It has been a tough couple of years for at-home fitness startup Tonal, but its new chief executive says the San Francisco company is working towards adjusted profitability this year.
The company announced yesterday that its president, Krystal Zell, had been appointed as CEO, taking the reins from founder Aly Orady who transitioned into a new role as CTO. They're still working closely together, Zell told me in an interview on Tuesday.
Zell previously held executive roles at Home Depot and Starwood Hotels, and she is now tasked with overseeing a challenging period of growth at Tonal.
Tonal raised $250 million in a Series E round in March 2021 that valued the company at $1.6 billion. Since then, the company had two rounds of lay offs, according to Bloomberg News and The Information. It also closed some showrooms and reduced marketing spend, and raised a $100 million financing round last summer that valued the company at $1.9 billion in an investor-friendly deal, according to various reports.
Amid its cost-cutting efforts, Tonal also reportedly sought a buyer last year but no deal materialized. It raised prices twice — in July and January — and the company's at-home smart weight training system now costs nearly $4,000 upfront, or $84 monthly, plus $59.95 a month for access to its fitness content.
And in November, its manufacturing partner Foxconn sued the company over late payments.
On Monday, Tonal also announced that it had raised $130 million in fresh capital from existing investors L Catterton, Cobalt, Dragoneer, Kindred Ventures and THVC. The company declined to comment on its current valuation, but the WSJ reported that it dropped to between $550 million and $600 million.
Its previous investors have also included professional athletes like Warriors guards Stephen Curry and Klay Thompson, tennis star Serena Williams, former NFL quarterback Drew Brees and Olympian Sue Bird.
I spoke with Zell on Tuesday about her strategy for Tonal's growth and achieving adjusted profitability — otherwise known as a company's earnings before other costs like interest, taxes, depreciation and amortization are accounted for, or EBITDA. The following interview has been edited for clarity.
What initially drew you to Tonal?
The customer love for the product. My special skill is building on experiential businesses that are relationship oriented that span between digital and physical. It all starts with passion, and passion creates a really special opportunity for customer experience. And that is very much there. For Tonal, the members are very loyal. They're very passionate. They're very excited about the experience of Tonal and what it brings to their lives, especially because we hit on this category of health and fitness.
You previously worked in the construction and travel industries. How are those experiences relevant to Tonal?
I was a big part of our go-to-market strategy for contractors (at Home Depot). They were online, they were using the app and they were having deliveries to a job site. There was this whole experience we were trying to create for them where we met their needs in a very unique way. I built the data science teams. We had a million and a half SKUs, and we were trying to organize all that for the customer and serve them. There were e-commerce and digital fundamentals that go behind that. Those things are very applicable when you think about what Tonal is.
Even with essentially just one SKU?
Yes, because when you go on the device, you're picking a class to take and we're trying to drive you to an experience. We're trying to create a personalized experience. It’s powered by a ton of data science and AI. What weight should we be providing you? What class do we think you should take? What programs should you do? There's personalization and how you deliver personalization. There's a lot to learn and transfer from e-commerce. I'm a scale manager for large teams and big orgs — how to scale, how to grow and how to run businesses really well.
What makes Tonal’s customers loyal and how much churn does the company see?
We don't publish our rates, but we have extremely low churn for fitness products and we believe it's because our customers get results from the product. They enjoy the experience and they get results.
How are you balancing Tonal’s need to cut costs and also grow your customer base?
We’re very much focused on sustainable growth, which means that the model that we have around customer acquisition makes financial sense. What we're trying to do, and what we've done, quite frankly, is drive our acquisition cost to be extremely reasonable relative to the price of the cost of the overall product. And then when we do that, we acquire subscribers.
Can you tell me about some of your cost cutting measures?
We've taken a look at our whole business to find opportunities to drive efficiencies, and have found them in lots of places. Part of it is operations. Every step, looking at all of the costs that you incur from selling a product to installing the product or servicing the product. We have looked for opportunities to reduce costs, but we've done it in ways that we have tried to protect the member experience. There's lots of small initiatives that actually add up over time and make a big difference from a P&L perspective, in addition to really honing in on having that much lower cost per customer acquisition.
Yesterday’s announcement also mentioned strengthening the company’s balance sheet. What else does that entail?
The big thing is aligning our supply and demand on a long-term basis. Aligning forecasting, the supply chain and production because we order a product nine months or so in advance. We’ve made tons of improvements. And I think part of that is developing an intentional strategy. We're feeling very good about the position of our supply chain and the work that we've done, and we are not facing the same supply chain challenges as the past.
Can you walk me through the new funding round, and what that's going to you achieve in the near term?
We reached a point where it was time to raise money to achieve all these goals that I laid out. And we have an amazing group of investors, and they believe in the future of Tonal. We're still actually very young as a company and started selling product not that not that long before COVID started. We're very much focused on getting to EBITDA profitability on an adjusted basis. And that means all the work that we've done to align pricing, costs, etc., allows us to pursue sustainable growth. With the growth in our subscriber base, it also allows us to make some improvements to our balance sheet, as I talked about in terms of aligning supply and demand.
Most importantly, the two more exciting pieces is it gives us the room to really continue to focus on the member experience. We have this amazing combination of performance science plus AI built into the technology, and the people in the organization that are helping create the great experiences and they grow content. So, we're very much focused on that. And then there's lots of avenues for further growth from a channel perspective, a product extension perspective, a market perspective.
What is your target for reaching adjusted profitability?
Over the next two quarters.
Is Tonal getting ready to launch new products?
We're not quite there yet, but we’re working to develop new products and that's very much a part of our plan long-term.
Is Tonal considering more price increases?
We're not planning on any more increases. We feel like we've landed at the right price for the product.
What's the mix of people who are buying Tonal’s equipment upfront versus taking the monthly financing?
I don't necessarily want to give that number away, but it's a mix.
Before joining Tonal, were you a fitness person?
Yes, in my 20s. And then I began the journey of being a working mom in my 30s, and it got a lot harder. I managed to keep up from a cardio perspective, but being able to go to the gym to do weight training while having two children and full-time challenging jobs just was very, very hard. And that's part of why I think the product is so great. It makes it easy to actually bring all that fitness that you want into your life without having to get up at 5 a.m. and go to the gym.
Is there anything else that you want us to be sure to talk about?
Aly and I are working very much as a partnership together. He’s staying in the business and leading all of technology. We're working really closely together on the future of Tonal.
You're taking over in this very challenging growth environment as CEO, but he's still there and is an active executive.
Exactly, he’s the founder and CTO.
