Warren Buffett couldn’t hide his excitement when Procter & Gamble announced it would acquire the shaving and personal care giant Gillette for $57 billion. “It’s a dream deal,” he proclaimed on that day back in January 2005. “[It will] create the greatest consumer products company in the world.”1
At the time, it was easy to appreciate Buffett’s enthusiasm. Five words captured the essence of Gillette’s deceptively simple model for its razor and blades business: “add features and raise prices.”2 That model generated a “seemingly indestructible, high-margin revenue stream” with an estimated global market share of 50 percent.3 One analyst described the potential leverage of the combined businesses over consumers and retailers by saying, “Shelf space is diamond-encrusted gold. It’s exposure to the consumer, and everyone wants exposure to the consumer.”4
The prices for razors and blades, which are complementary goods, have moved along one dimension: the package price. To live up to its slogan of “the best a man can get,” Gillette recognized that the only means to reflect the value created through its product innovations was to increase prices along that dimension. A report in the Financial Times in July 2013 said that since 1990, the price of Gillette blade cartridges, adjusted for inflation, had risen by 236 percent, or roughly 5.5 percent every year over a twenty-three-year period.5 But the implementation of that model led to frustration among customers. They had no choice but to “go to the store, ask a salesclerk to open the plexiglass-encased ‘razor fortress,’ and pay more than seems reasonable for a small pack of blades.”6
Five years after its acquisition by P&G, Gillette faced what AdAge called “an acid test” when it launched its latest innovation, the Fusion ProGlide shaving system.7 Could Gillette’s time-tested “trade-up model” still bring strong financial results in the tough economic times that lingered after the Great Recession in 2008? According to the AdAge report, replacement blades for ProGlide would cost 10–15 percent more than the previous model. That price increase was similar to the increase when Gillette upgraded its Mach 3 system.8
Little did the AdAge reporters, or anyone else in the market, realize that the ultimate acid test for Gillette would have nothing to do with the Fusion ProGlide. Instead, it would have to do with the outcome of a seemingly innocuous discussion at a holiday cocktail party a few months later. One of the party guests, Mark Levine, had a bunch of unsold, surplus razor blades in a warehouse. When another guest, a young entrepreneur named Michael Dubin, heard about that, it reminded him of his ongoing frustrations generated by Gillette’s business. The ensuing discussion between Levine and Dubin sparked a question: If a company could mail blades to customers at a reasonable price, would men appreciate the convenience?9 Both Levine and Dubin thought that men would.
The Dollar Shave Club was born. Instead of paying lots of money for blades locked in the “plexiglass fortress” at a retailer, men who joined the club could pay a few dollars per month to have replacement razor blades shipped to their door on a regular basis. This subscription model’s ordering process was nearly effortless, the price a small fraction of what Gillette charged, and the quality “good enough.” And it worked.
Thanks to the combination of irreverent and viral advertising, conscious brand building, and unmistakable affordability, Dollar Shave Club (DSC) attracted venture funding almost as quickly as it attracted subscribers. By 2015, the erstwhile startup had amassed more than four million subscribers served by over six hundred employees. With revenue of roughly $150 million in 2015 and a goal of $200 million in its sights for 2016, the company quickly claimed about half of the online market for razor blades.10 In the meantime, Gillette’s share of the overall market for men’s razors had fallen for six consecutive years, from more than 70 percent in 2010 to 54 percent in 2016.11
One year after DSC hit the market, the entrepreneurs Jeff Raider and Andy Katz-Mayfield launched a rival razor and blades subscription service called Harry’s. Their rationale, expressed on the Harry’s website to this day, reflects the same pent-up frustration that helped inspire Dubin and Levine: “Our founders, Jeff and Andy, created Harry’s because they were tired of overpaying for overdesigned razors, and of standing around waiting for the person in the drugstore to unlock the cases so they could actually buy them. When they asked around, they learned lots of guys were upset about the situation too, so they decided to do something about it.”12
Raider implied in a 2014 interview that analyst reports about the men’s shaving and personal care industry being “down and hurting” were misleading. “It’s not hurting, it’s moving,” he said. “And it’s moving in a direction that’s great for us.”13 The market was also moving in a favorable direction for DSC.
