Business Model Innovation - Keurig’s C/OS “Coffee Operating System”
Last weekend, my wife made a convincing case for an interesting kitchen appliance – the Keurig Platinum Single Cup Brewing System. The device is really innovative – it brews a single cup of coffee, tea, hot cocoa or even iced coffee in less than a minute, using “K-Cups” that you load into the machine and discard after each use. It is easy to use, easy to clean, and looks really cool. And you can choose from a lengthy list of branded providers of beverages.
I was skeptical, arguing that we didn’t need yet another space-age kitchen appliance and that the TCO (Total Cost of Ownership) was very high. But she won me over with her arguments that convenience trumps TCO and a hot cup of on-demand Joe was well worth the financial sacrifice and shelf space. As I sip my cup of Newman’s Own Extra Bold coffee that I made on the Keurig, I must say that she was right, as usual. This machine is the greatest thing since sliced bread! The coffee comes out piping hot, it tastes great, and the kids love the fact that they can make hot cocoa in less than a minute whenever they want.
But what impressed me more than the device is the innovative business model that Keurig and its competitors (Tassimo and Lavazza, among others) have created. I call it “Apple iPod/iTunes meets coffee”. Let’s look at the similarities:
· Like Apple, Keurig began with the premise that, while coffee makers have been around for a long time, the customer experience of making a hot, consistent and convenient cup of coffee in the home leaves a lot to be desired. Coffee makers are difficult to clean, a hassle to operate, the coffee sits there and becomes cold and bitter, and it is difficult to figure out exactly how much coffee to put into the filter.
· Like Apple, Keurig created a superb end-to-end customer experience consisting of an elegant hardware device, single-use “K-Cups” and a comprehensive ecosystem of “content” from 13 branded beverage manufacturers. Further, like Apple’s proprietary AAC format, the Keurig K-Cups are not compatible with other systems.
· Like Apple, Keurig sells the hardware for a similar price point as the iPod ($199), and content at a similar price ($0.60 per K-cup).
· Like Apple, Keurig creates an “open yet closed” customer experience by allowing independent content providers to offer their own branded beverages, while maintaining tight control over the buying and brewing experience.
· Like Apple, Keurig has been able to convince all beverage providers to sell the beverages at the same price. Just as i-Tunes sells all songs at $0.99, all K-cups sell for $13.95 for a pack of 24.
· Like Apple, Keurig has created a number of accessories, including reusable filters, milk frothers, travel cups, etc. that it sells at healthy margins.
· Like Apple, Keurig has created a strong lock-in effect because of the investment that customers have made in its hardware and accessories.
All this allows Keurig to make a killing, first on the coffee maker and then on the K-cups. For my household, here is the stimated CLTV (Customer Lifetime Value), assuming a 36-month horizon:
· Coffee Maker: $199
· Accessories: $50 (we have already spent about $30)
· K-Cups: $6,000 ($0.60/cup x 10 cups/day x 365 days x 3 years)
That’s a CLTV about $6,150, assuming a 10% discount rate. And you thought Starbucks was an expensive habit!!
Here are the lessons to be learned from Keurig and its competitors:
· Even a commodity category like coffee can be reinvented by focusing on creating innovative solutions and an innovative customer experience.
· Business model innovation has far greater payoffs than product innovation
· There’s a lot you can learn about business model innovation if you look beyond your industry
Now, I wonder why P&G and Kitchen Aid haven’t thought about creating a “personal laundry system” or a “personal dishwashing system”. This could include appliances that would accept proprietary “pods” of Tide or Cascade that would be inserted for each load, and would take the guesswork out of doing laundry or dishes. If HP can make money from ink, Gilette from razor blades and Apple from MP3 players, what’s stopping other consumer packaged goods companies from using a similar “razor-razor blade” business model?
Subscribe to this blog's RSS feed
Yin and Yang (a Poem to end the Year)
in every dusk a new dawning
in every cloud a new lining
in every storm a new calming
in every winter a new warming
in every hurt a new caring
in every frown a new smiling
in every silence a new calling
in every crime a new forgiving
in every sleep a new awakening
in every shunning a new [...]
Words on Words - a Poem
Words are wings for ideas to take flight
Words are rays that bring feelings to light
Words are bridges that span heart to heart
Words are arrows that can tear us apart
Words are legacies we leave when we pass
Words are clothes for our naked thoughts
Words are a balm that can heal our sorrows
Words are paths [...]
4 Challenges in Customer Segmentation
Customer segmentation is probably the most important concept in marketing. But it is also one the most difficult to do well. In this post, I reflect on four key issues that marketers must address in their segmentation work:
Scope of segmentation – What is the appropriate scope at which segmentation studies should be conducted? Specifically, how [...]
A brief poem (on a Santiago - ORD flight)
Butterflies
My thoughts flit around
Like butterflies
On gossamer wings
Soaring on currents
Of glorious memories
Only to descend steeply
Into melancholy valleys
Pausing on a flower of love
To drink your heady nectar
Till it is time to move on
To lands unknown
And gardens unseen
To fly is to keep living
For thoughts want to be free
Like butterflies
On gossamer wings.
Marketing lessons from the Obama campaign
For students of marketing, Barack Obama’s campaign is an excellent marketing case study on positioning and messaging. Here are some lessons I take away from his campaign:
Focus on pain points: Successful marketers are very clear about the customer pain points that their products or services address. Apple improved the lousy experience of buying and [...]
Reflections on Obama
A new day dawns today in America as Barack Obama becomes the first African American president of the United States. This is a time for us to look ahead. But it is also a time for me to look back and to marvel at how far this man and this country have come in four [...]
Cooking - the engineering way
In recent years, I have become somewhat competent at cooking. I never paid much attention to my culinary capabilities in the past, but a change in my life circumstances made me try my hand at cooking. And it has turned out quite well. I receive lots of compliments about my cooking. So what’s my secret? [...]
A poem I wrote on a plane this week
Memory Lane
Today I walked down memory lane
Thought I’d visit with myself in the past
It had been a long time
As I rummaged through my mind
Dusting off cobwebs from what was
I uncovered a scene that lay forgotten
Faded and dimmed by passages of time
As I began to play it back in my mind
It slowly came into focus
I [...]
Musings from Mexico
I was in Mexico this week to deliver a public seminar on Marketing. My host was Seminarium Mexico - they organize top-quality seminars featuring faculty from leading business schools. In my conversation with the host and participants, it became obvious to me how quickly the financial markets crisis affected the Mexican economy, and how bad [...]
