Nespresso’s success is generally attributed to the installed based profit model. Buyers of Nespresso coffee machines are locked into Nespresso’s expensive coffee pods. Yes, this is true. But a look at their history suggests there is a bigger, often missed, element at work that explains their success much better. It integrates many of their other innovations into it, including the Nespresso stores. And that is innovating on customer relationships …
Packaging delicious coffee into pods that you can only use with their machines makes this coffee expensive, indeed. When 1 kg of decent coffee costs say $50, 1 kg worth of Nespresso capsules will cost you 5-10x more.
Locking others out by some 1000 patents to hold a quasi-monopoly (until recently) suggests the installed base business model is sufficient explanation for their success. But is this the real story behind Nespresso’s success?
By no means! It is missing the most crucial element of their success. Nespresso has invented their system in 1976 and for the following 10 years it was commercially a flop. So much that in 1986 the entire endeavour was about to be canned. But Nestle management was hesitant to write off the huge inventory of coffee machines. This would have affected their financial results more adversely than they were willing to accept.
So, they spun out Nespresso and appointed a new CEO. The Nespresso success story started unfolding only after this. But the main changes that the new CEO made were in relation to customer relationships. Thus, Nespresso used the installed base model for 10 years without success. Success came with innovating on customer relationships. This innovation tactic played a crucial role in Nespresso’s turnaround.
The real innovation was on customer relationships
The two biggest changes were on the target customer and the change to the customer relationships. Initially Nespresso machines were targeted to offices and restaurants. After 1986 this shifted to increasingly wealthier families and individuals. With this came a significant change to the customer value proposition.
The other significant change was how Nespresso defined their customer relationships. Some astute commentators point out the changes made to the sales channel.
At the time offices and restaurants were the target customer, Nestle had their sales reps managing the customer relationships. With the change of the target customer Nespresso had two choices. Given that Nestle sells almost all their products through retailers it was likely that they would do the same with the Nespresso products. This, however, would have surrendered the customer relationship to the retailers.
Nespresso decided to go a different way. In 1988 they started mailing their coffee pods to their customers directly. This was indeed a new sales channel, a new customer relationship model and an important part of the new Nespresso business model.
What better customer relationships can do for you
Nespresso created their club (‘Le Club’) with a 24×7 phone service line and benefits for becoming a club member (see below).
It pays to be precise on what is the key innovation. Nespresso could have used the new sales channel to just push out their product. But they have done much more. The sales channel itself is the mechanical part. The real innovation was how they used the channel (and the club) to foster valuable customer relationships.
Here are a some of the ways that Nespresso benefitted from these direct customer relationships:
- Provide better customer experience: improve tastes, machines & services based on feedback.
- Better customer service: due to the direct personal interaction (‘Le Club’).
- Increase customer loyalty: through more targeted promotions and unexpected rewards.
- Increase consumption: through timely replenishment reminders (crucial for installed based profit model).
- Customer retention: targeted discounts for people who haven’t ordered in a while.
- Improve customer advocacy: through personalised services and perks for referrals.
- Improve your R&D process: by prototyping new flavours on limited member base.
- Richer data: verbal feedback, when correctly evaluated, is more valuable to understand customers’ desires.
The new sales channel helped to nurture customer relationships, helped to increase sales and accelerated their R&D process.
The latter point is particularly important in the early days. Getting rapid customer feedback is a common theme in innovation, product development and start-up frameworks. Eric Ries’ ‘The Lean Start-up’ is one of many point this out. And most of agile methodology is about this point.
Your opportunity as innovator
There is an over focus on the technical aspects of Nespresso’s innovation, such as patents and processes. And an under-appreciation of the customer relationship aspects. This is good news for you. Innovating on customer relationships is still a field with many opportunities. You can have an innovation advantage in areas where others are weak.
Some of what Nespresso has achieved we consider as standard these days. A lot of the mechanics is done by loyalty programs, webpages and mobile apps. But Nespresso understood the value of this 30 years ago – well before the word “app” even existed and direct customer relationships were in the hands of large retailers (at least for consumer goods).
Encouraged by the success in this field Nespresso have been fostering direct customer relationships relentlessly. Opening 250 Nespresso stores is one recent example for this. At the same time many industries have to yet catch up on what Nespresso achieved 30 years ago.
How does it stand in your industry?
Infographic + worksheet to download & share
Take action now & boost your innovation skills:
- List your companies key offerings. Which of the above ways to relate to your customer do you use and which ones are new opportunities?
- Come up with one idea for customer relationship innovation in your company. What would be its benefits?
This article by Murat Uenlue is licensed under a Creative Commons Attribution-ShareAlike 4.0 International License.
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