In the summer of 2016, Dubin signed the documents for the sale of the success story he and Levine had cofounded a little over four years earlier.14 Unilever, the consumer products giant and an archrival of P&G, had outbid several private equity firms to acquire DSC for an estimated $1 billion.15 Such a transaction would mark a happy ending for any entrepreneur. But the disruptive work of the shaving clubs was not over. An analyst at Barclays commenting on Unilever’s acquisition noted that “this is a bold statement that technology and product quality has reached a level where it doesn’t matter as much as channel and business model.”16
In the spirit of the Ends Game, had Gillette’s decision to price the package of blades finally exhausted its capacity to generate revenue for the organization?
The revenue model introduced by clubs such as DSC and Harry’s to the sector tackles what we label access waste. Access waste occurs when the customer cannot readily obtain the means necessary to achieve a desirable outcome, or dispose of them when the outcome is no longer valued.
On the one hand, access waste can be traced to a physical problem in the purchase process, such a stockouts or inconvenience. Stockouts are the consequence of inadequate planning by customers or of storage limitations. We are all guilty of having run out of some product when we needed it most. Inconvenience results from too much time, too much distance, or too many process steps to overcome. Think of what happens when people do not have access to a washing machine in their home or building. In order to achieve the desired outcome of clean clothes, they are forced to invest time instead of money. They put a basket of dirty clothes in their car or under their arm, go to the laundromat, exchange bills for a handful of change or tokens, spend that cash on detergent, washing, and drying, and remain on the premises until the last item is dry. There is efficiency in the elimination of workarounds like this one, especially when people are not aware of their true costs.
Another, perhaps less obvious physical problem related to access is the unwanted accumulation of idle assets. This is the flipside of struggling to obtain a product or service. Sometimes customers want to “lose” access by getting rid of what they own but no longer use. This is not always easy, especially when the asset is relatively expensive such as a vehicle or fine clothing. The accumulation of idle assets has become so severe that people now spend $38 billion a year to stash what they own but don’t need in self-storage facilities.17
On the other hand, access waste can also be traced to a financial problem. For instance, a business may lack the capital to purchase a product such as a fleet vehicle, a production machine, or a set of tools. Similarly, an individual may not be able to afford a car or a major appliance, either outright or even on an installment plan. Both business-to-business and business-to-consumer customers run the risk that they won’t achieve their desired outcomes as they trade down on quality, find a workaround, or postpone or forgo the purchase. In the case of cars, manufacturers would struggle to increase access to their products solely by lowering the purchase price. While that may bring in more customers in the short term, such moves—whether promotional or permanent—can have dire financial consequences for an automaker.18 Some customers who have the financial means to own a car may look for other options of transportation because they feel that purchasing one would be a misallocation of their resources. They may think that it is better to use public transportation, cabs, ride sharing, or other means rather than to own something that, on average, sits idle for the vast majority of its useful life.
A second financial problem related to access occurs when the revenue model prevents customers from achieving the variety of consumption they desire. The history of recorded music once again offers a good illustration, as it did in chapter 3. Prior to the digital age, the only way for customers to gain access to the music they desired, and the option to listen to it at any time, was to build a library of physical products. That became a prohibitively expensive undertaking for many people, especially toward the end of the twentieth century when customers needed to buy a full-length CD to get the one, two, or perhaps three songs they really wanted. One workaround to that access problem was illicit pirating, either on the private scale in the form of mix tapes and ripped CDs or on a grand commercial scale with free exchange of files on a service such as Napster.
