Value is the thing the shaver gets from having a razor. P&G doesn't get any value from giving you a razor, that's why you have to pay money to get them to do it. You have to transfer some of the value you get back to them in cash form.
If razors now cost 25% of what they used to, there is still exactly the same amount of value in existence. There are the same number of razors and the same number of dollars, only now more of the dollars stay with the customer. Probably there is more total value because at a lower price people will buy more of the thing.
This may be more easily confusing because we have become used to measuring the economy by stock prices. But stock prices are a measure of the inefficiency in the economy. They're a measure of the return on capital. The amount more that companies skim off the top between what the customer pays and what was necessary to produce it.
A company that makes products for $5 and sells them for $5 may have a negligible stock price while creating an enormous amount of value. A company that buys products for $1 and sells them unchanged for $10 may have a high stock price while creating no value at all.
I'm sure there's a name for that somewhere on The Innovator Dilemma, and if somebody finds it I'll gladly change my usage. But yes, calling it "value destruction" is stupid.
Anyway, It does not change anything on the overall idea, but your last paragraph is not really correct. If the company added no value at all, it wouldn't be able to sell the product. It may add value in distribution (yes, there is such a thing), or even just branding, but it better add more value than the price of the product, otherwise, people just won't pay.
If you can create "value" by creating a market, what happens to that "value" when that market is destroyed?
When trepanation went out of style, it destroyed the market for skull-drills, and destroyed the market for hole-in-skill-drilling service providers. While you can argue that there was value to the consumer in not having a hold drilled in their head, it was still a net loss to any shareholders in companies that provided trepanation products and services.
You're not destroying the market either. You're making the market bigger, because at lower prices there is usually more volume. What you're destroying is margins, but that's generally considered good by anyone other than the party whose margins they are.
> If the company added no value at all, it wouldn't be able to sell the product.
It depends how far you're willing to stretch the notion of value. It's possible that you can sell $1 items for $10 because you've paid off the government or are in bed with the Mafia and anyone who tries to compete with you gets thrown in jail or has their shop burned down, but it requires a strange notion of value creation to call it that.
And this happens to a lesser or greater degree every time a corporation buys a law.
I don't think the razor market grew at all. Or, at least not enough to compensate the prices reduction. How could it? It's pretty much bounded.
Making a market bigger by reducing prices is something completely different. It also goes by the same "disruption" name. That's why I started using that term.
About that second line, yes, any kind of coercion is an exception.
> I don't think the razor market grew at all. Or, at least not enough to compensate the prices reduction. How could it? It's pretty much bounded.
Sure, it probably only grew a little, e.g. because of a few people who used to use blades past when they were dull and now replace them sooner. But not growing very much (or even not at all) is not being destroyed. It's the margins that are destroyed, not the market.
> About that second line, yes, any kind of coercion is an exception.
The trouble is, for high margin businesses, it's the rule rather than the exception.
Without some statistics to back it up and a solid definition of "razor market" it's hard to determine.
For example, we could consider electric razors, disposable razors, and replaceable head razors as three separate markets. They are substitute goods, so as the price for replaceable head razors fall that market grows. In response the market for electric razors and and disposable razors contract.
"Market Destruction" is so much more accurate, yes. I suppose though, that in the sense of there being value in a company that Does 'X' for a high premium is lost when another company does 'X' without that high premium.
Still, that's a secondary effect brought on by the "Market Destruction" as you say.
Actually, there's not the same amount of value in existence, there's most likely more value!
When prices go down, people buy more razors. What does this mean? It most likely means that people get to shave with sharper blades, as it's now worth it for them to buy fresh ones and not use an old one.
Well its a matter of prospective. Value for a shareholder is usually the opposite of value as a consumer.
You also have to remember the subscription model that these razors run under. Gillette will happily give you a shaving handle + 1-2 cartridges for free, the theory being you are then locked into their system. Thus "value" is created for them, on expectations of future revenue.
I think that we are confusing two different things here—the creation of new value (making a razor) and the transfer of value from one person to another (paying money). Both are value, but only one is the creation of value. Gillette creates value by making razor blades, their lock-in is a technique to ensure that more value (in cash) is transferred to them in exchange for the value that they have (razors). So value is not created for Gillette, but existing value is transferred to them.
Another way to look at it is that the razor blades are not valuable in and of themselves, only when they are put in the hands of the consumer and used.
