Strategy served HOT by Nespresso!

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.

Photo of Nespresso Auckland by TheRegister.co.nz

Picasso: a great Artist or great Branding?

Picasso

After have been strolling up and down small corridors in Barcelona, I stumble upon Picasso. Not the actual Pablo Picasso, but the museum by the same name, and I decided to have a look.

Just a small update on Pablo Ruiz Picasso: Picasso was born in 1881 Malaga, Spain, and died in 1973 i Mougins, France. During hiss career Picasso managed to establish himself as a fine painter and artist, and is today considered one of the greatest painters of the 20th century.

The museum was interesting and I got a fine inside in the development of Picasso’s arts. However; strolling around at this fine museum looking at pictures created in the 19th century, made me think. Is this really beautiful, special or in any way extraordinary? Well I am not to be the judge of that. But comparing one of Picasso’s paintings with one of the street painters sitting on the sidewalk, the difference in talent with a brush do not really have to be that big.

So why is it that a painting made by Picasso can be sold for a 100 million dollar where the street painter can only get 10 euros? Well I do not have a scientific proofed answer, but I will dare to claim that it has to do with branding.

You can compare it to soft drinks. Even though you know that Coca Cola is not necessarily the best Cola on the market you buy it, because you attach value to the name and not to the actual product. You can look at paintings the same way. Hanging a Picasso in your living room signals wealth, status, and intellect. Not because the painting is beautiful or suit your living room, but because you attach value to the name of the painter. Hanging the same painting without Picasso’s signature and the painting would not get any attention at all.

It is a tendency that we see more and more, that the actual craftsmanship is deprioritized in favor of the brand. Another example is the music industry where the best singer is not the one topping the top 10 charts, but those who have been promoted the best.

It is like this in many industries, and therefore is it also important to take notion of.  Picasso might have been a great painter, but I would claim that his greatest talent was getting his pictures exposed the right places, and bought by the right people. And that way around attached psychical value to his paintings.

I am sure that only a minority will agree with me, so let me hear your argument and please post a comment.