Case Study Analysis: Business
Model Innovation: How Dollar Shave Club
Disrupted Gillette
Kristina Kemp
Gillette has had a long and distinguished history dominating
the wet shave market in the U.S. With Gillette’s
vision: “To build total brand value by innovating to deliver consumers value
and customer leadership faster, better and more completely than our competitors,”
the shave trailblazer has historically been able to dominate the market primarily through
their razor-razor-blade business model and continual innovation, until
recently. The most imperative battle for
Gillette is the threat of new entrants with low-cost alternatives encroaching
the market along with product substitutes and online competition. Additionally, the traditional shave market is
nearing the end of the maturity stage which further increases the competitive
intensity for Gillette, putting pressure on them to face the future and choose
a competitive option, namely in the online shave market, or bust. Geoffrey Moore believes that each stage of
the industry life cycle is dominated by a different customer group (Rothaermel,
2019). Because of this, Gillette needs
to figure out the distinctly different preferences of each of their customer
groups and respond accordingly with innovation, which is where they let their
guard down and created an opening for low-cost substitutes and new entrants. Options are
presented with pros and cons for each, and a solution suggests the best course of action for Gillette
to regain their market dominance and competitive advantage.
Background
The process of innovation starts as an idea. The disposable wet shave idea was authored
and fostered over a period of eight years beginning in 1895 by salesman King
Gillette with the help of an MIT professor who helped to foster and facilitate
the idea through invention of a cheap, thin, disposable blade for the benefit
of not having to continually remove and sharpen it on a whetstone. The idea
became an invention as it was transformed into the first double-edged safety
razor; an innovative, useful, novel invention that was successfully
commercialized. User value increased exponentially with volume
of users thanks to the US Army during WWI (Tarantola, A.A., 2014). Gilette benefited from economies of scale with
their first-movers advantage into the wet shave industry because Gilette’s razors
in the Army rations helped to create the network effect that cemented the
Gilette name into the history of the nation.
As the market for Gilette’s razor grew, so did the wet shave standard as
the shaver underwent product and process innovations.
Gillette has been able to sustain its competitive advantage for
more than 115 years of industry domination with a 75% market share of the $3
billion wet shaving market. This dominance was a result of continual innovation
and their razor-razor blade business model of selling the razor for cheap while
selling replacement razor blades at a premium (Rothaermel, 2019). As the wet shave industry has changed over
time, Gillette has been able to respond
with innovation based on market needs successfully. The company has demonstrated awareness that a
different customer group dominates each stage in the industry life cycle with
different preferences, who respond in different ways to innovation (Rothaermel,
2019). To discover their market segments,
the company identified two primary segments using demographic and psychographic
strategies (Bhasin, H., 2018); systems and disposables razors with sub-segments
for each one. To satisfy the needs of
each segment they developed products for each using differentiated targeting
strategies to differentiate the features for each segment (Bhasin, H., 2018). For example, in their shave system segments,
they developed premium and standard shave systems. Throughout the years, their premium shave
systems included Sensor Excel, Mach3, Mach3 Turbo, and M3 Power. They have repeatedly developed refined
products to meet segment needs in keeping with their philosophy of allowing the
customer the opportunity to shave with the best possible product (Gillette.cpm,
n.d.). In doing so, they have stayed
true to their vision which they have successfully used to guide the company
internally aligning to its objectives; however, they’ve failed to identify a
part of the market in conducting their market research, and for this reason,
they have begun to lose ground.
