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

July 2, 2016December 3, 2016

Why Microsoft and LinkedIn are the perfect Tinder match

Monday 14th of June the news of Microsoft acquiring LinkedIn was breaking all over the global media landscape. I vividly remember the moment, when I was dining at a restaurant in Vietnam and my phone alerted me of the US$26.2bn deal and I got pretty excited since it seemed like Microsoft had done the same assessment as I had in my earlier article about LinkedIn’s Strategy.

On April the 4th, I wrote: “LinkedIn has one of the world’s largest databases of professionals and LinkedIn has collected an unprecedented amount of data, which naturally can be utilized to offer a wide variety of professional service. Among these services is the Sales Navigator tool that opens LinkedIn to a whole new segment of clients.”

“What investors should assess when valuing LinkedIn is LinkedIn’s move into new and more lucrative customer segments. My belief is that the general perception of LinkedIn as a career portal is heavily mistaken and valuing LinkedIn with that mindset is potentially myopic.”

What I argued in April was that investors were mistaking LinkedIn for a career portal where it really should be assessed as a cloud services company.

Why did LinkedIn swipe right on Microsoft?

LinkedIn is one of tech industry’s most successful executors of the popular freemium business model and has been banking on converting free users to paying premium users. However, the freemium model has limited growth opportunity. LinkedIn has in recent years been transforming its business to become more of a media company, in an attempt to boost ad revenues, which I mentioned as stage 2, in my April article. However, as I wrote, LinkedIn will first become truly profitable when it enters stage 3 and this is where Microsoft comes into the picture.

Microsoft is one the world’s largest providers of business software solutions and has an impressive global sales network and millions of clients. LinkedIn has been struggling with meeting its sales targets and is in great need to boost its sales. Furthermore, LinkedIn is sitting on one of the world’s most comprehensive databases of professionals, but hasn’t managed to build professional services around it, that can be monetized in a big scale. Microsoft is however, an expert in monetizing its services and could very well be the ideal partner for LinkedIn to make its business profitable.

Why did Microsoft woo LinkedIn?

At the announcement of the LinkedIn acquisition, both parties were stressing the many synergies related to Microsoft’s Office products. Microsoft Office suits has been a cash cow for many years, but has recently experienced intensive competition from Google and other open source office solutions. This movement comes as we are changing the way we are using our electronic devices, where more and more is running on the cloud.

The strategic advantage is however, not with Microsoft office, but rather with Microsoft’s cloud based CRM solution Dynamics. It is well known that the CRM space is a lucrative market and Microsoft is already a large player, however, not dominating the playground. Allegedly Microsoft made a US$55bn offer for the cloud based CRM provider Salesforce in the spring of 2015, but the offer was turned down. Had Microsoft successfully acquired Salesforce it would have had a clear market leading position in CRM space. But with Salesforce declining the offer, Microsoft has had to look for other avenues to step up its position in the CRM space.

If you can’t acquire them, beat them!

So, this is my theory: Microsoft has been looking for a deal that could ramp up its competitive edge in the CRM space. When LinkedIn was punished by its investors in February, due to lower earnings expectations; LinkedIn appeared on Microsoft’s radar. What Microsoft saw that investors couldn’t, was the tremendous opportunity to monetize LinkedIn’s database in a way that only Microsoft can do.

With LinkedIn’s database, Microsoft suddenly has the opportunity to give its CRM solution Dynamics a competitive edge. Leveraging LinkedIn’s comprehensive database and its force in social selling, and Microsoft Dynamics can suddenly become the preferred CRM solution in the market. Especially if it can keep other competitors from accessing the same data.

Microsoft payed US$196 per LinkedIn share, equal to a 50% premium, which many commentators has said to be expensive. However, I might argue that they got LinkedIn cheap considering that the stock was trading at US$220+ in January. In January, the market had not factored in the opportunities of LinkedIn becoming a business solutions provider (stage 3 of LinkedIn’s strategy). With this new reality LinkedIn should potentially be trading way above its current US$189,-

Married but sleeping in separate beds!

The announcement stated that LinkedIn would remain a separate entity and LinkedIn CEO Jeff Weiner would continue his work at LinkedIn. This is a strategic wise move by Microsoft CEO Satya Nadella, as the synergies of the deal are not found in optimization of operations, but in a strategic alliance between Microsoft’s portfolio and LinkedIn’s data.

What we are going to see is a wide variety of bundles between Microsoft and LinkedIn’s products. When opting in for Microsoft Dynamics, LinkedIn sales navigator will be an affordable add-on. New professional services powered by Microsoft are going to appear as part of the LinkedIn experience, making both product suits more powerful and lucrative.

Microsoft and LinkedIn could be the perfect match! But like any marriage it requires hard work. For Microsoft to secure a solid return on investment (ROI), it must prioritize 3 important tasks:

Start selling bundled LinkedIn solutions with existing Microsoft products.
Build a seamless integration of LinkedIn’s services into Microsoft Dynamics solution, to ramp up competition in the CRM cloud space.
Finally, develop new and innovative business solutions on top of LinkedIn’s platform, executing on stage 3 of LinkedIn’s strategy, which will make LinkedIn truly profitable.