The music industry currently solves that problem through popular streaming services, a model that tackles both physical and financial access inefficiencies by allowing listeners to have unlimited access to a library of music no matter where they are. The groundwork for the solution was laid step by step, first as a way to improve physical access. In 1997, Capitol Records made one of the first moves to bring music online when it offered a digital single (“Electric Barbarella” by Duran Duran) for sale as a download. Their internal digital team’s proposal proved remarkably prescient and highlighted the access waste that digital music would reduce: “There is a group of people who like music but can’t go to a record store anymore. It can be simply that their lifestyle doesn’t permit it or that there is not enough time in the day. That group of people will purchase online and the music industry should find way to connect with them … because the store is online, it’s open 24/7 and it’s global. With digital distribution, a product never goes out of stock.”19
Over twenty years later, streaming services have not only taken hold, but also ignited a recovery in the music industry. In 2016, a report from Goldman Sachs referred to this new mode of generating revenue as “a massive game-changer … that establishes a much more sustainable business model for the labels.”20 That forecast has held true, as the music industry’s revenue growth and overall financial strength have improved significantly. By early 2019, Spotify reported that it had ninety-six million paid subscribers to its music service, an increase of 36 percent year-on-year.21 The International Federation of the Phonographic Industry estimated that 255 million people around the world were using music streaming at the end of 2018, and they accounted for 47 percent of all revenue in recorded music.22 The individual music labels are also benefitting. Warner Music Group reported record revenue for the 2018 fiscal year, stating: “We’ve had another terrific year and revenue exceeded $4 billion for the first time in our fifteen-year history as a standalone company.”23 The streaming services have become so pervasive that Apple decided in June 2019 to reconfigure its once-groundbreaking iTunes service. That initiative provided music fans access to individual, downloadable songs legally and at scale. But after eighteen years, its functionalities will be distributed across separate apps for Apple Music, podcasts, and TV.24
What happened in the wake of Unilever’s acquisition of DSC showed that shaving clubs would prove to be much more than a speed bump in Gillette’s growth path. By introducing a new, leaner form of exchange with customers, the startups had permanently altered the decades-old trajectory of an entire industry. The new trajectory is still taking shape. In April 2017, Gillette made moves to “halt the inexorable surrender of its men’s razor business to the newcomers.”
First, the company cut prices. Under the headline “We heard you loud and clear,” Gillette’s websites explained the changes. “You told us our blades can be too expensive and we listened. You can find most Gillette blades and razors in the United States at lower prices without any compromise in blade quality.”
But more important for the future of the business, Gillette introduced a new (to them) form of exchange with customers, the Gillette On Demand program, which offers some of the ease-of-use improvements and more affordable prices that DSC and Harry’s pioneered.25 Even the look and feel of the Gillette On Demand website shows many similarities to the approach taken by the disruptors.26 Customers are “completely in charge. You can choose your own razor and how often you receive your replacement blades, making our shave club totally flexible to your individual needs.”27
Gillette’s use of the phrase “hassle of a subscription” is intriguing. It signals the possibility that the adoption of a revenue model that shifts the emphasis of the exchange between organization and customers from ownership to access is only a first step. Subscriptions are a hot topic as we write this book. But they are also only the first of many potential moves in the spirit of the Ends Game. The current shaving club models improve access by bypassing the “plexiglass fortress” in retail stores entirely. The convenience of the subscription model means that customers do not have to visit that section of the supermarket at all. It also means that consumption may increase, because the customer no longer faces the risk of running out of supplies. DSC explicitly recognizes and emphasizes how this convenience eliminates access waste when it states that it will ship its Restock Boxes whenever a customer wants so that “you never run out of anything you need to look, smell and feel your best.”
But these changes may only mark a transitional step as the shaving companies learn more about the actions of their customers, moving them closer to understanding the value that shaving contributes to a desirable outcome we could phrase as “looking good and feeling good.” What makes the difference, as we discussed in chapter 2, is information technology and customer impact data. The direct-to-customer model of shaving clubs helps each company close the loop on customer focus by providing rich, direct data on customers within a given community. To adopt the phrase of the analyst quoted at the outset of this chapter, access to impact data is today’s “diamond-encrusted gold.” The two-way flow of data between organizations and their customers has replaced “exposure” as the goal that every organization pursues. Such data are particularly important in the world of shaving, because both the frequency of consumption and the perceived quality of a shave can vary significantly from individual to individual.
When Unilever acquired DSC, the two companies stressed the startup’s “incredibly deep connections to its diverse and highly engaged consumers” and its “unique consumer and data insights.”28 The current communication strategy of DSC takes advantage of this opportunity to understand what customers want, and how these wants manifest themselves in individual buying behavior, which may change or fluctuate over time: “Tell us a bit about how you get ready, and we’ll send you trial size products to dip your toes into the amazing waters of DSC. Two weeks later, we’ll ship you a Restock Box with full sizes of all those products, at a discount, of course. You’re in control. Any time you want, add and remove products, plus adjust how often you get Restock Boxes. See? Simple.”29
Gillette also continues to collect, explore, and learn from customers. No two men or women shave in the exact same way, according to Kristina Vanoosthuyze, a principal scientist at the Gillette Innovation Centre. She elaborated on this variance: “There are guys that take 30 strokes and some take 700 strokes. Some people take 30 seconds, some take 30 minutes.”30 This knowledge can lead to more nuanced revenue models that come increasingly closer to reflecting the value that a company like Gillette has proven it can deliver.