The
problem is, while Gillette was overshooting their market demands, they were
pricing their products too high and focusing on a high-margin, high-end traditional
market segment, which created a market opening for low-cost disruption with
invasion from the bottom up. Their laziness in market research and
marketing has caused a break in the levee just big enough to allow a torrent of
competition rush in at the opportunity. Entrepreneurs such as Michael Dubin
with Dollar Shave Club developed a low-cost alternative, and they deliver these
substitutes by mail to their customers on an innovative subscription-based
business model (Rothaermel, 2019). They
seized a part of the market that wanted low cost and didn’t want the hassle of
going to the store. This slip-up of
neglecting an underserved portion of the market was much more devastating than
Gillette could’ve envisioned. If it wasn’t
bad enough that the new market entrant depressed Gillette’s profit potential,
Unilever saw their chance at the U.S. market and took it. They bought out Dollar Shave Club, giving them
a 16% share in the U.S. razor market, a market they’ve long avoided due to
Gillette’s long-standing dominance (Paracciano, A., 2017). Following the lead of Dollar Shave Club, and because of the low investment costs of the
online business models, new entrants continue to emerge into the online shave
market. Harry’s has entered the online market as yet, another subscription-based,
mail-order shave company, and Unilever intends to leverage this online business
model to take over market domination in the U.S. from Gillette (Rothaermel,
2019). Gillette responded in 2015 with
its’ own Gillette Shave Club to try and win back its customers from Dollar
Shave Club, offering shave plans as well as free shipping (Wahba, P., 2015). As this new business model is in its growth
stages, new entrants will continue to emerge, and current competitors will
continue to steal market share from Gillette.
Talking
about the root cause, for Gillette, they are on the brink of the market decline
stage in the traditional market. The conventional
shaving market is shrinking while the online market is growing fast, and
although Gillette dominated the traditional market, Dollar Shave Club dominates
the online market (Paracciani, A., 2017). Gillette’s Customer preferences have been
changing, and although Gillette has done some market research, the market
continues to evolve with new entrants, which further changes customer
expectations due to changes in market standards. These significant differences can make for a
difficult transition to a new stage in the industry life cycle. Gillette must recognize the opportunities and
apply the appropriate competencies to avoid falling into the chasm (Rothaermel,
2018) and getting devoured by the competition.
There are a few alternatives for Gillette to resolve their performance
issues in the online market as well as the traditional market and ramp up their
total market share to better meet market
demands and expectations of value to regain their competitive advantage.
Alternatives
When considering alternative actions
for Gillette to take back its market share, they should consider the changing market needs and what’s trending. In addition to the threat of new entrants and
substitutes, they should also take a hard look at how the markets are
changing. Based on market research, one
of the growth drivers in the wet shave market is that men are becoming more
concerned about their looks and personal grooming and are more inclined to explore
new and innovative shaving products (Grand View Research, 2016). Women are also demanding shave products at a growing
rate with an anticipated high wet shave industry growth rate in Europe in
particular, demanding product innovations like natural and organic ingredients (Grand View Research, 2016). Because the market segments in the men’s and
women’s wet shave products are in high demand, Gillette has options to capture
some of these market trends and needs/wants.
Possible
Option 1
Option
1 proposes for Gillette to launch an aggressive pricing strategy both online and in the traditional market segment
but to primarily focus on its online
market. Pricing should be considered
their most important influence of profitability so they may want to launch either
a penetration pricing strategy to gain market share or a forward pricing
strategy by pricing their brands below the cost of goods sold and focusing on
future costs of their shavers (Jefferson, L., 2017).
Pros
-Gillette
will gain back its market share and
strengthen brand loyalty.
Cons
-Pricing aggressively below the cost of goods sold may have an adverse
effect. They will need to determine if
they will have a higher margin by deciding
what they will sell by what date.
-Reducing prices may result in a price war with
competitors as they attempt to compete for more customers, which will force Gillette
to decrease their pricing even further,
which could result in a loss of profits.
Possible
Option 2
Men’s
grooming products are expected to grow 3% internationally and 4% in the U.S this year, and 3 percent year
over year and most of this growth will be seen
in the online market segment. (Paracciani, A., 2017). Option 2 proposes that Gillette aggressively
promote grooming products online in
addition to their razors to include shaving creams and soaps, lotions, creams,
scrubs, and beard oil. Also, since women
are demanding more wet shave products, they should launch separate campaigns
targeting both male and female segments.
Working women account for a significant share of the total revenue in
the shave products market due to the substantial
rise of women in the labor force
(Business Wire, 2016). Gillette needs to
respond to market demand for shavers and products including more natural and
organic products in the women segment, and offer soaps, lotions, creams, as
well as a new and innovative feminine razor with refillable blade cartages.
