Nespresso Case Study

1. a) How did Nestle position Nespresso when it was launched in 1986? Who was the target customer?

When Nestle launched Nespresso, in 1986, it had a different positioning and targeting than the one it has today. Nespresso was targeting other companies with offices, its coffee machines were designed to serve as office coffee machines. Nespresso’s first coffee machines were larger and bulkier than the ones it produces today. Nespresso was designing its coffee machines to specifically target businesses with offices operating in Switzerland and Japan. On the other hand, Nestle positioned Nespresso as an office coffee company for a certain user group, companies, and Nespresso’s coffee machines were positioned as high-quality coffee makers.

b) What transformation did Gillard bring about when he took charge of Nespresso?

When Gillard took charge of Nespresso, he started transforming it from a company that produces office coffee machines to a company that sells luxurious coffee machines to households. As a result, Gillard worked hard to transform the coffee machines from big machines that take a lot of space, to smaller and luxurious-looking coffee machines. Gillard reduced the prices of the coffee machines and he granted licenses of production to other companies in return for money. Coffee machines were produced in partnership with other brands, which resulted in higher brand awareness in the market. Gillard increased the prices of Nespresso’s coffee capsules used for its coffee machines. Gillard was trying to use the razor blade business model, which is a profit model innovation. For instance, Gillard’s goal was to generate higher revenues from the coffee capsules, this is known as the captive pricing strategy. In other words, Gillard changed the positioning of Nespresso and its target customers. Gillard’s vision for Nespresso was clearly different from the vision it had before his transformations started taking place in 1988. Gillard wanted Nespresso to be at home, he was targeting coffee lovers who want to have a prestigious style of preparing their coffees. Gillard made Nespresso a company that sells small and appealing coffee machines that make coffee in an authentic, fancy, and luxurious way.

2. a) Profile a Nespresso consumer in the ’90s and 2000s based on their characteristics, motivations, needs, goals, etc. Discuss how Nespresso fulfilled the needs of such a consumer.

Nespresso consumers in the 1990s and 2000s do not have many differences; instead, their consumer behaviour is considered to be quite similar to one another. For example, a Nespresso consumer is a coffee lover who, possibly, enjoys having coffee in the early morning. In a study, Pet et al. (2009) found that 40% of coffee drinkers drink their coffee at home. This is why a Nespresso consumer is probably one that enjoys drinking coffee at home. The goal of having a coffee machine, such as Nespresso’s is to save time; for instance, saving time is a need for many people. The best advantage perceived by Nespresso’s consumers is the ability to prepare their favourite hot espresso shots at home within the shortest period.

People that want to drink espresso in the early morning at their homes, before going to work, want an easy way to prepare their espresso drinks. Nespresso has helped these people do so using its coffee machines and coffee capsules. Nespresso was designated to fulfill the needs of working consumers in other organisations. For instance, Nespresso’s coffee machines were mainly used by other business organisations. Employees within these organisations were using the Nespresso coffee machines to prepare a small shot of espresso. Meanwhile, Nespresso’s consumers might have slightly changed throughout the years. However, Nespresso’s consumers’ main needs and goals did not change much. Nespresso’s target market might have expanded throughout the years, and this is because of the world economic changes and the company’s noticeable shifts in its strategy.

b) Imagine that you are the product manager of Nespresso in the early 2000s. Create a positioning statement and positioning map(s) for Nespresso.

Positioning Statement:

For those who want a whole new level of coffee experience, Nespresso provides coffee drinkers with a professional way of preparing their espresso drinks within a minimal amount of time in their homes, creating an authentic experience and taste.

Positioning Maps:

If I were a product manager at Nespresso between the 1990s and early 2000s, I would have a positioning map that has other coffee shops. Nespresso was the company that revolutionised the coffee machine market, and there were no real competitors within that market. I would view other coffee shop brands, that serve espresso drinks, as the real competitors. Consumers in the early 2000s would substitute Nespresso’s espresso drinks with an espresso from Starbucks, for example. Nespresso’s real product managers might have not viewed other physical coffee shops as their competitors, and they could easily positioned their brand better because they had primary research to analyse their market.

3. a) What type of pricing strategy did Nespresso initially adopt? What are the pros and cons of such a pricing strategy?

Nespresso adopted a captive product pricing strategy. Nespresso was trying to generate the highest possible revenues from its continuously purchased coffee capsules rather than from its core product, the coffee machines. This type of pricing strategy has both pros and cons, here are some of the pros and cons:

Pros:

- Attracts more consumers to purchase the core product.

