Fitbit: Taking a Step in the Right Direction
By: Bryn Davis & Taylor Goodfield
The Ivey Business Review is a student publication conceived, designed and managed by Honors Business Administration students at the Ivey Business School.
With its humble beginnings as a wooden box prototype with a circuit board, Fitbit has grown to become a $1.5-billion public company that is synonymous with the fitness tracker industry. Despite developing one of the first commercially successful fitness trackers, Fitbit is struggling to retain its market share in the face of increasing competition and changing consumer needs. Smartwatch manufacturers such as Apple and Xiaomi have entered the space with the introduction of their own fitness bands and fitness-focused applications. The consolidation of the two wearable technology segments is making it increasingly difficult for Fitbit to maintain its differentiation in an increasingly competitive industry.
The Wearable Industry Kicks into High Gear
Having grown from $76.4 million to $2.2 billion in sales from 2012 to 2016, much of Fitbit’s rapid gains can be accredited to overall industry growth. Fitbit was not alone in understanding the increasing importance of data personalization. Wearable technology, including electronic accessories and garments, took the tech industry by storm in the past four years and grew at an annual global rate of 40.6 per cent between 2012 and 2016. Major technology companies, such as Xiaomi and Apple, were keen to cash in on this fast-growing market with the introduction of Xiaomi’s Mi Band and Apple Watch’s fitness applications. Fitbit had been able to maintain its market dominance in the past due to strong brand recognition and a wide range of products that covered a variety of price points and users. However, that dominance has been deteriorating, with Fitbit’s market share falling to 12.9 per cent in the second quarter of 2017 from 24.1 per cent a year prior. Over the same period, Xiaomi and Apple became the leaders of the market as both saw increases in their market share to 13.4 per cent from 13.0 percent and to 13.0 per cent from 9.6 per cent, respectively. The falling market share contributed to a 22-per-cent decrease in revenues for the company in the third quarter of 2017 to $393 million from $504 million from a year prior. Reflecting the deteriorating investor confidence, Fitbit’s share price has fallen from 53.1 per cent over the same period. The company recently laid off six per cent of its workforce to reduce costs. However, this measure will be insufficient going forward as Fitbit faces structural concerns regarding its customer base.
Where Have All These Fitbit-ers Gone?
Fitbit’s decline is driven by the increasing popularity of both Xiaomi’s and Apple’s fitness devices combined with a maturing industry, where overall wearables sales are expected to grow only 16.7 per cent in 2017. Both brands have developed value propositions that target opposite ends of the spectrum. Xiaomi targets the price-conscious buyer with the Mi Band priced as low as $15 in the U.S, while Apple caters to the luxury buyer with the Apple Watch Series 3 priced at $329. Fitbit sits in between these two with its base model, the Flex 2, priced at $60. As a result, Fitbit’s decline in the industry stems from its mass market strategy. Fitbit’s focus on the average consumer means that it is at risk of being squeezed by competitors on both sides. It is unable to price competitively against low-cost competitors and is also unable to add the technology and design necessary to differentiate itself enough in the luxury segment. In fact, Fitbit’s products appeal to only a few of the attributes that each customer segment values. In this highly competitive consumer market, switching costs are low and two distinct groups of buyers are either looking for value, or are willing to pay higher prices for premium features and a recognized brand. Without altering its strategy, Fitbit will struggle with its current positioning.
In addition, Fitbit’s innovation has been small and incremental in the context of the industry. Its focus has been updating how consumers wear their device and increasing the metrics the device tracks. However, relying on incremental innovation is not sustainable as most permutations have already been done, are easily imitated, or do not add additional value. With a business model that depends on one-time purchases of each model, Fitbit’s ability to sustain sales depends on the loyalty of its customer base. In fiscal year 2016, returning customers represented 26 per cent of new device activations, largely driven by the release of new products. With 74 per cent of activations stemming from new customers, representing 15.7 million activations, it is important for Fitbit to convert new customers into loyalists to sustain revenues with each model upgrade. However, active ownership as a percentage of total registered users has fallen to 46 per cent in 2016 from 73 per cent in 2013. This drop in active ownership is concerning, because if current users are disengaged, they will not make new purchases of either model upgrades or complementary products. Across all fitness trackers, there is an estimated 30-per-cent abandonment rate as users become bored with their devices or find limited opportunities to use them. With a maturing industry, Fitbit may find it increasingly difficult to continue acquiring new customers. As a result, it will need to focus more on loyal customers. Repeat sales are a function of loyalty and active engagement. Without either, Fitbit will face difficulty in sustaining revenues.
Trying to Keep Pace
To expand its portfolio to capture the premium segment of the customer base, Fitbit released Ionic, a luxury smartwatch priced at $300 in 2016. However, competing with Apple for the premium user is not sustainable. Apple is 600 times larger in market capitalization. Without the ability to outcompete Apple in terms of resources, human capital, or brand equity, Ionic will not be the saving grace for Fitbit. On a positive note, Fitbit has realized it needs to cater to other segments as well to remain successful. In 2015, Fitbit tried to pivot to the “fitness user” by releasing the Charge HR, its first product to measure calories and heart rate. Since then, Fitbit has launched headphones and an improved scale. Overall, this is a shift towards a more defensible segment of the market.
