The Power of the Peripheral

Posted on Posted in Retail Marketing

One of the best retail ideas on the planet today owes a debt to a 19th century travelling salesman.

The concept I’m talking about is Nestle’s “Nespresso Boutique”, and the huckster was a guy named King C. Gillette, the eponymous founder of the Gillette Safety Razor Company. Gillette popularized the “razor and blades” business model, whereby you sell the razor cheaply, in order to make a healthy margin on the disposable blade.

Nespresso follows exactly the same model and to me it’s up there with Apple as an example of great contemporary retailing. In Nespresso’s case, the customer buys a handsome machine for a few hundred dollars or less, and then they keep coming back for coffee-filled aluminium capsules which each make a single-serve of premium brew. The machine’s manufacturer keeps the profit on the hardware, and Nestle makes their money (serious money) on the software – the pods. That’s the power of the peripheral.

You can buy Nespresso machines through a variety of retailers, but the full Nespresso experience is only available through their 220 “Boutiques” worldwide. In terms of location, architecture, visual merchandising and service, the stores strive to position the product as premium, and make the customer feel special. You’ll find Nespresso Boutiques in some of the most expensive retail strips in the world, including Pitt Street Mall in Sydney, Madison Avenue in New York, and the Champs Elysees in Paris.

The retail environments are both glossy and “clubby”, and make liberal use of the product in VM, building the pods into the fitout itself and featuring the packs in impressive “power walls”. Customers can sip coffee, purchase a unit, pick up pods or accessories and discuss the finer aspects of coffee culture with the staff.

Your initial purchase comes with a selection of 13 different “Grand Crus” coffee capsules (love the snobbery of that term), with blends like “Arpeggio”, “Volluto” and “Cosi”. You also receive a hard-bound booklet that aims to turn you into a Nespresso lifer, by inviting you to join the Nespresso Club. From that point on, you’re hooked into the system, and Nespresso is admirably agnostic about how they extract their money from you. Pick the channel that’s most convenient to you – web, phone, or Boutiques.

The value equation is incredibly clever too. Each Nespresso capsule costs about 70 cents. In terms of coffee and material cost, the amount is ludicrously expensive – about 7 to 8 times an equivalent fresh-ground product. But it’s about a quarter of the price of a coffee from a cafe, and when you take into account the added convenience and the appeal of the brand, it seems to be a relatively good deal.

Nespresso further enhances its brand image by using George Clooney as advertising spokesman, and sponsoring events such as the America’s Cup.

For retail observers looking for a case study that’s every bit as good as Apple, Nespresso is well worth studying. It’s also useful to consider how you might be able to leverage the “power of the peripheral” in your own retail business. What’s your “razor and blades” equivalent to keep customers coming back and generate recurring revenue?

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