- Consumers might perceive it as lower lower-priced coffee machine, ignoring that it is expensive over the long term.

- Consumers will become more loyal to the brand, and they will be encouraged to buy from the same brand’s accessories (Henderson, 2020).

- Higher revenues from the consumption of captive products, which are the capsules.

Cons:

- Consumers might purchase captive products, for a cheaper price, from third-party producers.

- Not enough revenue from the core product to generate high profits.

- The company will have to upgrade and offer new captive products continuously to satisfy its consumers (Henderson, 2020).

- Consumers might become unsatisfied with the concept that they need to continuously purchase captive products (Henderson, 2020).

Nespresso might have chosen to adopt the captive pricing strategy because it might be the best pricing strategy possible for Nespresso’s nature of products.

b) Imagine you are the product manager of Nespresso in 2012. What would be your response to the impending influx of third-party capsules in the marketplace and why?

As a product manager, I would be disappointed by having third-party capsules in the marketplace. However, since Nespresso’s patents expired, I cannot do anything to force third-party capsules to leave the marketplace. Instead, I would have multiple options to respond to their presence by taking several steps. First, I would respond to them by differentiating Nespresso’s capsules in the market, and I would convince consumers that they have an authentic taste that is not provided by other capsules. By doing so, more people might be attracted to the brand itself, Nespresso, and that would lead to consumers’ brand loyalty. Another thing I would do is update the core product, coffee machines, and its captive products, capsules. This will demotivate third-party capsules on continuously producing capsules that fit Nespresso’s coffee machines. As a result, they would either be producing capsules for outdated machines or exiting the whole marketplace.

A major change that I might make is to get rid of the whole capsule concept for Nespresso’s coffee machines. Coming up with a whole new core and captive products would grant Nespresso patents for several more years. The patents will again protect Nespresso for several years against third-party captive product producers. Away from product adjustments, I would focus on enhancing the customer service experience provided to the consumers. For instance, I would create an authentic experience for consumers in which they would only want to purchase Nespresso’s captive products. I would create a smart system connection between an application on consumers’ smartphones, the coffee machines, and Nespresso’s databases. Instead of purchasing online or having to make an order, the coffee machines can automatically order capsules for consumers once they’re almost out of capsules. Focusing on enhancing Nespresso’s services would attract consumers to experience Nespresso’s outstanding products.

4. Refer to the academic literature on celebrity endorsements and critically analyse Nespresso’s decision to use George Clooney as an endorser for the brand.

Many marketers choose to use celebrities as endorsers, in other words, sponsors to promote their brands. Kotler et al. (2005) suggest that marketers should be very cautious whilst choosing the celebrity that will endorse their products. In other words, marketers should consider the long-term outcomes of their brand’s endorsement rather than thinking of the short-term benefits. Kotler et al. (2005) mention that Kobe Bryant, the basketball player, endorsed Nike, and he was accused of sexual assaults later on. Indeed, marketers did not know that Kobe Bryant would be accused of sexual assault, and this is the dilemma of using celebrity endorsements. Similarly, with Nespresso, Nespresso’s marketers can never know whether George Clooney would end up being a good addition to the publicity of the brand or whether he would hurt it.

People would prefer to buy a product from an endorsed brand over another just because they think that this product will be purchased more by other individuals, and this is why marketers adopt the endorsement strategy (Clark and Horstman, 2003, cited in Sharma and Kumar, 2013). With all that being said, Gaillard was not convinced that Nespresso should use a celebrity to endorse its brand. Olenski (2016) says that endorsement on its own would not make a brand succeed, instead, marketers should focus on other aspects of the product and mostly its price. Gaillard was against endorsement because he thought that this method promoted both Nespresso and Clooney, which is true. For instance, Nespresso paid Clooney to promote its product, but Clooney promoted himself too and became more known in return for money. Kraft (2018) discusses that this is a drawback of endorsement, in which the celebrity could overshadow the brand.

Clooney had perceived a benefit by endorsing Nespresso’s products, Clooney made more than forty million US dollars from the endorsement of Nespresso (Heilpern, 2016). Heilpern (2016) discusses how a competing brand, Espresso Club, made an ad with a man who looks very similar to Clooney to promote its products. These kinds of incidents are the con of using a celebrity to endorse products. However, that does not mean that Nespresso should have not used Clooney to endorse its products. After Clooney endorsed Nespresso’s products, Nespresso’s sales increased by 22%, and it made very high revenues just after its first ad. As a result, Nespresso’s marketers made a good choice that generated high revenues.

