Peloton

VO: Get ready for your semi-regular dose of random ideas from the guys at Codelation. We like to talk about big ideas companies that are winning, and those that aren't along with current events in our crazy world of software startups. So come along with Erick and Josh, who challenge you to think big, start small and turn your ideas into something on this episode of, from idea to done.

Josh: Welcome to another episode of idea to done. Hi, I'm Josh

Erick: And I'm Erick. And today's big idea we're going to talk about is Peleton. The world's craziest SAS company. And I didn't know what SAS was, um, when I started with a group of software engineers. And so Josh, can you kind of explain what SAS is? Absolutely.

Josh: Most of the apps that we work on are SAS based apps. And what SAS is, is software as a service. So think about you used to have to go buy QuickBooks and put it onto your computer and you'd pay an annual license. Now you can subscribe to it online and pay a monthly or annual fee. That's what SAS is, is, is the subscription to the software.

Erick: And as the internet has evolved, that's really brought in a big change in mindset. I remember like back in the day, you used to have to buy really expensive software once and hope that it was compatible next year at tax time and hope that it worked with the government and hoped everything. And now you just kind of buy or you just monthly subscribe to it. And you know that in theory that it's going to work when you need it. And it's something that you use.

Josh: Yeah. The, the nice thing about is that they take care of all the updates for you. So you don't have to worry about that new feature coming out next version, but I'd even say this is different though. Typically in a SAS business, if they have a hardware component, that's going to get sold as a loss, as a loss leader, meaning they're going to lose money on it just to get the user into the software licensing, but not, not here. This is something a little, a little different

Erick: And you don't, in, in 99% of cases. You don't want to pay for hardware. If you're paying for a subscription, the point of the subscription is to take care of kind of everything that's leasing versus owning a car, kind of a situation,

Josh: All, all the costs. Yeah. Eric, you're a gamer, right? Yes, yes I am. So it would be like you buying the console, you buying the game and then you have to lease a subscription to play the game each month.

Erick: And, and other companies have tried that in the gaming world. And I don't think anyone's really gotten away with it. There's been something like world of Warcraft where you pay for the, the S the game and then a subscription and people, there is some flack kind of, kind of against that. They haven't even gotten to the hardware of this situation.

Josh: So what we're finding is that hardware and software combined is a tough in a subscription model. Eric, tell us what is Peloton and kind of why it works for them.

Erick: It's the exact terrible ideas that we're just talking about. That shouldn't work. What they are is they, they sell kind of spin class style, um, by stationary bicycles for your home or treadmills. And then you pay for a subscription to use your bike on top of that. And Josh, I know that, you know, kind of being in your role, you hear a lot of pitches from different businesses. What would you tell someone if they were pitching this idea to you?

Josh: Well, I like to joke, I make the worlds where a venture capitalists, because I would say this is a horrible idea. You come in and you're trying to get someone to buy a three or $4,000, you know, spin level bike. And then you're going to ask them to pay a monthly membership fee to use the bike on top of it. It just, I don't know. It seems like the most ludicrous thing in the world. It

Erick: Does seem like ludicrous. And we've talked about why it's a terrible idea. Can we talk about why it's an amazing idea?

Josh: Well, it's an amazing idea because they prove me wrong and it's working. They're actually making money at it, but what I really wonder what's different. I know Erick, you said that you like to ride a stationary bike. You've got one at home, right? Yes.

Erick: And I, what I use mine for, it's really different. I've gone to spin classes and I do stationary bike and all at home. I'll just kind of pull up my laptop and put it on like a music stand basically. And I'll clean out my inbox and it's kind of, oh, I didn't notice that I went 10 miles tonight. And that was really nice. But at the same time, when I go to class, it's very different because there's someone yelling at me to do better. And it shows me where I rank in the class and I have to chase something and I get a much better different workout at, at the class. And so that's kind of the difference between my stationary and the class setting.

Josh: So what I'm hearing is you're not crushing any land speed records at home, but you get the privacy of home.

Erick: Yeah. Right. The gym, the gym class, isn't on my schedule. And that's the huge, different part that I think that that's the big key difference.

Josh: And I think the other difference that works here is that I've, I've got a gym membership that I rarely use. I will, let's be honest, never use. I think everyone's had this at one point in their life. They're paying a monthly subscription fee to something that they, they aren't using. And I think what we're Peloton wins is that I can't see my gym membership. I see it come out every month and go, oh yeah, I should probably cancel that or actually show up and use it. But I could see the bike. If it sat in my house every single day, I could walk past it and go, gosh, I just spent how much on this and now I'm paying monthly. So I think that's where they win versus the gym membership. My wife

Erick: Walks past it everyday too, which is a little different in researching this. Actually, we kind of found out that Peleton has more members currently than soul cycle without any of the overhead of an actual physical gym. And this is kind of the way businesses starting to evolve in some of the more successful ones are happening. It's kind of similar to what we see in a Netflix versus blockbuster kind of example.

Josh: Yeah. We, we had an episode earlier on of Netflix and kind of why they won and what I'm seeing as the big takeaway is that Netflix didn't have the overhead, the brick and mortar that blockbuster did in the same way that Peloton doesn't have the brick and mortar that soul cycle does. And that's, that's one piece of the mix, but the biggest takeaway that, um, that I'm seeing in a SAS business, and there's a few metrics for how we measure success in SAS. And one of them is, is churn, which means how often does a member leave your business? Um, or your SAS subscription and pelotons annual retention of customers is something like 96, 90 7%, which is absolutely just ludicrous. It's unheard of. It's definitely not the gym membership,

Erick: Which is nine months in like, oh God, I have the top.

Josh: Yup. But I think that the key of how they retain their members is the fact that they offer three plus year financing on their bikes. And so now if I don't keep my subscription up, I can't use the bike. And if I don't pay for the bike, it's going to ding my credit. I don't know if there's bike, repo people out there or what, but it's a very interesting model that they were able to crack a number of metrics, which is really, really tough in SAS of hardware versus software, hardware, and software, and then also paying for a big ticket item plus the monthly membership.

Erick: Okay. So yeah. So there you have it, the way to get through and some is to create a need with a hardware and software and just make people pay for it for four years.

Josh: Yeah. It's a baffling thing, but somehow they made it work and I'm sure that they had a lot of people doubting them along the way. Um, I still doubted it, it came across my desk, but,

Erick: But there you have it. I mean, they, they were, they had this idea to make it happen and now it's done.

Josh: So, so thanks for listening. If you know, a startup that could use daily advice, have them subscribe and leave a review on iTunes.