Dollar Shave Club: The latest example of technology upending established markets
Dollar Shave Club disrupted the traditional promotion and distribution model, but it wasn’t the first seemingly simple innovation to do that.
When it comes to razors, Procter & Gamble (P&G), which owns the Gillette brand, has had a sizable, established share of the market for decades. By investing heavily in research and development, marketing, and distribution, Gillette developed multiple competitive advantages, enabling it to charge a premium for its products.
But in what is just the latest example of technology upending established markets, P&G’s main rival, Unilever, recently purchased Dollar Shave Club, the online service that ships razors and other grooming products directly to customers. As Ben Thompson of Stratechery explains, Dollar Shave Club neutralized P&G’s competitive advantage on investment in research and development by claiming that razors were already good enough.
The traditional promotion and distribution model, used by P&G and others, costs a lot of money — to cover research and development, television advertising, and retailer margins. Consequently, new but perhaps unnecessary products, such as the five-blade razor, saturated the market with a 40 percent price premium. But the process revered at P&G also opened the door for Dollar Shave Club to take advantage of the type of entrepreneurship that can lead to creative destruction.
Utilizing social media platforms such as YouTube and Facebook, the small startup was able to reach a market of 20 million people at a much lower cost than traditional media advertising. And thanks to technology like Amazon Web Services, Dollar Shave Club entered the market by offering home delivery, eliminating the need for wholesalers and retailers and the additional costs that come with them. Despite having none of the traditional advantages of Gillette, therefore, Dollar Shave Club has been able to produce quality products at a lower cost than other manufacturers. As of last year, it had captured 15 percent of U.S. cartridge shares.
Unilever’s purchase of Dollar Shave Club is estimated to have cost $1 billion — a small amount in comparison to the $57 billion P&G spent to acquire Gillette in 2005, but with a sizable percentage of the market attached. What Dollar Shave Club shows is that technological innovation and creative destruction can lower prices and deliver better quality products to consumers.
However, regulatory barriers prevent disruptions from reaching many industries. Sectors such as health care, financial markets, and transportation are held in the captivity of regulation and are shielded from technology-enabled competition much more than other sectors, in this case consumer packaged goods.
The growth of the Dollar Shave Club model offers a true opportunity for these sectors to provide better quality services at lower prices to consumers — but only if regulators remove barriers to entry and allow market disruption. As Ben Thompson writes, “The Internet (and e-commerce) has so profoundly changed the economics of business that it is only a matter of time before other product categories are impacted.”
Technology and the Home
We often do not think of household innovations as technological changes, but inventions such as dishwashers, vacuums, and washing machines have dramatically improved the quality of life of those who have access to them.
In his book Permissionless Innovation: The Continuing Case for Comprehensive Technological Freedom, Adam Thierer explains that we stand poised to enjoy even bigger advancements in technology, but only if we preserve the “permissionless” approach to innovation that has been applied to information technology in recent decades. In Thierer’s view, we are at the dawn of a new Industrial Revolution, one that has the potential to dramatically improve well-being.
For more than 100 years, though, household innovations have already spurred disruptive revolutions by freeing up significant time previously spent doing chores. Below are some examples.
Determined to prevent any more chips to her fine china, Josephine Cochrane of Shelbyville, Illinois, came up with a mechanical solution to the problem in 1886 — three years after her husband’s death, which had left her with a great deal of debt.
She built a machine that held dishes in place with wire racks on a motorized wheel that spun as jets sprayed hot, sudsy water. Soon, Cochrane had patented her dishwasher and was marketing it to restaurants and hotels — establishments with a higher volume of dishes than the home and even more reason to purchase one of her machines.
By the 1950s, dishwashers had become commonplace in most homes, and now, dishwashers are an even more affordable and practical appliance. Not only do they get dishes clean while conserving water and energy — they also save people a great deal of time and labor.
Though he never finished grammar school, wireless communications expert Percy Spencer went on to accidently invent what is now another essential time-saving kitchen staple, the microwave oven.
One day when crossing an active radar set, Spencer noticed that a candy bar in his pocket had suddenly melted. After additional experimentation with eggs and popcorn, Spencer developed the first true microwave oven.
The first commercially available microwave oven was by no means convenient, selling for $5,000 and weighing 750 pounds. But by 1967, the counter-top model we recognize today was more widely available, and today it is a common kitchen appliance. The microwave oven has transformed the way we view leftovers and plan our meals, allowing us to save on our grocery bills and time spent cooking.
If you are in the mood to watch your favorite movie or TV show, you no longer have to check the TV guide or even have a cable subscription. Streaming services like Netflix and Hulu, coupled with inexpensive equipment like Apple TV, Roku, and Chromecast challenge the traditional cable bill, increasing consumer choice, encouraging a competitive playing field, and bringing entertainment to a wider range of customers. While there may be an economic rationale for the traditional cable bundle, it is clear that consumers today have more entertainment choices.
Business for All
Entertainment and communication aren’t the only norms that innovation has disrupted. New Internet-based services enable more people to work remotely and pursue opportunities that better fit their schedules.
Founded in 2005, Etsy has turned hobbyists into entrepreneurs. Providing sellers with a digital storefront, Etsy goes one step further, educating sellers about business, facilitating online bulletin boards, and hosting offline meetings. Today, Etsy boasts a staggering 1.6 million active sellers with over 35 million items for sale.
Etsy has empowered artisans — especially female entrepreneurs — from around the world to start their own businesses. Of all Etsy sellers, 86 percent are women, and 76 percent of Etsy sellers see what they do as their business.
Delivered to Your Doorstep
Standing in line at the grocery store only to get home and realize you forgot a critical item is an experience we can all relate to. To remedy this, Amazon’s Dash buttons allow for instant product ordering, while grocery delivery services such as Instacart bring the grocery store checkout line to the comfort of your home.
Innovations like these have improved our quality of life and save us hours of labor each week. That’s time we can spend being with family, advancing our education, or even designing the next revolutionary invention.