The common denominator across all the access models described in this chapter is that revenue accrues to the organization as a function of time. For example, the basis of the shaving clubs’ model is a periodic (monthly) purchase, even though they show product-based prices for cartridges, razors, or bundles on their websites. At first sight, this is nothing new. For decades, people have had subscriptions to newspapers, magazines, cable television, and so on. People pay rent. Retailers have long disguised their ownership-based approach to commerce by offering installment payment plans. But a host of recent technological changes—pertaining to monitoring, prediction, logistics, payment, and more—allows access models to spread across most sectors of the economy. Organizations today can lower the barrier of entry into a market by turning almost any good into a “service” with enhanced convenience.
Welcome to the world of XaaS—suggestive of the title of some forgettable science fiction novel from decades ago. In fact, the acronym XaaS, which is short for “Everything as a Service” implies that any transaction based on the transfer of ownership of a physical product (the X) can conceivably be replaced by a transaction offering access to that product on a periodic basis. XaaS has become the mainstream revenue model in software and tech industries, rendering the old perpetual license transaction comprising a software CD packaged inside a cardboard box obsolete. Citing an extensive survey of hardware and software buyers, the Boston Consulting Group notes that XaaS models “have become so pervasive and so desirable in the tech sector that cloud-like pricing is now a purchase criterion unto itself. Of the buyers surveyed, 77% said they would reallocate some spending or consider switching suppliers entirely if their current supplier failed to offer an XaaS model.”31
The standard, time-based XaaS models effectively boost access in several ways. They create more discrete purchase and support options, including providing upgrades and training to customers. They reduce the financial burden on customers, especially for small and medium enterprises, by eliminating the need for the large upfront payment for a perpetual license. The cloud-based software giant salesforce.com expanded into the small- and medium-sized business sector exactly by attracting customers who were hesitant to purchase on-premise solutions.32 Finally, XaaS models can lower search and administrative costs to practically zero. An executive at the messaging platform Slack captured that sentiment when he described his experience with Amazon Web Services (AWS), which provides “on-demand” cloud computing platforms to individuals, companies, and governments: “With traditional IT, it would take weeks or months to contend with hardware lead times to add more capacity. Using AWS, we can look at user metrics weekly or daily and react with new capacity in 30 seconds.”33
XaaS models can also link together entire value chains that did not exist at the turn of the twenty-first century. Today, whenever someone brings up subscription models, it doesn’t take long for that person to make a reference to Netflix. Yet in 2007, Netflix was a small but growing player in the DVD rental market, with a share of 12 percent and revenue of less than $1 billion. Then it launched what CEO Reed Hastings referred to as its “second act,” an online movie rental service that did not require the customer to order, download, store, or remember to return the film or show.34 Eventually, Netflix needed a type of subscription of its own in order to provide its streaming service to users: the company subscribes to AWS for access to cloud servers in order to “quickly deploy thousands of servers and terabytes of storage within minutes.”35
Cocktail dresses and evening gowns “sit idle” more often than even cars do. They serve a desirable and valuable purpose, but many are expensive and rarely worn, in some cases only once. Using the tagline “You don’t have to own it … to own it” Rent the Runway has a value proposition that is tailor-made to reduce the access waste in the market for designer clothes and accessories. The company offers “fashion freedom, a smarter closet, total wardrobe flexibility, and a smaller clothing footprint” at prices that are a fraction of the cost of one designer dress.36 Jennifer Hyman, the company’s cofounder and CEO, said, “Our goal is really to create the Amazon Prime of rental.” A round of funding completed in March 2019 put the value of Rent the Runway at $1 billion.37
Rent the Runway allows women to select the clothes online, including seeing how the clothes look thanks to photos posted by previous users. Customers can choose a one-off rental, or subscribe to the basic service for $69 per month and receive up to four pieces at a time, including free insurance, dry cleaning, and shipping. But the advantages extend beyond having access to amazing clothes and accessories from at least 350 designers and lower prices. Women can receive personalized style tips and concierge service for fit and styling assistance.38