Should Salesforce and other CRM competitors be worried?

Potentially! Microsoft’s acquisition of LinkedIn represents great opportunities and if Microsoft successfully integrates the two product portfolios, they can find themselves in a favorable competitive situation. Competitors should access the situation very carefully and prepare themselves to be competing against a formidable CRM solution.

April 4, 2016

Do you really understand LinkedIn’s business strategy?

LinkedIn is transitioning from a career portal to a professional network, enriching its members with industry relevant content and professional office solutions.

On February 5, 2016, LinkedIn experienced its worst day since its high profile IPO on the New York Stock Exchange in 2011. The stock plunged as much as 46.5 percent to a three year low of 102.89 and the market value dropped by $11 billion (Reuters).

Investors punished LinkedIn due to its weak net revenues of $2,991mm compared to the forecasted range $3,600mm to $3,650mm (Reuters). Furthermore, the percentage year on year revenue growth was down 10% points from 45% 2014 to 35% 2015 (Both US and International markets). In particular international Marketing Solutions dropped from %y/y revenue growth of 38% 2014 to 12% 2015. As well as Premium Subscriptions that was down 20%points from 42% 2014 to 22% 2015 (both US and International markets).

“Stock price represents the market value of the future stream of earnings”

What is LinkedIn’s business?

LinkedIn is organized in 3 main revenue streams:

Talent Solutions
Talent Solutions is the most known of LinkedIn products, and potentially what most users associate LinkedIn with. Under Talent Solutions exist the opportunity for Companies to create career pages, post job ads and look for suitable candidates with LinkedIn’s recruiter software. Talent Solutions represent 63% of LinkedIn’s total revenue and can be defined as the Cash Cow.
Marketing Solutions
Marketing Solutions is LinkedIn’s ad service where you can buy text, display, InMail, and sponsored updates. An ad product similar to Facebook ads that allow clients to customize a message and display it on the site. The challenge that LinkedIn is facing with Marketing Solutions is LinkedIn’s limited repetitive page views that in comparison to Facebook or Google are relative low. In 2014, American users spend on average 42 minutes a day on Facebook, whereas LinkedIn was just 9.8 minutes (eMarketer.com).
Sales Solutions
Sales Navigator is the latest product in LinkedIn’s portfolio and to most people an unknown service. The product is utilizing data from LinkedIn’s 414 million members to generate valuable leads and assist sales staff prospecting. The product is still considered to be in its infancy stage and has received mixed reviews. However, there should be great potential for Sales Navigator being one of the key streams for revenue in the future.

From Job Search to Publisher

LinkedIn started out as an online network for professionals and have become the world’s leading portal for job seekers and recruiters. Talent Solutions has very much defined people’s perception and LinkedIn is now working hard to change that mindset to suit a broader value proposition.

People who is active on LinkedIn would have noticed a recent explosion in publications on LinkedIn. LinkedIn allows every single member to publish posts on his/her profile and lately LinkedIn has been hiring professional journalist from papers like the Financial Times and Huffington Post to enrich LinkedIn Pulse with professional content. This is all a part of a strategy to increase time spend on LinkedIn and transform LinkedIn from being perceived as a career portal to become a professional platform providing value on several different levels.

Where is LinkedIn headed?

LinkedIn has one of the world’s largest databases of professionals and LinkedIn has collected an unprecedented amount of data, which naturally can be utilized to offer a wide variety of professional service. Among these services is the Sales Navigator tool that opens LinkedIn to a whole new segment of clients.

What investors should assess when valuing LinkedIn is LinkedIn’s move into new and more lucrative customer segments. My belief is that the general perception of LinkedIn as a career portal is heavily mistaken and valuing LinkedIn with that mindset is potentially myopic.

Is LinkedIn overvalued or not?

LinkedIn closed at $114.35 equal to Earning Per Share (EPS) of $-1.29, which indicate that it might not be the most attractive investment available. However, considering that the stock was trading at $200+ last year and now is trading at half price, despite no operational changes at LinkedIn, might indicate that investors do not fully understand the strategic transition driven by LinkedIn CEO Jeff Weiner.

From a strategic position LinkedIn is currently only executing stage 2 of a 3 stage plan.

Stage 1 was to establish a member base of critical mass and ensure network effect, which LinkedIn achieved with its Talent Solutions products.
Stage 2 is to make LinkedIn widely valuable to professionals outside of job seeking and hiring. LinkedIn must attract more traffic and is with its services Pulse and Lynda competing in totally new territory.
Stage 3 is where LinkedIn will become profitable. Through professional services like the Sales Navigator sold to companies and enterprises. For stage 3 to succeed, Stage 2 must be a success. Only then will LinkedIn fully benefit from its 414 million members.