Sep 5, 2019

Dissecting the customer acquisition costs of the latest unicorn IPOs

Felix Salmon, author of Edge

Illustration: Aïda Amer/Axios

Apparently investors love to read IPO prospectuses in August, because both Peloton and WeWork unveiled their S-1 filings last month.

The big picture: The two companies are similar in that they both spend a lot of money on sales and marketing, which they then attempt to recoup over time with monthly payments from their customers.

The big question: How much time does a customer need to remain a customer before a company becomes profitable?

In the case of Peloton, the answer is "almost immediately." Customer acquisition costs are roughly equal to the markup on the company's bicycles and treadmills. After that, Peloton makes money every month that the customer pays $39 for a fitness subscription.

  • But, but, but: Peloton's losses have been rising along with its revenues. As the NYT's Erin Griffith reports, "competitors and copycats are moving in aggressively," often at significantly lower price points. If Peloton wants to maintain or increase its market share, its customer acquisition costs are probably going to increase over time.

WeWork's financials are harder to understand. Rett Wallace, the CEO of private-company intelligence firm Triton, has called the company's S-1 "a masterpiece of obfuscation." It's therefore hard to work out exactly what WeWork's customer acquisition cost is. But Wallace estimates that a tenant needs to stay in place for 13.5 years, on average, before they break even for the company.

  • Between the lines: WeWork's value proposition is that it doesn't lock tenants into long leases. But the company's accounting hides the cost of finding new tenants to replace ones who move out.
  • How it works: After a location has been open for 24 months, its sales and marketing expenses no longer appear in WeWork's corporate sales and marketing budget, and instead are incorporated into the individual budget for the location itself. Shareholders therefore have no way of seeing WeWork's total sales and marketing expenses.

The bottom line: "Customer acquisition costs always go up, not down," says Wallace. Anybody buying into the WeWork or Peloton IPOs should bear that in mind as they try to model when and whether either company might become profitable. In the case of WeWork, the company itself seems to be asking similar questions.

Go deeper: WeWork CEO returns $5.9 million "trademark payment" to the company

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