Everyone knows Nespresso as a consumer product, but few know Nespresso for the incredible business journey that changed the Nestlé Corporation forever.
There’s a lot to unpack and to learn from this brand and in this post, we’re going to delve into it and find out all that Nespresso can teach to luxury companies.
Switching from Producer to Retailer
Before Nespresso, Nestlé, the parent company, had little if any experience with retail distribution. Most of Nestlé products were in fact sold through national and international distribution chains managed through Business to Business relationships. This was often the case as fast-moving consumer goods are sold through intensive distribution strategies.
Because of this practice, it is only natural that the first strategy to sell Nespresso was based on a B2B model where Nestlé would sell high-quality coffee through vending machines in office buildings.
There was also another reason for Nestlé to approach this distribution strategy, and it had to do with the way Nestlé saw this product.
The company was in fact, focused on the functional value that Nespresso brought to customers.
However, in reality, there are three distinct values that products bring to market, which we could summarise as:
- Functional jobs, as in solving a material problem.
- Social jobs, as in owning goods which are indicative of social status.
- Emotional jobs, which provide us with particular emotional feedback, such as entertainment, excitement, or thrill.
Nespresso marketers focused mostly on a functional benefit: the benefit of not having to leave the office in order to have good quality coffee. Having good coffee at the office would also help companies create a more productive environment for their employees.
In reality, this approach ended up being a complete failure. No office manager wanted to get the Nespresso vending machine as employees have coffee, not only to enjoy the drink but to take a break and enjoy a little fresh air.
Once Nestlé understood that functional values were not going to sell Nespresso, it had to reinvent a strategy from scratch and realize that the only other feasible approach was one based on delivering an emotional value. This required a complete redesign of the product’s distribution approach which had to switch from Business to Business to Business to Consumer.
Moreover, the experience of the first failed launch made the company realize that in order to be successful in their second attempt they did not only have to think about the product or value to the consumer but to a whole series of decisions connected to identifying a new target customer, developing the right distribution strategy, identifying the right customer relationships and setting the right price.
In one word, they had to develop a Business Model for the new Nespresso.
We’ll explore Nespresso’s Business Model in the next part of our post.
Building a Unique Business Model for Nespresso
In order to enhance the value connected to the product, Nestlé had to completely reimagine its market strategy. To discuss it, we’re going to break it down into 5 sections, following the structure of the Business Model Canvas.
As discussed in the previous paragraph the value brought to market is now experiential and emotional, connected to coffee connoisseurship and to the appreciation of a broad variety of coffee types and origins. Nespresso is like the coffee you would drink at a poolside table when you’re hosted by George Clooney in his Italian villa overseeing Como Lake.
The target customer for Nestlé are not business establishments but pretty much now anyone who appreciates good coffee. You’d ideally want to experience coffee in style, as a daily luxury that relaxes and energizes you. The product needs therefore to be sold at an affordable price, as it needs to be accessible. Customers should not worry about the cost, because they deserve a little luxury treatment every day.
Customer relationships are formal yet friendly, through the Nespresso Card any Nespresso store knows your preferences and will be happy to serve you with your favorites. A tasting table will allow you to experience different varieties of coffee in-store and find the one that you may prefer. The retail experience is meant to educate and inform customers so that as they keep experiencing different blends, they truly become coffee aficionados.
This is the most remarkable change in respect to the previous approach. Nespresso is sold through vertically integrated, company-owned stores which are located in high streets and popular parts of the city. Through this approach, a high-end retail experience can be delivered through the relationships that staff and customers are able to foster.
As mentioned above, the pricing strategy was based on the idea of creating synergy. From one end the coffee machine would be sold at a very low-profit margin to encourage adoption. This would allow the brand to create a hard lock-in, making customers more loyal, as they now get to buy the Nespresso machine and take it home.
Once the habit to have coffee with Nespresso has been developed, then customers will acquire Nespresso capsules directly from Nestlé paying a higher price and providing a very high profit margin.
This approach turned out to be a huge success, making Nespresso the popular global brand it is today.
Nestlè however developed more than one product based on the Nespresso technology but realized that to be successful, it had to make sure that each product would be differentiated on all of the 5 accounts discussed in this section of the post.
That’s why it went ahead to develop a Business Model Portfolio comprised of one different business model for each of the products it sold.
Developing a Business Model Portfolio and Luxury
This is when we can start drawing multiple connections between Nespresso and the luxury industry.
A Business Model Portfolio suggests how a company may not necessarily be luxurious in all of its value propositions. It can be possible to offer products that satisfy functional needs, at a lower price, social needs at an intermediate price, and emotional needs at a higher price.
All of these products, managed through a different business model, can coexist and the fashion industry is full of examples that can show how luxury collections, mid-tier collections, and commodities can all safely coexist within one brand.
An example of this is brought by Giorgio Armani who developed its collection making sure all of them would be differentiated in terms of value, target customer, price, distribution, and shopping experience. Here’s a breakdown of Armani collections to shows these elements of differentiation among them.
- Giorgio Armani Privè. This is the haute couture collection (shown in Paris) which has only one womenswear collection per season.
- Giorgio Armani. This is the top line, also known as the black label. This is sold only in mono-brand stores and each season there is a man and woman collection.
- Armani Collezioni. This is the so-called white label. This collection has a lower cost of the top line, but it still features the brand’s stylistic identity by being elegant and classic.
- Emporio Armani. This is the young and trendy line, it’s sold in mono-brand stores and multibrand stores, this collection is also designed in one man and one woman collection for each season.
- Armani Jeans. This is the denim collection, it is sold mainly in department stores. this collection is also designed in one man and one woman collection for each season.
- Armani Exchange. This is the most affordable line, with collections continually renewed based on the fast-fashion formula, this collection is also sold through the website.
There you have it. We have analyses Nespresso’s “go-to-market” strategy and learned a lot of notions that perfectly apply to luxury goods.
We’ve covered a lot of material, it’s now time to move towards our conclusive remarks.
There you have it! In this post, we’ve looked at how Nestlé as a mass-market producer evolved into a high-street retailer after having learned what value the product had to offer to its customers. Despite initially focusing on offering functional benefits, the brand soon realized that the Nespresso technology had an opportunity to focus on emotional benefits, as a daily luxury experience.
This insight pushed the company to design a fully-fledged business model around Nespresso so that it could better emphasize the desired customer experience of purchasing and owning the product.
At the same time, with a stroke of genius Nestlé realized how even if it had other products based on similar technologies, each one had to be brought to market with its unique value proposition and business model, therefore realizing that value, price, customer relationships, distribution channel and customer segments are closely entwined.
We can see how many brands have learned from Nespresso the benefits of a Business Model Portfolio and have been able to develop tailored marketing strategies to provide luxury, emotional experiences to their customers.
Examples include Giorgio Armani who has used the Business Model Portfolio to create multiple collections each distributed and communicated according to the value offered to the customer.
An example of luxury distribution as a means to enhance the product experience is instead offered by Nike and their approach to distributing limited-edition sneakers using collection drops.
There you have it. We hope you have enjoyed our post. Feel free to navigate our blog section to discover other resources in fashion marketing and luxury marketing. Enjoy!