See the case below:
Business Model Innovation: How Dollar Shave Club Disrupted Gillette WHILE MOST of our attention is captured by fancy high-tech innovations such as the iPhone or Tesla’s sleek electric vehicles, innovations need neither to be high-tech nor radical to be successful. Until recently, Gillette, the company that invented the safety razor and the razor–razor-blade business model, dominated the $3 billion U.S. market for wet shaving with some 75 percent market share. Yet Dollar Shave Club, which began as a fledgling startup with an initial budget of $8,000, disrupted the powerful Gillette with a low-tech innovation and is gaining market share rapidly. How can the powerful Gillette, a unit of Procter & Gamble with annual revenues of $65 billion, be beaten by a brash startup? Gillette’s pattern of innovation over time led to overshooting in the market, resulting in a product that became overengineered and too expensive. The entrepreneur King Gillette invented the safety razor some 115 years ago and also came up with the highly profitable business model of selling the razor for a low price and charging a premium for replacement razor blades. This razor–razor-blade business model, so named to commemorate its origins, has now been widely adopted. When introduced, the safety razor was a radical innovation, allowing Gillette a temporary competitive advantage. To sustain this advantage, Gillette followed up with incremental innovations, mainly by adding more blades to its razor until there were not one but six! As a result of this innovation pattern, Gillette’s newest razor, the Fusion ProGlide with Flexball technology, a razor handle that features a swiveling ball hinge, costs $11.49 (and $12.59 for a battery-operated one) per razor! This pricing exposed Gillette to low-cost disruption. The high-end, highly priced offering of the market leader is not only overshooting what the market demands, but also often priced too high. Does anyone really need six blades on one razor or want to pay over $10 for one cartridge? image The entrepreneur Michael Dubin founded Dollar Shave Club using a business model innovation by providing an online subscription-based mail-order alternative to in-store retail purchases of razor blades. Many customers were not only turned off by Gillette’s premium prices, but also by the inconveniences that in-store purchases entail. Given that packs of razor blades are a prime target for shoplifters, many stores lock them in glass vitrines, much to the dismay of customers who have to hunt down an employee with a key to access razor blades. ©Dan Krauss Seeing the opening provided by Gillette’s focus on the high-end, high-margin portion of the market, Dollar Shave Club established a low-cost alternative to invade Gillette’s market from the bottom up. With an $8,000 budget and the help of a hilarious promotional video that went viral with 25 million views, entrepreneur Michael Dubin launched Dollar Shave Club, an ecommerce startup that delivers razors by mail. After the promotional video was uploaded on YouTube in March 2012, some 12,000 people signed up for Dollar Shave page 475membership within the first 48 hours! The company also raised more than $20 million in venture capital funding from prominent firms such as Kleiner Perkins Caufield & Byers and Andreessen Horowitz, among others. Dollar Shave Club followed up with advertising on regular television in addition to its online campaigns and has expanded its product lines with the introduction of additional personal grooming products. Dollar Shave Club is an ecommerce company that uses a subscription-based business model. As the company’s name suggests, its entry-level membership plan delivers a razor and five cartridges a month for just $1 (plus $2 shipping). The member selects an appropriate plan, pays a monthly fee, and receives razors every month in the mail. Dollar Shave Club is using a business model innovation to disrupt an existing market. Technology is defined as the methods and materials used to achieve a commercial objective. The technology or method here is the business model innovation, a potent competitive weapon. The entrepreneur identified the market need for those who don’t like to go shopping for razors and certainly don’t like to pay the high prices commanded by market leaders such as Gillette. Procter & Gamble’s competition also took notice. Unilever, P&G’s European rival, has long stayed away from the U.S. wet shaving market because Gillette was so dominant. But noting how Dollar Shave Club disrupted the market, resulting in Gillette’s rapid market share decline, Unilever saw its opening into the U.S. market. The Anglo-Dutch multinational consumer products company, with some $61 billion in annual revenues and thus roughly the same size as P&G, offered a whopping $1 billion in cash in 2016 to buy Dollar Shave Club. Not too bad of an offer for a five-year-old startup! Dubin happily accepted the offer and sold Dollar Shave Club to Unilever. With sales of razors and razor blades moving rapidly online, Unilever is hoping to leverage this business model innovation to unseat Gillette’s dominance in the U.S. market. Gillette is not sitting by idle: It responded swiftly by offering its own subscription-based service (Gillette Shave Club) and by lowering prices up to 20 percent, a move that was unimaginable in the past few decades. Successful innovations also lead to imitations. A mere two years after Dollar Shave Club started, two entrepreneurs founded Harry’s, another online, subscription-based mail-order business for shaving equipment. After Target invited Harry’s to put flashy displays in all of its stores in 2016, its business took off. This was a smart move on Target’s part, because it allowed it to put some competitive pressure on Gillette, which has historically held a near-monopoly position as a supplier with its 75 percent market share. Similar to Dollar Shave Club, Harry’s business is growing rapidly. As a consequence of increased competition, Gillette’s market share in the $3 billion market for razors and razor blades has declined from some 75 percent (in 2010) to below 60 percent (by 2017), and continues to slide.
DISCUSSION QUESTIONS
If you buy shaving equipment, do you purchase it in a retail store or online? Explain your choice. Apply the four I’s framework: idea, invention, innovation, and imitation to describe the wet shaving industry in the United States over the past 100 years.
How was Gillette initially able to gain a competitive advantage? Was Gillette able to sustain its competitive advantage? If so, how? What market opening did entrepreneurs, such as Michael Dubin with Dollar Shave Club, use to enter the industry? How did they enter the industry?
What type of innovation did they use, and why were they successful? Why did Unilever offer $1 billion (in cash!) for Dollar Shave Club? Do you think online startups such as Dollar Shave Club and Harry’s will continue to steal market share from Gillette? Why or why not?
