Turning the packaged goods business model on its head

Self portrait, shaving with reflection, by saintbob. CC BY 2.0

By Joe Ballantyne and Andrew Curry

This is the second of a series of articles about business model innovation. The first one is here.

The acquisition in 2016 by Unilever of Dollar Shave Club tells an important story about business model disruption in the FMCG (packaged goods) sector, and the story is this: that the strengths that packaged companies believe they have may not be as effective as they used to be at protecting them from competitors with different business models.

The company that was being disrupted by the acquisition was not any old company, but Procter and Gamble, which has written many of the category rules for the packaged goods sector over the years. Its revenues have doubled decade on decade since 1950. P&G owns Gillette, which it acquired in 2005 for $57 billion, when Gillette had 60% of the American razor market by value.

Unilever, in contrast has spent $1 billion on a company which holds 16% of the US market by volume, quite a lot less by value. But however you do the arithmetic, this represents a huge loss in category value. It is disruption on a large scale.

So it is worth rewinding a little.

The history of Dollar Shave Club is increasingly well known, but not to everyone. The company was set up in 2011 by Michael Dubin and Mark Levine, and has been backed by a number of venture capitalists. It launched in 2012 with a You Tube video (see below) that crashed the company’s server. It offers customers a choice of three monthly plans, and had two million members as of mid-2015. Unilever acquired it in July 2016.

The story we’ve told elsewhere about business model innovation is that,

(1) it becomes more necessary as a result of slow growth,

(2) at its heart there are four different archetypes of innovation, which are

(3) extracting, bundling, upserving and market-making.

When you compare the Unilever acquisition of Dollar Share Club with P&G’s acquisition of Gillette, some important themes emerge. The classic strengths of the packaged goods businesses are their marketing and advertising skills, their distribution channels, their relationships with retailers, and their ability to innovate in the category.

We see all of these strengths in the Gillette business. But Dollar Shave Club turned them on their head.

All of the clues are in that viral video that launched the business 23 million views ago. The way in which it disrupted the shaving market drew on several of our business model innovation archetypes, combining them into a new proposition.

It’s worth replaying the video to see the clues. It features the Dollar Shave Club co-founder, Michael Dubin, who had some experience in improv and standup.

The video that crashed the servers, 23 million views later.

And it’s worth reflecting on the way that each of these carefully crafted script lines deconstructs the Gillette business model.

Source: Dollar Shave Club/ Kantar Futures

In her book, The End of Competitive Advantage, Rita Gunther McGrath writes of how new competitors can mobilise assets and resources by leasing them, and part of the Dollar Shave Club story is about this more flexible (or “transient”) approach to building businesses.

To summarise:

• It used digital channels like You Tube to get its message out, cutting out spend on television advertising, and online to register new customers

• It accessed “good enough” razor blades to service the market — although its top end “Executive” membership category, at $9 a month, offers a six-blade razor

• It used the mail to send the products out — a traditional approach that would have been familiar to Sears a hundred years ago.

Ben Thompson has a fuller account of this at his Stratechery blog. But Dollar Shave Club it isn’t quite the transient competitor of McGrath’s account.

The company used story and tone effectively to differentiate itself, and apparently one of the earliest hires was a top quality writer. In the 21st century, this is still hard to replicate. Its customer database is now hard to copy. And, critically, its direct-to-customer relationship expertise is said to have been one of the attractions for Unilever. Certainly, Gillette’s faltering attempts to launch its own direct service suggests that building customer relationships by selling direct is harder than it looks.

So what do we learn from Dollar Shave Club?

The first thing is that successful business model innovation combines multiple types of innovation. Dollar Shave Club’s remaking of the US razor market involves extracting (research costs), bundling (we send it to you) and upserving, notably in the packaging.

The second is that its challenge to Gillette and to P&G operates by rethinking the whole proposition, all along the value chain. It’s not just about customer experience and touchpoints, although these clearly matter. In thinking about business model innovation, the whole business process needs to be scrutinised.

The third is that there is more of a role for marketers than ever. Business model innovation involves telling consumers a new story about how a product or service is being delivered, and why this represents a benefit. In the case of Zipcar, for example, the classic “bundling” proposition, it’s about the journey, not the car. In the case of Aldi or Mercadona, who have reconfigured the supermarket business by “extracting”, by reducing certain types of choice, it’s about explaining why that is a good thing.

In doing this, the innovator is often combining a new way of thinking about the category with a new story about it, while also removing some familiar pain points. In telling this story, the business is surfing transitions in consumer values, running ahead of the wave rather than behind it. Aligning proposition, positioning and purpose becomes more important than ever.

The image at the top of the post is by saintbob. It is used here under a Creative Commons license, with thanks.