5. Nespresso currently faces two big issues — consumers’ changing coffee-consumption habits as well as their greater concern for the environment. If you are the present product manager of Nespresso how would you address these issues and why?

Hunt (2015) reports that the sales of Fairtrade coffee beans have grown by more than 250% between 2004 and 2014. This shows that coffee consumers are becoming way more conscious about the impacts of drinking coffee on the society and environment. Blacksell (2016) says that the consumers’ biggest concern is how fairly and environmentally friendly the coffee beans have been made. If I were to be Nespresso’s product manager, I would ensure consumers that Nespresso uses Fairtrade coffee beans for its products and stress that in advertisements. I would try building a service experience that would motivate consumers to consume Nespresso’s products more often. For instance, I would build a service environment that encourages consumers to purchase more coffee. For example, develop a mobile app that can reorder the capsules automatically for consumers once they are running out of capsules. This service system would tackle the consumers’ changing coffee consumption habits.

Another thing I would develop is an environment-friendly coffee machine, and promote how much energy the machine would save. Energy-saving coffee machines would help Nespresso gain a good public image and promote outstanding products. I would try to reduce the amount of plastics in the capsules so that I gain consumers’ trust. Again, I would create a service in which consumers can take free capsules in return for recycling a certain amount back to Nespresso. Recycling requests can be done using the mobile app, and then points for free capsules would be redeemed. Finally, a drastic change that I might take is shifting the whole product. For instance, I would eliminate the coffee machine and capsules concept. Only a certain percentage of the capsules will be recycled whilst the rest will be harmful to the environment. In conclusion, I would come up with alternative coffee machines that work using glass fillers, and all consumers have to do is buy these glass jars and place them on the coffee machines. By doing so, consumers could be given an alternative to the capsule coffee machines.

References:

Blacksell, G., 2011. How green is your coffee? The Guardian. Available at: https://www.theguardian.com/environment/2011/oct/04/green-coffee [Accessed April 2021].

Grant, T., 2020. A Brief History Of Coffee Pods. Perfect Daily Grind. Available at: https://perfectdailygrind.com/2020/08/a-brief-history-of-coffee-pods-nespresso-keurig-capsules/ [Accessed April 2021].

Heilpern, W., 2016. Nespresso is suing a coffee rival for using this George Clooney lookalike in its adverts. Business Insider. Available at: https://www.businessinsider.com/nespresso-sues-for-clooney-lookalike-2016-1?r=US&IR=T [Accessed April 2021].

Heilpern, W., 2016. Nespresso is suing a coffee rival for using this George Clooney lookalike in its adverts. Business Insider. Available at: https://www.businessinsider.com/nespresso-sues-for-clooney-lookalike-2016-1?r=US&IR=T [Accessed April 2021].

Henderson, C., 2020. Captive Product Pricing- What Are the Pros and Cons? Zip Ordering. Available at: https://zipordering.com/pricing-strategies/captive-product-pricing.html [Accessed April 2021].

Hunt, T., 2015. Drinking an ethical cup of coffee: how easy is it? The Guardian. Available at: https://www.theguardian.com/sustainable-business/2015/may/29/drinking-an-ethical-cup-of-coffee-how-easy-is-it [Accessed April 2021].

Kotler, P. et al., 2005. Principles of marketing 5th ed., Pearson Education Limited.

Kraft, K., 2018. The Pros and Cons of Celebrity Endorsements. Baer Performance Marketing. Available at: https://baerpm.com/2018/01/02/pros-cons-celebrity-endorsements/ [Accessed April 2021].

Olenski, S., 2016. How Brands Should Use Celebrities For Endorsements. Forbes. Available at: https://www.forbes.com/sites/steveolenski/2016/07/20/how-brands-should-use-celebrities-for-endorsements/?sh=1215acbe5593 [Accessed April 2021].

Pet, E. et al., 2009. Research Concerning the Behaviour of the Coffee Consumer.

Sharma, K. & Kumar, S.S., 2013. CELEBRITY ENDORSEMENT IN ADVERTISING; CAN IT LEAD TO BRAND LOYALTY IN THE LONG RUN?