Unilever recently acquired Dollar Shave Club for a whopping USD 1 Billion. This e-commerce company, which started in 2011 and got popular mostly for its viral video, has been rivaling with the majors like Gillette by custom delivering disposable razor and blades directly to consumers for as little as $1 a month. Gillette pioneered the razor blade model where the core product is sold at a discount for a lower margin of profit and the dependent consumables are sold with a considerable higher margin recouping lost profits. DSC clubbed this business model with the subscription service model and delivered new value to the customer in terms of savings and convenience. The strategy adopted by DSC has been simply brilliant. They differentiated their product with price and convenience and kept high margins on the consumables. They created such a simple service that made the customers to almost stop buying their competitor’s product. They ventured into a category where the incumbents sold their products only through the retail shelves and they don't have a direct relationship with their customers. DSC even managed to go one step further to obtain a sustainable competitive advantage by capturing customer’s product and service usage data.
DSC is not the first company to adopt the razor blade business model; it has been tried in several other product categories. But not everyone has been successful with this model and Kodak is a great example for this. In DSC’s case, the razorblade model didn't drive the success, rather it was the smart implementation of the subscription service model what made DSC successful. It essentially turned the chore of purchasing a traditional replenishable standard product into a fun process with a customized delivery system and accelerated the consumer’s product repurchase cycle.
“People don’t want to buy a quarter-inch drill. They want a quarter-inch hole!”
This is a famous quote by the HBS Professor Theodore Levitt. Here the customer wants to accomplish the task of creating a hole, for which he has to buy a drill, which he’s not going to use until next time he needs a hole. For a moment, let's consider all the products that we own today, as a medium or a channel to avail a service that helps us to do a certain thing or accomplish something. Say cars, it is helping us to move from point A to point B and when we have reached our destination, we are not going to use it unless we want to continue our journey to point C or return to point A. The same way DSC provides a service which helps you to shave your beard at a cost of a dollar a month and it is there whenever you need it. Technically, you don't own a razor or a blade, as you get a new razor every time you upgrade or downgrade the service. In the same way, imagine you don't need to own a printer from HP, you avail a printing service from HP and they provide you a printer and ink based on your choice of print quality and use and you can upgrade the service anytime you want.
Customers are increasingly adopting new consumption models such as subscribing, sharing, and leasing rather than actually buying or owning a product outright. The millennials, especially, no longer find ownership a necessity and they find access to everything and everything to be personalized, more important. These shifts are becoming more significant as millennials are now overborrowed and undersaved. In the coming times, IoT will also transform the meaning of products as products become a channel to obtain customer-specific usage data. Hence, it's the right time to rethink how we are going to deliver value to the customers.
Zipcar and contract carrier mobile phones are some of the examples around product as a service model. Recently Philips sold light as a service. Philips worked with architect Thomas Rau to offer light as a service. They created a bespoke intelligent lighting system, 'pay-per-lux', to meet the user's lighting requirements of a space, at an agreed price. Philips retained the ownership over its products, while enabling better maintenance, reconditioning and recovery. This model also benefits customers as they only have to pay for the service they require and use and receive a better service from the manufacturer.
Forever, there has been a disconnect between the product maker and the customer after the point of sale. With new products and services consumption models, it is becoming quite essential to establish and maintain a connection with the customer even after the sale. The product as a service model also reduces the barrier to adoption for the customer, which in turn helps companies to increase their customer base.
Companies will now need to connect with their customers more at the individual level than collectively as a target segment. They will have to understand each individual's usage pattern than just understanding the need of the demography. It is also important to understand the experience around discovering a product in order to identify new channels to distribute the product. Understanding the customer's usage pattern, product makers will be able to assess how their customers are choosing their brand or product over the time. These customer insights can help the companies to develop new supply and delivery methods. In the coming times, retail shelf space would no longer be a sustainable competitive advantage rather the customer specific data will govern the market leadership.