Liz Coddington: So the first question sounded like it was related to unit economics for a third-party. So our — from a gross margin perspective, the unit economics for selling through a third-party channel like a Dick’s Sporting Goods or an Amazon are lower because, obviously, there is that margin that we have to give to the wholesaler to that third-party retailer. Where we sort of make up the difference on that is in our market — our sales and marketing spend. So we expect our customer acquisition costs through those channels to be substantially lower, and that’s what we optimize for as well as driving as much of that those units have incremental units through those channels as we possibly can. And so that’s the key difference.
So you see the gross margin pressure from third-party and it should be offset, and that’s how we model and that’s how we run those channels with more efficient sales and marketing spending. Now the other question was what percentage of our Connected Fitness subs are coming from the secondary market, I think. It’s increasing quarter-over-quarter. In Q2, it was actually slightly down as a percentage of our total gross additions versus Q1, just under 30% coming from that channel.
Barry McCarthy: Let me come back to 3P for a minute and let’s talk about FaaS in the same — the rental program in the same context. It only makes sense to give up margin if the customers you’re acquiring are — if a large percentage is incremental. And it’s relatively easy to do the math to figure out what the crossover point is where you’re economically advantaged by making the lower margin trade-off. Now in Q4, we had explosive growth with the 3P partners. And it cost us an incrementality. And so it was really — it was a really important lesson. And once we were into the quarter, there was no way to undo the sales of inventory that to our third 3P partners that were competing with us during the holiday season. So what we learned is there are periods that are sort of uniquely special.
We’re just those partners individually Prime Day by a way of example are on promotion, and we can move a lot of units. And there are other times of the year when you could come to us, you could go to them. Consumer might be indifferent, but we’re not. And we need to be more thoughtful about our sell-through to those partners during those periods of time. I think we talked about the incrementality on FaaS, it’s north of 60% in the more like 63, 62 pretty consistently since we started. So even though economics as compared with at least the cash flow aspects of it or less attractive than the sell-through. We’re absolutely able to attract a significant audience that we wouldn’t otherwise be attracting.
Operator: Thank you. One moment for our next question. And that will come from the line of John Blackledge with TD Cowen. Your line is open.
John Blackledge: Great. Thanks. Just on Tread+, Liz, kind of just addressed it. My question is, is demand more so from existing members? Or is it a mix of existing and new members. I think she said more so from existing members now. But I guess as we get through the second half and into next year, would you see — would you expect to see more demand from new members given the market is two times bigger than the Bike market. And then my second question on paid apps. The high end, it looks like the high end of paid app subs is down a little bit. Just how should we think about trajectory of paid app subs kind of into the back half and kind of into fiscal ’25 and beyond? Thank you.
Barry McCarthy: I think we’ll probably comment here, John. Thanks for the question. I think you’re absolutely right that we — it’s reasonable to expect that we would see a shift in the mix from existing members to new members because, of course, today, really the only members who know what the Tread+ represents are the existing members.
Liz Coddington: Also our Tread+ is actually just reviewed as the best overall Tread in 2024 by CNN, which is — which should also help grow the awareness of the product.
Barry McCarthy: And with respect to the app, I think in the past, we’ve referred to it as the best product we have that nobody knows about. The unaided brand awareness, which was down 1% is the unaided brand awareness is 6%.
Liz Coddington: There was a question about the range. So I can take that part. So —
Barry McCarthy: Sorry, hang on a second. Yes. I just wanted to talk about sort of the momentum and where we are in the learning curve and because I think it important us about our go-forward view. So it’s at a very high level, I think, your question is, okay, so we restructured our app pricing model. Is the business better off for having done it? And the answer is, today, not yet. But we think the crossover point happens in June, and we’re pretty optimistic about the trend line we’re on now. We foot-faulted early when we focus primarily on free. We struggled with that for several months and then we pivoted to focusing on the paid piece. And ever since we focused on the paid piece, we have seen significant progress. And we continue to make important steps in improving the overall user experience.
