefore taking on credit risk, this new arrangement eliminates the need for financing, removing yet another barrier to owning a Peloton product.  

McCarthy stated in a CNBC interview with Jim Cramer that his intention is to drive higher demand by "playing around with the relationship between the monthly recurring revenue and the upfront revenue." Additionally, his plan is to test, learn, and continuously adapt in order to find better success -- he certainly hasn't wasted any time.  

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Current Price

$21.02

Will demand get a boost?  

The new pricing bundle has the potential to help spur much-needed demand in the select test markets where it's available. Strong results would likely lead to the program rolling out across the entire country (and other regions). From a consumer perspective, choosing this option makes sense as it doesn't require the significant upfront spending that's needed to buy a piece of Peloton equipment.  

On the other hand, there are potential drawbacks to the new pricing structure too.

The bundled pricing plan may make Peloton's products accessible to a wider swath of consumers, including those on the lower end of the income spectrum, but the company is reducing the friction to both sign up -- and cancel -- their subscriptions. Peloton will offer a free equipment pick-up option to subscribers if they decide to cancel this service, meaning Peloton's historically remarkable churn (at 0.79% in the most recent fiscal quarter) will probably take a negative turn and rise meaningfully.

And therein lies the second issue. Peloton will have to navigate a difficult logistics situation if this program takes off. During the demand surge the company experienced in the early stages of the pandemic, new customers had to wait longer than expected for delivery of their bikes and treadmills. How well Peloton can handle even greater volumes of Bikes moving across the U.S. is a big question mark.  

Figuring out ways to repossess Bikes in a timely fashion, while at the same time trying to manage a growing inventory of used equipment, is something the management team will have to figure out quickly. That explains the limited rollout of the bundled pricing as Peloton can evaluate the early program and learn from it to figure out what the next stage of expansion should look like.

It's a positive sign that McCarthy is willing to experiment in order to revive this well-known consumer brand following its rough patch. Shareholders and prospective investors should pay close attention to any details about the progress being made with this new pricing model.  

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This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium advisory service. We’re motley! Questioning an investing thesis – even one of our own – helps us all think critically about investing and make decisions that help us become smarter, happier, and richer.

Neil Patel has no position in any of the stocks mentioned. The Motley Fool owns and recommends Peloton Interactive. The Motley Fool has a disclosure policy.