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Brewing excellence, one cup at a time

March 10th, 2014

That’s the marketing slogan of Keurig the company (among others) that has created coffee pods they call K-Cups that allow consumers to enjoy a really good quality coffee beverage without having the skill expected from a trained Barista and, most importantly, it makes all this possible to quickly and conveniently do in their home or office.

Coffee_in_cupA brew of Keurig’s coffee costs 50 cents which is 10 times the cost of a traditional drip filter version. Nevertheless consumers are willing and happy to pay the premium because of the “speed and convenience” of the solution. Once again we see evidence that consumers look beyond the guts of a product itself to find value in what else it gives them – great taste, quickly and conveniently 24/7.  By innovating the way the coffee can be brewed Keurig made it possible for coffee to be re-positioned from being simply a commodity that is very difficult to differentiate to as product that solves a customer problem or offers a customer value.

However, although Keurig could see that value proposition it was worth more to a coffee roaster than to Keurig as a manufacturer so in the fullness of time Keurig was acquired by Green Mountain Coffee Roasters. In 2011 they formed a partnership with Starbucks who was once a competitor. In the first two years 850 million Starbucks K-Cups were sold and the market growth in single serve coffee was nine times higher than the regular coffee market.

There are several things to learn from this case study.

First, to break away from the “commodity” character of your product or service one strategy is to find a way to deliver it in a way that creates value in its own right. Importantly, that “value proposition” may not be something that keeps a customer awake at night e.g. I’m sure before the K-cup came along people did not feel the biggest life challenge they faced was brewing coffee but once the K-cup did come along they all of a sudden said “that’s so cool, I want that.” As Henry Ford and Steve Jobs famously said in their own words: “people don’t know what they want until you give it to them and then they can’t live without it.”

Second, when you find a value proposition that customers do recognize, the pricing leverage can be enormous. Some accounting practices really understand this and offer their clients a premium service protocol at a premium price for exactly the same product. This was discussed at the Disrupters Conference we sponsored and presented with the folk from Verasage last year – you can get access to all that content by clicking here.

While on this point it’s worth noting that a customer value equation looks like this:

Customer Perceived Value = [The pure utility value of the product received+ the experience value] divided by [The product cost +/- the cost of acquiring the utility and experience value]

The utility value in this case is the quality of the beverage. But it’s very important to note that on this dimension the quality is absolutely NO better than a beverage made with the same quality beans using a drip filter or french press so the essence of the customer value proposition is in the second part of the numerator of this ratio.

The experience value is the brewing 24/7 brewing convenience AND being able to give your guests a really high quality beverage quickly that is noticed and commentable ( a word I invented) – this is what Seth Godin in Purple Cow (and other writing) refers to as remarkable and Jonah Berger of Contagious fame would refer to as Social Currency (and Practical Value) – these are some of the things that make product go viral because these are the things that represent the real value.

So the big message here is this: when you can’t differentiate the product, differentiate the process by which it is delivered or the way it can be used by your customers.

Third, never ignore the possibility and value of collaborating with a competitor (i.e. GMCR vs Starbucks in the roasting space are head-to-head competitors) when there is a clear mutuality of benefit to be gained.

 

 

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