Nespresso has done an interesting thing. I’m not referring to changing the way we buy coffee, although that is true. Or by making us spend more on coffee, which is also true. The one thing that stands out to me is how they have taken two standards, unexciting production models, those of selling coffee and of selling hardware, and turned them on their head. They’ve switched out the business models for each and changed the way they do business.
Let’s look at the two parts as we are used to seeing them:
1) Coffee Machines
This is the thing you make your coffee in - from a plunger to a full ‘grind your beans, put the grinds in a pressurised machine and express your coffee’.
Normally, once the machine has been sold the transaction is over, until five or more years down the track when you need to buy a new machine. These machines are made and marketed by manufacturers and sold via appliance stores, like most appliances. For the top end machines, these are sold via distributors.
This is the fast moving consumer goods (FMCG) flavour part of the coffee making marriage. It is sold by the bean, grind, instant, or those sachets that make a fluffy coffee. These are sold at supermarkets or coffee bean specialists and rely on the best shelf positioning for them to sell.
So what has Nespresso done that’s different? Most people view of being in the business of 'coffee machines’. We refer to the machines as 'Nespresso’s. However, Nespresso doesn’t actually manufacture machines. They’ve spread this between Breville (a known home coffee machine manufacturer), and DeLonghi (a known appliance manufacturer) - and worldwide, also Krups and Magimix. So by the time the manufacturer has made these, you can see there is not much room for Nespresso to make a lot of money on them compared to if they’d manufactured the machines themselves.
These machines are available for purchase directly from Nespresso, but also from appliance retailers.
Let’s talk about the other side of the business, the coffee. The only way to buy Nespresso coffee is through their own retail chain! Either through their online store or by going into a Nespresso store. Each 'coffee’ serve (or pod), is $1, and you can only buy them in lots of 10. So the minimum purchase for any customer is $10. But, because you have to make a special trip - online or to a physical branch - you’re going to stock up. In fact, for 'mailing purposes’ you have to buy a minimum of 50 coffee serves online. That’s now an average spend of $50!
Why do we keep buying $1 coffees that we drink at home?
You can have the option of buying 'other brand’ coffee pods, and many people will take that option. But the quality of the Nespresso coffee pods and the choice they give in flavours, married with the buying experience of going into a Nespresso store keeps the customers coming back. The packaging is beautiful, and the experience of cracking open a sleeve of pods, and popping a pod in the machine surpasses the feeling a no-name pod can give.
The price point is interesting as well. We can justify our spend by comparing it to a cafe coffee, it’s one-third to one-quarter the price of a cup of coffee. It’s also consistent, so we know what we’re getting, so as a consumer the price objection can be overcome. They make sure it’s not compared to an instant coffee, that’s for sure - making it all about controlling our perspective.
How can you make your company better through letting go of parts of your business, while strengthening control of other parts?
The first step is to get an outside perspective on your business. Then through a little bravery, and some business modelling before you make any changes in your business can help ensure that you have a plan, know that it should work and identify any parts that just don’t fit.
Take a look at the business model canvas below for Nespresso, and witness how simple it is. For those of you that are not familiar with this type of business modelling, contact us on the form below. We can walk you through it, and also help you see how this tool could be applied to your business.