Differentiating a Commodity

Volume 12 Letter 8

You can purchase it in 16 flavours, it comes individually portioned and it’s a 3.2 billion dollar a year business for Nestle. We’re talking about the Nespresso coffee business that uses George Clooney as its spokesperson. Selling to both individuals and business customers, Nespresso is Nestlé’s fastest growing business unit. According to Nestle, these premium priced coffee pods deliver the perfect cup of coffee every time.

The Nespresso machine that dispenses the Nespresso coffee is widely available through many retail outlets. Of crucial importance, the coffee that goes in them isn’t. Coffee capsules can only be purchased on-line or through one of Nespresso’s 215 high end boutiques worldwide. To bring in clients Nespresso heavily promotes a lifestyle associating the product with an exclusive club of like-minded coffee connoisseurs. So if you really want to know what George Clooney lives like you need only buy into the Nespresso experience. While the experience doesn’t come with an invite to George’s Lake Como estate or a ride in his classic wooden motor boat you can at least drink the same coffee.

As we all know, belonging to an elite club does come at a price and since the Nespresso machines accept only the patented coffee pods, the coffee itself sells at a significant premium. It gets even better. Because it really is a club, members must register to get more coffee allowing Nestlé to constantly collect data which is used to further segment the market and build stronger relations. Benefits to club members include a range of services from easily re-ordering coffee, receiving “coffee news” ( I can’t imagine), to getting advice from coffee experts. Of course the real brilliance in this is that Nestlé has convinced customers to purchase coffee directly from the company, at elevated prices, while getting them to by-pass the grocery store thus eliminating the outlet margins.

Even as my cynicism leaks through one must admit this approach of differentiating a cup of coffee is unique and very profitable. Turns out that being part of an exclusive family also creates very positive word of mouth. In Nestlé’s case, 50% of new Nespresso users experience the brand through an existing club member. Cynic or not you must appreciate what they’ve done. What can we learn from the exclusive club that is Nespresso?

  1. People want to belong: Premium products can attract people who like being part of an exclusive club. Are there products in your portfolio that could bring exclusivity?
  2. Exclusivity builds word of mouth. 50% of Nespresso’s customers are word of mouth converts
  3. Data is king: savvy companies like Nestle / Nespresso are collecting data in unique ways such as through clubs to get closer to their customers’ needs.
  4. People will pay for exclusivity: customers seek the provider who differentiates on both product quality and service.

Building a 3.2 billion dollar per year business in a commodity market is no easy feat. Nestle has differentiated a commodity with service and advertising (life style) – what can you do to differentiate your products?

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