The disruptive effects of different revenue models in shaving, music, fashion, and other industries are no guarantee of success, however. In March 2017, General Motors launched the Book by Cadillac subscription service to test the viability of a Netflix model for luxury cars. For $1,500 a month, members could step in and out of Cadillac’s ten models up to eighteen times a year without recurring additional charges.39 Instead of buying one vehicle under the traditional model, subscribers essentially received temporary “ownership” of a vehicle and the license to use it and swap it in line with their personal needs, which can differ significantly for the same person or family. Taking a leisurely weekend drive, picking up friends or family at the airport, transporting bulky items, and rushing to a meeting in a crowded city all work best with vehicles of different shapes, sizes, and performance levels. Several other automotive brands, including Volvo, BMW, Mercedes-Benz, Audi, and Porsche, have launched similar subscription services.40
In December 2018, however, Cadillac temporarily closed down the Book by Cadillac service, citing some of the costs of operating the program, even at the small scale in only three cities. Those costs included the logistics of repairing damaged cars, cleaning them between uses and delivering them within twenty-four hours, as well as back-end technology issues that made some customer-service functions tedious and time-consuming.41 The new version, scheduled for launch in 2020, will better integrate Cadillac’s dealer network into the program.42
Another product that people run out of at inopportune times is liquor. When one finds an empty bottle in the cabinet, replacing it triggers a similar time-consuming, unpleasant process as in the case of razor blades. Solving this pain point is one of the many ideas behind what the French spirits company Pernod Ricard had in mind when it developed “Opn,” a home entertainment system for serving cocktails. The system solves a host of access problems that people face when planning a party or simply mixing a drink at the end of a long day. It provides access to the spirits in the correct amounts, access to advice and cocktail recipes, and access to replenishments, all with the automated convenience. The design of the system also has appeal. Rather than a motley collection of bottles on a counter or a bar, Opn comprises a system of containers shaped similar to books—hence the name liquor library—on a docking station that integrates the book to mobile apps as well as a central database. The shape of the container is a key enabler for the collection of impact data. Each “book” stores a different type of alcohol, and the docking station tracks and reports how much of each book’s contents remains, in much the same way your automotive telematics inform a driver about fluid levels (gasoline, water, wiper fluid) and air pressure. The docking station and accompanying software also analyze the data to determine whether and when to order replenishments, and also how many drinks one can still make from what remains.
“From helping put together shopping lists to seamlessly ordering spirits online and having them delivered to your door, creating social calendars and offering inspiration on the art of hosting, Opn will simplify and enhance the way we organize events at home, and help us prepare our favorite cocktails, in the smoothest possible way,” Pernod Ricard described the system in a press release.43 The four pillars of the system include the containers, the docking station, the app, and the website. One review picked up on the attractiveness of these features, noting that the tray or docking station “has an ability to track remaining levels of liquid and notify OPN system via the app (or a website) about the new orders as well as adjust cocktail recommendations based on what’s available.”44
In the introduction and chapter 3, we explained that the elimination of waste is cumulative. An organization cannot address consumption waste unless customers can access the product or service to begin with. However, some customers—whether they are a business or an individual—cannot guarantee that their rate of consumption justifies owning the product. Several cases in chapter 5 will describe solutions to this problem, as we look at consumption waste, its causes, and ways to eliminate it in the spirit of the Ends Game.
1. A. Sorkin and S. Lohr, “Procter Said to Reach a Deal to Buy Gillette in $55 Billion Accord,” New York Times, January 28, 2005, https://www.nytimes.com/2005/01/28/business/procter-said-to-reach-a-deal-to-buy-gillette-in-55-billion-accord.html; N. Deogun, C. Forelle, D. K. Berman, and E. Nelson, “P&G to Buy Gillette for $54 Billion,” Wall Street Journal, January 28, 2005, https://www.wsj.com/articles/SB110687225259838788.
2. S. Terlep, “Gillette, Bleeding Market Share, Cuts Prices of Razors,” Wall Street Journal, April 4, 2007, https://www.wsj.com/articles/gillette-bleeding-market-share-cuts-prices-of-razors-1491303601.
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23. Warner Music Group, “Warner Music Group Reports Results for Fiscal Fourth Quarter and Full Year Ended September 30, 2018,” news release, December 20, 2018, http://www.wmg.com/news/warner-music-group-corp-reports-results-fiscal-fourth-quarter-and-full-year-ended-september-3-5.
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