The fitness user is primarily at the gym and Fitbit needs to reach these users, as they represent a market size of more than 25 million people. The U.S. gym, health, and fitness club industry is fragmented with the market leader, 24 Hour Fitness, owning only 4.8 per cent of the overall market. It is primarily made up of traditional gyms that have open equipment and group classes as well as boutique gyms that offer group exercise specialized in only one type of activity. One of the new ways to engage members in these group classes is to use their physiological data to gamify the workout experience. For example, MYZONE produces a heart rate monitor and operates in the fitness segment. The device tracks the users’ heartrate and gives them “Effort Points”; more points are given for higher heart rates reached. This innovation would improve the proportion of active to registered users and drive sustainable growth through repeat and extension product purchases.
Fitbit already has prior experience partnering with health clubs. In January 2016, Fitbit announced a partnership with Crunch Gym to launch a group fitness class powered by Fitbit. With only 225 locations nationwide, Crunch Gym is too small for Fitbit to organically grow its ‘fitness user’ base. However, the experience acted as a pilot project to demonstrate the advantages of a Fitbit-integrated gym. Other gyms have also begun partnering with third-party developers or creating their own wearable devices. MYZONE, which is partnered with gyms such as LA Fitness, Snap Fitness, and GoodLife, is currently the largest third-party fitness wearable being used in gyms to help members track their fitness.
Getting in the Zone
MYZONE is a leading producer of wearable technology for health clubs. Specifically, it focuses on selling a suite of heart rate monitoring products including an award-winning monitoring strap, watch, and technology-enabled apparel primarily to health clubs, through health clubs and direct-to-consumer. Through its partnerships with LA Fitness, Snap Fitness, and GoodLife, MYZONE can reach customers across more than 2,400 clubs in the U.S., Canada, and in select international markets. Including other independent gyms, MYZONE is exposed to approximately 3,500 clubs. With one of the most accurate trackers on the market, the patent-protected hardware and system allows users to track their workouts with 99.4 per cent accuracy. In addition to the hardware, MYZONE’s mobile application serves to gamify the workout experience and to track fitness data. However, the software lacks the sophistication seen in the likes of Fitbit in terms of functionality. While MYZONE only has patents on its hardware, Fitbit has an extensive patent library in both software and hardware, ranging from music selection based on exercise detection to a method of providing biofeedback during meditation.
Fitbit currently has an application called Fitbit Coach which is priced at $40 for an annual subscription, and allows customers to workout virtually with their adaptive workout videos. In addition, Fitbit’s recent acquisition of the Pebble smartwatch’s software earlier in 2017 provides a suite of tools to build up its app ecosystem. Although it was only established recently, the Fitbit store has already partnered with the likes of Strava, Starbucks, Pandora, and numerous others, thanks to its commitment to an open application programming interface (API) that makes it easier for third-party development of applications. Prior to being acquired by Fitbit, Pebble boasted one of the largest app ecosystems available for a smartwatch, allowing for a high level of customization. On the other hand, MYZONE’s core competency is in its hardware, which is one of its most valuable assets along with its relationships with gyms. If Fitbit is able to combine its software and brand with superior hardware technology appropriate for fitness users, it would then be feasible for the company to redefine its value proposition.
Getting Fitbit in Better Shape
While Fitbit could enter the fitness market through in-house development, there are barriers to entry in establishing partnerships. If Fitbit was to acquire MYZONE, Fitbit would be able to integrate into two of the four largest American gyms and the largest Canadian gym, while providing additional value to both the gym and its members. This is not including the independent chains in which Fitbit is already present.
Fitbit’s sophisticated back-end technology brings additional value to gyms. Fitbit collects data about every user who interacts with its devices. Through an acquisition of MYZONE, Fitbit would have valuable information about the gyms’ customers and fitness preferences. This would incentivize gyms to work with Fitbit as they would be able to buy the consolidated fitness information of more than 300,000 MYZONE users from Fitbit to better cater their services to their members. Fitbit could also use this information in its research and development to focus new innovations directed at the lucrative ‘fitness user’ segment. To further add value, an acquisition means Fitbit would acquire MYZONE’s intellectual property, which includes its chest-based trackers and wearable clothing technology.
Partnerships with gyms present four potential revenue streams that would lead to increased revenues over time. The first stream is from new customer purchases of Fitbit hardware and hardware acquired from MYZONE. The second comes from fitness group classes using the newly acquired software and Fitbit’s brand name. With the third stream, Fitbit can also develop a custom page on its app specifically for partner gym workouts, thus driving subscription purchases and an additional stream of stable revenue. The fourth revenue stream is comprised of the costs for the technology and data-sharing charged to the club. This revenue stream involves sharing the data collected from users with the club without identifying the user. For the club, useful utilization metrics would help determine which areas of the club are worth investing more into to drive member satisfaction and engagement.
Fitbit Gym – Coming to a Location Near You!
This acquisition will give Fitbit a stronger position in the wearable market with more engaged users and a focus on both recurring and one-time revenue streams. By capturing fitness users at the gym, Fitbit will be able to tap into both the active and passive daily movements of customers to give them a more holistic view of their fitness and stay in control of the wearable market. Reaching the fitness user is just the beginning to applying trackers to new markets. After all, a journey of a thousand miles begins with a single step.
