The Rise and Fall of Nespresso: Meeting Customer Needs

Deborah Mills Scofield
Deborah Mills Scofield
August 7, 2023
4 min read

Have you heard of P&G? They’ve done an excellent job of creating compelling value propositions over their almost 200-year-long history. One of their most well-known products for the last 77 years, Tide, reached its peak in the late 1990s. They have always been industry leaders. Even if you use products from other brands for your laundry, you definitely know Tide. Many of you have probably compared Tide to other laundry products when deciding what to buy. That’s part of the definition of market leadership - when your product is the standard by which other products are judged.

Since Tide had been in the market for decades, P&G has experienced many shifts and transitions in the market and consumers. So how do they master their product market fit strategy to continually stay on top? By constantly trying to understand real customers’ real needs from multiple angles with multiple market research methods.

P&G gathered insights with focus group.

For decades, P&G used focus groups as a key method for market research. They’d get a bunch of their customers together and ask about a specific product, category or customer need. In the 2000’s, when they were doing a focus group on Tide, P&G learned that people wanted to wash clothes in cold water to save energy and money. Voila, in 2005, when they got the formula right, P&G launched Cold Water Tide, which was a big success.

P&G shifted to directly observing customers.

The focus group inspired P&G to find out more details about customers. Instead of just listening to what the customers had to say, P&G's CEO made a controversial decision to have their team directly observe people doing laundry. Why was it controversial? Because, at the time, many of the team members thought it was a total waste of time. They wanted to spend their time on product development and not watch people doing laundry. And guess what, that bet on observing customers paid off in a big way. The team uncovered a tiny detail that became a pivotal turning point in their product market fit strategy, which led to a big jump in sales of Tide.

P&G found a tiny detail that shifted their strategy.

When these P&Gers delved deeper into the daily routines of their customers, they saw that putting the cap back on the bottle made a huge mess for customers. This problem was so trivial that the focus group didn’t even mention it. That's why it's so important to test from different angles using different testing methods. It's hard to predict whether customer observation will yield better result than focus group. Isn't it fascinating to see how a simple observation can drastically strengthen the value proposition of a product?

P&G didn't rest on their laurels.

P&G didn't just settle for being the best in the industry. They could have easily continued improving the scent or formula of their products, but instead, they took a different approach. By observing and listening to their users, they were able to shift their focus to the user experience. And it certainly paid off. Once they observed the soapy dripping mess, they discovered a problem that users hadn’t truly realized they had. By finding users' problems before the users and competitors, they were able to stay ahead of the game. But here's the thing - users will pick and choose what problem is worse for them at that point in time, and they may not even be able to tell you which one is the one they really want solved. So, it's up to you to get out there, observe and find the real problems that need solving. Because when you do, you'll avoid the risk of disruption.

Did P&G's approach pay off?

You bet! They redesigned the bottle and patented the cap, and Tide was flying off the shelves. However, their patent only protected the innovation for a limited time before their competitors found ways around it. Even though P&G remained popular with customers, the value proposition didn't do enough to retain all their customers. When people were presented with other options, they were more likely to choose cheaper brands, just as we saw happen during COVID and the rise of inflation. As a result, P&G's product market fit shifted as they needed to find other compelling add-on value beyond their initial innovation. So, the lesson here is that you should always be looking for ways to improve your value proposition, anticipate and exceed customers’ expectations.

Many other companies have conducted this type of bottoms-up market research.

Did you know that Starbucks uses ethnographic research to understand customers' behaviors and desires? They are not just observing how customers order, but what they are doing before and after they order. This approach led to the development of Starbucks' Mobile Order & Pay feature, which allows customers to grab their coffee and go.

Have you ever thought about the products you use in your everyday life and how they solve problems for you? It's easy to take them for granted when they're so integrated into your daily existence. If you take a closer look, you'll see that successful products all have a unique value proposition. Besides Tide, P&G has created many successful brands such as Olay. By observing and addressing their users’ pain points, P&G has continued to deliver compelling value propositions to its customers.

What is a value proposition?

A value proposition is the fundamental benefit your product or service provides customers that sets it apart from others and convinces them to choose your product. It is the answer to "why" customers should choose you instead of the competition. Sometimes, your key competitors are more subtle, like “doing nothing” or settling for “good enough.”

