This business model canvas lets you look at all nine building blocks of your company on one page. Alexander Osterwalder shows how it's done, using Nespresso as a case study.
Alex Osterwalder: My name is Alex Osterwalder. I'm the lead author of Business Model Generation and co-founder of strategizer.com. I'm going to walk you through the business model of Nespresso, a company that sells coffee in the espresso business. So let's look at the value proposition first. It's composed of two products -- the Nespresso machine, and the pods that go with it. And we're going to look at the distribution strategy that Nespresso had. They sell the machines to through retail to households, which means they earn a one-time transactional sale from selling the machines.
Most of that money goes to the key partners, the machine manufacturers who they work together with. And for the Nespresso pods, they have a totally different distribution strategy. They only sell the pods through their own channels. Started out with mail order and call center, then they built nespresso.com, and today in the biggest cities of the world, you'll find Nespresso stores as well. This is interesting, because it meant that they had to build distribution channels as a key resource in their business model, because this is the first time that a Nestle-owned company sells directly to households.
Now, why do they use different distribution channels for the machines and the pods? Well, they use retail because it has the broadest reach possible, because they want to get the machine into your household. Once you have it in your house, you're actually locked in, because you can only use Nespresso pods. That's so-called switching cost, which prevent you from going to another machine manufacturer. And they defend that through the patents that they have in the key resources.
And some of those patents actually expired last year, which means they need to renew their business model to a certain extent. Now, once you have the machine and you're locked in, you're going to have to buy pods from Nespresso, which means they earn money from repetitive pod sales. They create so-called recurring revenues. They changed an entire industry from moving it from a transactional business to a repetitive business with recurring revenue.
So interestingly here, they have recurring revenues. They have direct sales with higher margins. And they ask you for five to six times more for the coffee that you pay. So they get people around the world to pay much more money for the same amount of coffee. Now, let's look at the left hand side of the business model canvas to see what they need to have to do what they plan to do on the right hand side. First of all, they need coffee. So they work together with coffee growers, and they try to source some of the best coffee in the world, which they put in the pods.
And the pods is something that they manufacture themself. So production of the pods is an important key activity. And they have production facilities to do that. They churn out 12 billion pods every year, which is one of their main costs. Another important activity and key resource and main cost in marketing and branding. Obviously, when you're in consumer goods, you need to put a lot of money into that. And the last piece here that's interesting is that because they sell directly to households, a decision made on the right hand side of the canvas, they had to build up business to consumer distribution logistics, which we find in the left hand side of the canvas.
So now we have everything that's important for the success of Nespresso on one piece of paper. And interestingly, when Nespresso started out, they had a totally different business model around exactly the same product, and that almost went bankrupt. So it's only after a couple of iterations of the business model that they were able to find the business model that you see on this piece of paper, and that led to a multi-billion dollar business. So the difference was not the product alone. The difference were all the pieces here on the business model canvas that led to the success of Nespresso.