Peloton's $400M lesson after its first profit
Hi Everyone,
In September 2020, Peloton reported its first ever quarterly profit. $89 million, with revenue almost tripling in a year.
Eight months later, the company invested $400 million in a new factory and kept hiring. By February 2022, Peloton had lost $439 million in a single quarter, cut 2,800 jobs, and replaced its CEO.
The profit was real. The trouble came with the decisions that followed.
Here's what to lock in place after your first profitable quarter, and how to bring that plan to your board.
The profit came from old decisions
Your first profitable quarter is the result of choices you made two to four quarters ago. The prices, the channels, the cost cuts — each one needed months to pay off.
The delay works both ways. The full effect of whatever you change this month won't show up in your results for months. If it was a mistake, you'll find out late.
Unusually high profits also fade fast. Eugene Fama and Kenneth French studied around 2,300 US companies per year across three decades and found they fade at roughly 38% per year. The bigger the jump from a company's usual profits, the faster it tends to fade. One strong quarter isn't necessarily the new normal.
Three things to lock after your first profit
1. How you win customers: Keep your budget on the channels and customer types that produced the profit. A new market or a new way of selling would change the one thing you finally have proof is working.
2. The hiring bar: Buffer grew from 34 to 94 people in one year, from a healthy position, then laid off 11% of the team. CEO Joel Gascoigne called it "entirely self-inflicted." They hired against revenue they expected instead of revenue they had. Until the profit repeats, approve new roles only against signed revenue.
3. Prices and cost rules: One profitable quarter doesn't prove you can charge more, and it doesn't relax the spending rules. Hold both until the profit has repeated across more than one quarter with steady gross margin.
Tell your board what "sustained" means
The first profit changes what your board expects. Growth alone was enough last quarter. Now they'll want growth and margin together, and some will start asking about payouts or exit timing.
Tell the board what would prove the profit is real before they decide for themselves. For example, profitable in two of the next three quarters at the current gross margin. Then present the three locks and what needs to happen before you release them.
You can still invest during the lock
During the lock period, invest more in what generated the profit. Buy more of the channel that's working, and speed up the projects with payback you already understand.
Anything new to the business — like a new market or product line — must wait. Once the profit has repeated, you can make the next big bet with evidence behind it.
Before your next board meeting
Write one page listing the decisions that produced this quarter's profit, with the date each one was made. Share it with your leadership team so everyone knows which decisions are behind the profit before they change anything.
We put together a free template so you can fill it in before the meeting.
Peloton believed one profitable quarter meant the demand would last, and spent $400 million on that belief. If you're about to approve something big — a hire, a market, a contract — check it against the three locks before you decide.
Go deeper
👉 Buffer: Tough news: we've made 10 layoffs — read Gascoigne's full account of hiring too fast from a healthy position; it's one of the most honest write-ups a CEO has published.
👉 Ben Horowitz: Peacetime CEO / Wartime CEO — use this to decide which mode your company is in before you relax anything after the milestone.
👉 CNBC: Peloton replaces its CEO and cuts 2,800 jobs — the full arc of the story above, worth ten minutes if you're weighing a big bet after a good quarter.
👉 McKinsey: A playbook for newly minted private equity portfolio-company CEOs — read this for the investor's side of the table and what boards look for once the numbers turn.
Coming up tomorrow
Tomorrow, we'll share how to tell the difference between a real competitive threat and plain old competitor envy.
See you soon.
P.S. If you've had your first profitable quarter (or month), let us know. We'd love to celebrate with you.