-Gillette
will target a significant portion of the market that hasn’t been fully tapped when targeting women, and
they’ll gain brand loyalty from women, which could have a substantial impact on global sales.
-By
offering more grooming products to men, they stand to gain a large percentage
of the market and take customers away from Harry’s and other competitors that offer grooming products like Badger.
Cons
-Gillette
will have to spend a lot to market their grooming products to males and females
separately and launch double their add campaigns.
-Developing
new product lines can be very costly, especially in the natural and organic
area where the demand might not be as high as the costs to develop and market them.
-There
are many brands, and types of grooming
products on the market, and that market could be saturated.
Possible
Option 3
Yadav
and Monroe (1993) conducted research investigated buyers’ perceptions of their
overall savings when they assessed a bundled product offer. Buyers experience different relative
influences, one- if goods are purchased separately, the perceived savings of
each item individually, and two- their
perceived saving when the items are bundled together. Their findings indicated the bundle had a bigger
impact on the perception of value (Yadav,
M. S., & Monroe, K. B., 1993). This
research makes it clear that Gillette should be bundling their razors with one
or more grooming products as a package deal.
Pros
-The
demand for product bundles could be the exact strategy that Gillette needs to
regain its market share. People love when they believe they are
getting a bargain, and the perceived value should increase sales.
Cons
-The
competition may already offer bundled products.
Gillette will need to research these and determine pricing strategies
for the product bundles as well as what products to bundle together.
Proposed
Solution
My
suggestion for Gillette is a combination of all three options. They need to launch an aggressive pricing
strategy both online and in the traditional retail market with offerings that
tailor to the different demands of both the male and female markets. Additionally, they should develop a grooming
line including a shave soap, shave cream, lotion, and scrub that caters to each
male and female market segments, offering bundled grooming and shave tools in the bundles.
Recommendations
and Conclusion
Gillette
has enjoyed dominance and a near monopoly of the wet shave market in the
U.S. for more than 115 years by
continually innovating and offering customers the newest technology with their razor-razor-blade
business model. Although they have
enjoyed being in the lead, they are quickly experiencing faster decreases in
the market than ever. Gillette needs to
figure out the distinctly different preferences of each of their customer
groups and respond accordingly with innovation, which is where they let their
guard down and created an opening for low-cost
substitutes and new entrants. As the
market continues to evolve with new entrants, which further changes customer
expectations due to changes in market standards, so does the needs and wants of
the market segments. These significant
differences can make for a difficult transition to a new stage in the industry
life cycle. Gillette needs to recognize the opportunities and apply the
appropriate competencies. By launching
an aggressive pricing strategy, offering bundled products, and heavily
marketing to both men and women, Gillette could turn around their quickly deteriorating
wet shave market share. I predict that because
of their strong name and strong brand loyalty
if they implement these changes, they can regain their near monopoly of the
market and the new entrants will fade away.
References
Business Wire. (2016). Global female
depilatory market to witness growth through 2020, owing to increasing number of women in the workforce:
Technavio. Retrieved from https://www.businesswire.com/news/home/20161004005103/en/Global-Female-Depilatory-Market-Witness-Growth-2020
Jefferson, L.
(2017). Why you need a new pricing strategy the strategic CFO. Retrieved from
Gillette.com. (n.d.). Gillette our
history | gillette. Retrieved from https://gillette.com/en-us/our-history
Grand
View Research. (2016). Wet shave market size & trends
analysis | industry report, 2016 –
Paracciani, A.
(2017). Seven reasons why unilever bought dollar shave
club. Retrieved from https://medium.com/@aparacciani/seven-reasons-why-unilever-bought-dollar-shave-club-e9dc41b601fb
Rothäermel, F. T.
(2019). Strategic management (Fourth edition, international student edition
ed.).
New York, NY: McGraw-Hill Education.
Retrieved on March 25, 2019
from https://gizmodo.com/a-nick-in-time-how-shaving-evolved-over-100-000-years-1545574268
Wahba, P. (2015).
Gillette is clawing back market share from the shaving clubs. Retrieved from
Yadav,
M. S., & Monroe, K. B. (1993). How Buyers Perceive
Savings in a Bundle Price: An
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