Coffee pod logic, why digital solutions theory is a package

Companies and people buy products. Some of those products are physical tangible things, while many others are actually services that we quite importantly still call products. The idea that any service is a combination of more than one entity, unit or elemental thing supplied by an organisation makes us feel happy. It makes us feel well served - the clue is in the name.

As world economies bend, shape and change, significant developments in many industries are driven by customer willingness to pay for any given service. The point where customers exhibit quantifiable measurable buying patterns based upon service adoption often defines the shape of business strategy for all vendors in a market.

Let’s consider a product/service combination play that has changed the way many people go about their core morning rituals. It’s your morning coffee.

Cappuccino coherence

A self-brewed coffee at home has an average cost of just pennies. Combine water, electricity and even some relatively good coffee powder and it’s still not that much. 

That standard has of course changed thanks to the arrival of the coffee pod and the machines it works inside. At the time of their launch, these handy little units were priced somewhere around a dollar, euro or pound each - and although they’ve gone down to around a third of that cost now, it’s still considerably more expensive than brewing up your own beans by hand.

But why would customers be willing to pay so much more instead of continuing to use the cheap way of making coffee? Simple answer: because customers want to have the same cappuccino coffee experience at home that previously only a professional cafe establishment could give them. 

But the key point here is not just convenience and coffee quality, it is the fact that when customers bought a Nestlé or Nespresso coffee ‘experience’, that meant buying the machine and the pods together; they couldn’t be separated and so it was a great example of vendor lock-in. Although more machine interoperability has been achieved since then, this was a service experience that taught us a lesson.

That lesson is very straightforward - customers want a solution for a problem, not another product

Give us solutions, not products

Moving the basis of this product shift theory into an organisation’s modern digital strategy for operations is a logical progression. Companies must now define, create and refine a product or service and create an ecosystem that can’t be easily divided into separate parts and that competitors can’t deliver as an alternative in a short period of time. 

A successful digital strategy has to create a high-value service that solves a problem important enough to customers to spend their money on. Only then can a digital strategy be considered innovative and able to create enough cash flow in its first years. With the spectre of digital competitors always looming, that same digital strategy must also be composable, interoperable and essentially adaptable in order to ensure an organisation’s longevity in its chosen market.

As noted in a Harvard Business Review article in 1960 titled Marketing Myopia by Theodore Levitt, to ensure continued growth, organisations must define the industry they are in broadly i.e. not broad as in general, but broad as in broad terms with a broad view and ability to change. 

Fire protection against extinguishing exhaust

As we have said, customers look not for a specific product but a solution to a specific problem. But there is a deeper logic to embrace here, since problems are evolving and changing over time, companies must continuously innovate with solutions for those problems, otherwise, they’re condemning themselves to a position where they will be exhausted and extinguished in the eyes of the customer base.

As we all remember, neither Blockbuster or Kodak were ready to shift at the same speed as the customer and the market in general, so both lost out, in on-demand video and digital photography respectively. 

In the above-referenced book, Levitt summarised his thoughts by saying: "People don't want to buy a quarter-inch drill. They want a quarter-inch hole!". This tells us how far ahead customers are thinking, how post-implementation customers position their mindset… and it tells us how solutions-focused that customer is, always.

Think about Netflix. We know that Netflix subscription rates vary between countries, but most often the price is comparable to what households are already paying for the mandatory national TV subscription fee, or at least a basic connection to a core cable service. Why are customers willing to pay an additional fee? Mostly because Netflix offers a broader set of movies and TV shows than what consumers can find on national TV channels.

The value vortex: create, capture, cycle  on the y by v

It’s not a piece of academic economic theory as such, but if there is a value vortex that organisations now need to think about in relation to this discussion, it is a dynamic drive to find a way to ‘create value’, then ‘capture value’ and ultimately to be able to circulate, innovate and repeat that process through economic cycles.

In short, it is necessary to create a strong integration between services that makes it difficult for a customer to acquire them separately. Let’s consider again the online shopping experience. The success comes from bundling purchases with shipping to make it easy enough for a customer to order and receive the product at home. Instead, if purchasing the product on an online store would have required the customer to take care of the logistics, the model wouldn’t have been so successful.

We can extend the cappuccino logic in our home coffee pod machine into other environments and examples. Many cinemas combine the price of an entry ticket with the option to purchase a tub of popcorn. Some even offer a pizza or nachos option. 

The customer could get their tickets, then go outside into the high street or mall and get some snacks, but why would they bother when the whole experience is sold to them so nicely packaged into one single convenient viewing and eating solution? Answer: they often don’t.

Maximised remuneration

These business models are valid strategies that companies can evaluate, define and decide to adopt. But where a digital strategy can create premium value for services, this is always a far more remunerative strategy. 

Companies that go to market with high-value ‘combined product’ solutions are very typically the ones that find themselves capable of outperforming others. Travel agencies have understood this reality for decades, it’s called a ‘package’ holiday for a reason i.e. one purchase includes flights, airport transfers, food (sometimes drinks) and a few tours.

Successful digital strategies enable companies to find that cafe-style cappuccino coffee pod or pizza-popcorn movie bundle and so solve a problem important enough for customers to spend their money. These strategies are usually based on integrating systems to outpace potential competitors and, once mature enough, give the organisation an established leadership position.

One such example of a company that was able to combine offerings and provide new digital services to customers is leading Italian insurance company, Sara Assicurazioni. 

Sara built a multi-cloud enterprise application solution that connects all its data and systems. Newfound flexibility, scalability, and innovation supported reimagining the way its insurance services and products were developed and delivered. It shifted  all-in-one products to fast-to-market, highly personalised policies customised to customer habits, behaviours, and preferences. In Italy’s insurance landscape, Sara Assicurazioni transformed from a 70-year-old traditional insurer into a head-turning, digitally-driven leader.

When your organisation thinks about building its next great solution, remember to consider combination, integration and packaged-up presentation. But please, I am Italian, keep the pineapples off of the pizzas, yes?