Over Christmas I visited the Nespresso brand store at Aarhus, Denmark together with my girlfriend. She was very fond of the beautiful coffee machines, whereas I found them too expensive and unnecessary. However, it sparked an interesting discussion and a fascination about Nestlé’s successful journey in transforming a mere commodity into a premium product. Admirably, Nespresso contributes approximately 8% of Nestlé’s EUR83 billion in revenues 2015 and represent a 25% margin compared to Nestlés overall 15% margin. Furthermore, the single-serve cup segment is the fastest growing in the industry.

How did Nespresso do it?

Establish an ecosystem – The Capsule

It all started with the coffee capsule which was invented back in 1976. However, it wasn’t before the 1990s that the concept really caught on as it was introduced to the consumer market in Switzerland.

The capsule is a significant part of Nespresso’s success. One thing is that the capsule serves a modern demand of single servings, as people more than ever before are living alone and are craving individualized experiences. As my girlfriend argued that the capsule concept allows her to make a cup of cappuccino just for herself before she leaves for work, instead of making an entire pot of coffee that goes to waste. More so, the capsule is the core component of establishing an ecosystem where you as a customer are compelled to purchase Nespresso capsules to use your Nespresso coffee machine. If you take a step back, you realise that this strategic decision allows Nespresso to gain revenues from two successful avenues: the coffee machine and the coffee capsules

Pricing

This brings me to pricing. Pricing is absolutely vital for the ecosystem to exist and thrive, as the relatively high price of a Nespresso coffee machine creates high switching costs. Spending EUR150 on a coffee machine makes you vested in the ecosystem and you will be less likely to switch.

An example of another businesses that has created a similar ecosystem is Sony PlayStation, as games won’t work on competing consoles, forcing you to remain in the PlayStation universe. Similar to Nespresso the PlayStation console is relatively expensive starting at EUR299, enforcing high switching costs.

Branding

Another vital reason for Nespresso’s success has been investing in Marketing and in establishing brand awareness. George Clooney has been the brand ambassador of Nespresso since 2006 and has played a significant role in forming the brand values associated with Nespresso. Nespresso has also embraced Social Media and has shown excellent commitment to engage with its follow-base. If you study Nespresso’s Facebook page you will find that Nespresso is actively responding to both positive and negative comments made by customers.

What should be recognised is how consistent and aligned Nespresso’s communication is from its brand stores, its TV commercials, its social media activity, not to mention its e-commerce platform. No matter which channel you choose to communicate with Nespresso it will be consistent.

Creating a community

When you buy a Nespresso Coffee Machine you also buy the Nespresso Club Membership. The Club Membership gives you a range of benefits like: automatic order online, free delivery, special promotions, 24-hour coffee expert hotline and exclusive brand events in your local Nespresso store. Every activity is designed to create and maintain loyal customers, and furthermore, increases the switching cost.

Another industry that is very successful with loyalty programs are the Airline industry. Frequent fliers will confirm that the benefits related to their loyalty membership influences their choice of flight.

What can we learn from Nespresso?

What should be noticed is that Nespresso is selling coffee, which is a global commodity traded by the kilo. However, Nespresso is still charging about 3 times that of a regular cup of premium coffee, which means it is not competing on product, but rather on an experience. The Nespresso experience is the way it is served and the image it creates in the mind of the consumer.

Nespresso is a great case study for other companies. Creating an ecosystem around your product offerings can be a tremendous opportunity. However, an ecosystem must be guarded and requires extensive nurturing to flourish. Establishing brand loyalty is no easy job. However, by ensuring high switching costs you make it easier for your customer to remain loyal.