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

Freedom is Priceless

Time is precious

I just watched a show on the popular TV channel Nation Geographic, which inspired me to do this article. The show was about a real life story of four American guys, making the worst decision of their lives, when they get involved in drug trafficking. The four guys are stopped in the airport in Brazil and are sent to prison. The sentence was originally 25 years, but due to a bribe of the judge the four guys’ only end up serving 4½ year in prison. One quote said by one of the boys serving was: “freedom is priceless”.

With that sentence: “freedom is priceless” there is no doubt that he is absolutely right, however the most of us actually don’t care or at least never give it a thought, probably because we take our freedom for granted. It is really hard to explain the feeling I was left with when watching the show, but it made me wonder if we as human beings of the free world, are appreciating the freedom our ant sisters have been fighting for. There is an old saying sounding something like: “You only know what you got, till it is gone” and I guess that was what those four guys realized in the second they were put behind bars.

I would like to turn this true real life story in another direction, to a topic that has had my attention for a while: “Time”!  In the article about Georg Soerensen I was as well putting emphasis on the subject time, because time is a limited resource and we do only have a certain amount of hours on this planet. The question is if we get the best out of it?

Looking at this problem through the eyes of an entrepreneur, the greatest wish would be to have an extra hour in a day and since this probably is too great a challenge for even the best entrepreneur, the solution might be found elsewhere. An interesting approach would be to look at reducing the time spend on sleeping. I am quite sure that if anybody could come up with an innovation that could reduce the need for sleep, he or she could make a fortune just on the patent alone. However there might be another approach to the problem.

Because what is it worth to get an extra hour awake every day, if it is not an affective hour? I know from myself that I spend too much time everyday doing stuff that does not in any direct way create any kind of value for me. I don’t learn anything from it, I do not extend my network, I do not make money, and in general I spend too many hours wasting my precious time. It takes self-acknowledgement to reach this conclusion, but only by being aware of it, I can work on it and become better.

Here I would like to draw the connection to the four guys from the TV show. They learned it the hard way, how precious life is and especially how much freedom and the opportunity to do whatever you want to should be appreciated. You never know what tomorrow will bring and you never know which day is your last.

The conclusion must be that time shall and must be lived RIGHT NOW, because you never know if tomorrow will be your last. So do not waste your time doing things that does not create value in your life and remember to enjoy every single minute of your freedom. Do never take anything for granted.