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Nespresso’s new business model is outstanding

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Peter Thompson

In business we are usually trying to find new ways to cut costs and have services or products that are not entirely a commodity solely traded in price. How about if you could drastically increase the margin you make on a product bypassing all third party sales channels and reposition a global industry all in one hit? This article looks at the launch and execution of Nespresso.

It’s not actually the Nespresso coffee I want to highlight in this article because it basically didn’t change, but, wow, their entire business model did and for mine it almost achieved a magnificent transition with full marks on so many different layers.

I am not the greatest fan of super large companies, but Nestle sure got it right with this new improved business model. I don’t think they by any means invented the combination of the dedicated coffee pods because I am sure that Philips beat them to it, but the execution is pure beauty.

Let’s take a look at some of the strategic moves that took place…

Firstly, Nescafe was the primary Nestle coffee. It’s an ordinary instant coffee that can quickly be prepared at home or work. It is efficient and easy, but by no means a premium product. It is distributed via retail outlets. No doubt, Nestle has achieved excellent market penetration with their instant coffee, but where the new Nespresso is going is just pure business brilliance.

I was recently in Andrassy Avenue in Budapest. For those who don’t know, it’s a beautiful street in Hungary where many of the world’s top brands sell their merchandise. But, the one store that had a line of people queuing out the door was Nespresso. Yes, a coffee retailer. It reminds me of the top Apple retail stores that are simply full of people all day long.

The introduction of the personal espresso machine and the coffee pads delivered a very simple and clean coffee making process that is fast with an excellent result. Nespresso took this a few levels further with sexier machines and a large range of different pods that can be bought in packs of ten allowing consumers to select coffee from all around the world. Additionally, they regularly introduced new coffee pods and allowed the consumers to try a new taste with any in store purchase.

The company managed to lock in the technology so that the coffee pods can only be purchased directly and only work in approved machines ensuring that the quality of the coffee can be maintained. It also locked up the buying cycle. They don’t discount coffee pods irrespective of how many you purchase.

Having a dial-in number where coffee can be ordered online and delivered straight to the consumers door is yet another of the service enhancements. The only way to order the coffee and have it delivered is by providing the serial number of the Nespresso machine. Amazing, they know exactly how much coffee each owner consumes. I have heard of stories in the Netherlands that once someone consumes enough pods, Nespresso sends the consumer a new machine for free, allowing the consumer to give their old machine to someone else. An entirely new sales relationship is born.

Nespresso marketing created feeling and emotion. They generated experience. They moved the product from the supermarket shelves to the top high streets and shopping centers around the world. Inside of their stores are well dressed, polite, young and energetic sales people. After a purchase, the consumers move to a coffee counter for a free new coffee. By introducing George Clooney among others to represent the brand they brought class and association to the entire Nespresso experience.

From a business perspective, one of the most interesting decisions was changing the entire business model to dealing direct with the end consumer and bypassing the retailer. This was an absolutely brilliant move because it allowed Nespresso to have a direct relationship with the consumer. Removing the third party retailer whilst increasing the average price of the coffee by around four times the price.

The Nespresso business model is simply beautiful and brilliant. I truly commend everything that they have achieved and even though they obviously have extremely deep pockets under Nestle, it just shows what can be achieved even in modern retailing.

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About Peter Thompson

Peter Thompson
Peter Thompson founded GCOMM in 1996. He received his Bachelor’s degree in Software Engineering/Information Systems from Griffith University and his MBA from Nyenrode Business Universiteit in Holland. He believes in building great teams of people, both in business and socially.
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