The other “Swiss” case that I teach, in addition to Swatch, is the Nespresso Story. Although, again, this case involves a new product, the Nespresso machine and its capsules, it also contains elements of business model innovation, imported by Nestle to the coffee industry from other spheres. Nespresso capitalizes on the well-known business model called razor-and-blade model, practiced for instance by Gillette: the Boston-based company has been selling razors at cost while making its profits on the blades. Other companies have used this strategy, such as printer firms, known for making their profits on the ink cartridges rather than on the printers themselves. Apple has applied this model “in reverse”, when through the creation of iTunes it made its iPod sales explode.
But who was the first one, the originator? A difficult question to answer in the business world, where imitation thrives in the same industry or across industry boundaries. In my genealogy of business ideas, I go back all the way to George Eastman. When he invented first the film roll and then the Kodak camera, he commercialized the new product with an astute and innovative business model: the camera was preloaded with film for 100 exposures, sold to customers, who then had to send the whole camera back to the company to have their prints developed, new film inserted, and the camera shipped back to the customer again (Chandler, 1977: 297). “You press the button, we do the rest” the advertising slogan in 1888 ran. Thus, Eastman figured a way for Kodak to have a continuous revenue stream, based not only on selling the new product, camera, but on supplying film and developing pictures for its customers.
Similarly, Nespresso sells its machine at cost, while making most of its profits on the capsules. An ingenious system, for which the first patent was deposited in 1974. Interestingly, it took the company until 1995 to break even on this R&D project, that first catered to the restaurants, then tried its luck with the office market, before turning to the households as the last resort to sell the new machine. Although slow, the success has crowned Nestle’s R&D efforts with this “skunk works” project.
Today, Nespresso faces new challenges, due to its success – imitation. It first started with Senseo, developed by Philips in 2001 for the mass-market, and has continued since, especially annoying for the Nespresso model being companies attempting to supply capsules that can be used with the existing Nespresso machines. For instance, banking on the Nespresso capsules being made from aluminium and not that environment-friendly, Ethical Coffee Company, led by one of the Nespresso’s own ex-employees, tries to sell recyclable capsules, while ridiculing Nespresso for going to court to try to stop them:
Who is right, who is wrong in this case? Difficult to decide, but the message remains clear: if successful, any innovator has to carefully consider and anticipate how to prevent imitators from appropriating value from the original innovation.