Therefore, it is critical to validate and continually evolve your value proposition. What do you offer that gives customers value, meaning, and worth? Do you save them time, money, and effort? Do you provide convenience, help them stay safe, or feel important? Do you do it well enough for them to pay for that value?

Without a value proposition that provides compelling value to your customers, your product, service, or business won't last long. Consider some products, services, or companies that have disappeared and why they failed.

How can you create new customer demand?

Coffee is a daily staple for many people, but have you ever stopped to think about how the coffee industry evolved to become what it is today? Let's take a closer look at one of the biggest players in the game: Nestlé.

During World War II, Nestlé developed a new type of instant coffee called Nescafé. Its convenience and long shelf life made it popular among troops. After the war, the convenience of instant coffee made it a popular choice for households, and it gained widespread adoption.

After training the market to like instant coffee, Nestlé wondered whether they could create another demand. However, since instant coffee didn't taste very good, Nestle was looking for a solution that would provide a better taste with convenience. To achieve this, the Nestlé team began researching ways to improve product quality. In 1975, Nestlé employee Eric Favre noticed a small coffee bar near the Pantheon in Rome that was incredibly popular. This inspired him to design the first Nespresso machine.

Nespresso’s wrong hypothesis.

The first Nespresso machine was large and expensive. Given its size and price, the team believed that the machine would not be affordable for most families, so they decided to target businesses instead. The initial product was positioned to let businesspeople make coffee of the same quality as that found in coffee shops in the office, by themselves. However, the market proved this initial hypothesis wrong. During focus groups, Nespresso discovered that businesses were not interested in using the machine.

Nespresso turned the page.

Rather than giving up, Nespresso looked to target a different market by asking Paul Gaillard, a famous salesperson of luxury brands, for his insight. Gaillard assumed that high-income families would value high-quality coffee, so Nestlé tested this assumption. Nespresso shifted its focus to high-income families, lowered the machine price, and increased the pod price. They also changed their packaging and commercial style to meet their audience's expectations.

Nespresso's new and unique positioning resulted in creating new customer demand for luxury coffee. As Gaillard stated, "I wanted to create the Chanel of coffee, and decided to keep it chic and bobo." Additionally, Nespresso established membership programs to build personal relationships with all customers who purchased a pod. These programs provided a new channel for market research and enhanced brand loyalty from repeat customers. By 2005, Nespresso had reached its peak.

Keurig took over Nespresso’s success.

In 2012, as several key Nespresso patents from 1992 began to expire, they faced fierce competition from newcomers like Keurig, the company behind K-cups. K-cups were able to capture the market share by providing a more convenient and cost-effective solution for coffee drinkers. Nespresso's failure to anticipate the market shift and adapt its strategies ultimately led to its decline. Unlike Tide, Nespresso didn't seek alternative sources to refine, or redefine, their product market fit, and they didn't think they would lose market share to the competition.

It is critical to continually refine your value proposition, stay ahead of the competition, but most importantly exceed your customers’ expectations and needs. Nespresso's initial, fairly long, success was due to its ability to gather direct feedback from real customers and make changes accordingly. However, their failure to anticipate the market shift and adapt their strategies ultimately led to their decline.

What happens when you stop listening to your customers?

Keurig made billions with their sleek coffee machines and attempted to apply the same strategy to the home carbonation market. Around the mid-2010s, SodaStream had created a quiet machine that let you set the amount of carbonation you wanted and was priced at around $80. It was a hit, validating the market for home carbonation. Keurig saw this SodaStream’s growth and, after spending millions of dollars on R&D, jumped in with KOLD.

Instead of conducting market research, Keurig relied on its previous playbook, the one that beat Nespresso. They  over-engineered an expensive, lousy solution. KOLD was priced at $370. The machine was big, loud, and came at a time when soda drinking in the USA dropped to a 30-year low. Keurig failed to learn the lesson that helped them beat Nespresso and ended up pulling a Nespresso themselves. Keurig pulled KOLD from the market less than one year after launch.

No matter how great your product or logo is, if it doesn't solve real problems for your customers in a way that fits into their lives, you won't have a lasting business. And that's why it's so important to conduct market research and listen to your customers, even if you've had success in the past. So get out there and discover what your customers need and how they need it, and use that knowledge to create a compelling value proposition that will keep you ahead of the game.

Deborah Mills-Scofield is the founder of Finding Blue Lobsters and author of Value Proposition.

Deborah Mills Scofield
Deborah Mills Scofield
August 7, 2023
4 min read