Back in March, I asked our blog readers if they had any opinions about Fitbit and its consumer wearables. Readers provided a range of responses, but the majority of voices sounded a tone of skepticism. I believe the term “gimmicky” was used more than once. In my blog, I implied that the company would need to develop something more engaging if it wanted to maintain its healthy profit stream.
Since that piece, the company has reported six months’ worth of activity. The results have been predictably abysmal. Its operating profit margin collapsed, from 23% in the first six months of 2015 to 3.7% over the same period this year. That is a staggering fall for a business in which revenue grew 48% over the same period.
Digging into the numbers, two things jump out. First, Fitbit’s gross margin has declined meaningfully. This tells me that the company is feeling the effects of what has become a very crowded market. Either it has not been able to raise prices enough or, more likely, has been forced to discount more aggressively in order to sell units. Readers posted a number of alternatives from the likes of Jawbone and Garmin to plenty of others foreign to me. And of course there’s your phone.
The other area of concern is marketing. Fitbit has gone from spending 15% of its revenue on marketing to 20% – which may not sound like much but represents a doubling in actual dollars. It is getting more expensive to stand out from the crowd.
To its credit, the company is attempting to create a more interactive customer experience. You can challenge friends or receive customized training programs based on your data. You can use your Fitbit in conjunction with your phone to embark on an augmented reality journey as your steps trace you through famous hikes. The company organises group activities connecting users in local areas. Time will tell if it can find a magic formula – one that makes it irreplaceable to its customers. Otherwise, don’t expect it to find its way back to those lofty profit margins of yesteryear.
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