Gillette has not 'created value' when it made a razor blade, only created the potential for value which is then crystallized when a consumer buys the item with the intent to use it.
Similarly, a consumer who buys a razor blade has not created value at the time of transaction, but actually accrues value over time as it is used.
The other amazing thing that may be obvious but is striking to me when I think about it: that all B2B spending must eventually be covered by a consumer buying a product or service.
It's a mix. Corporate taxes end up affecting the customer, employee, supplier and shareholder.
Think about the two extremes: If taxes are 100% - the business goes under and everyone loses their jobs, suppliers lose a customer, customers lose a product they liked and shareholders lose everything.
If taxes are 0%, the business grows - shares become more valuable, the demand (and therefore price) for employees and suppliers increases, and customers will pay less.
It sounds like you found out costs exceeding cash flow is bad, not that taxes are bad. Anything taking 100% cash flow from the business is likely detrimental.
The naivety of your second paragraph suggests you think business is not operating in its own best interest. How does employee and supplier costs going up = consumer cost going down? There seem to be huge leaps being made here.
Corporate tax policy and supply/demand economics is probably too complex to try to boil down to a a short paragraph each.
That's what it sounds like to me. The author is writing from the perspective of P&G (though he never makes that explicit) so of course there is tremendous value destruction from that point of view.
As you imply, it might be better to think of it as a shift of value from the producer to the consumer.
The internet is doing this all over the place (just ask the newspapers--plenty of the value they captured before the 1990s shifted to other outlets, and eventually into the consumer's pockets). The auto did this, every important technology does this.
I see it more as the value publication companies captured from entities advertising through them is now shifted to different advertising media such as facebook and google. The value the consumer derives from published content has stayed the same, or arguably declined in the case of printed news due to reduction in spending on content. Though the internet has lowered the barrier to disseminating content, eg blogging, which has put previously unpublished ideas out there.
> Value is the thing the shaver gets from having a razor.
No, value is the $35 that P&G gets for selling a $5 razor blade pack for $40. It's the difference between perceived value vs. commodity value.
By milking the Gilette cow a little too much, P&G created an absurd situation where razors were just ridiculous. That made the market ripe for new entrants who used marketing efficiencies to hock a similar, though inferior product at a "really high" vs "ridiculously high" margin.
The confusion around the word "value" here is unfortunate but hilarious. Marx distinguished between "use value" (the value you get from using the razor) and "exchange value" (the money you are willing to pay for the razor). Those terms would help a lot to put this discussion on a coherent footing.
Economists have tended to shy away from trying to measure use value. However they are forced by actual events to talk about increases in "consumer surplus" which is effectively defined by the increase in use value per dollar, or alternative decline in dollars per unit of use value.
More generally the problem isn't just that "we have become used to measuring the economy by stock prices." The problem is that we've only ever agreed on ways to measure the economy that depend on money.
However money as a measure of the economy becomes less and less useful. Productivity increases are measured in % per year -- which implies productivity is on an exponential curve. And as productivity tends toward infinity, exchange value and profit tend toward zero. We'd better get a handle on use value, otherwise we won't be able to measure much at all.
>A company that makes products for $5 and sells them for $5 may have a negligible stock price while creating an enormous amount of value. A company that buys products for $1 and sells them unchanged for $10 may have a high stock price while creating no value at all.
A company that comes in and produces that same $5 product for $1 and sells it for $4 is creating far more value, both for its owners and its customers.
Economic profit is not inefficiency, it doesn't matter regardless of whether the consumer or producer gets the surplus. Inefficiency is excess work that people do in service of their goals.
The high cost that is not profit, is inefficiency: Paying someone to do work is inefficient not because it costs money, but because the person had to do the work -- it would be more efficient if the work product could be created with less work.
(Compare cost of labor to cost of scarcity: It's not efficient to buy/sell a diamond -- diamond seller is very happy to sell their scarce good for very little work. The coal seller is less happy -- they have to do a lot more work to earn their revenue.)
> Economic profit is not inefficiency, it doesn't matter regardless of whether the consumer or producer gets the surplus.
Economic profit is friction. If you replaced the profit-taking entity with one that performed the same function but took half as much profit then more surplus-generating transactions would take place.
Which means there is more work being done for the same result, because e.g. the higher price causes the customer to spend twelve hours fixing his own car instead of paying an experienced mechanic who could have done it in six.
"A company that makes products for $5 and sells them for $5 may have a negligible stock price while creating an enormous amount of value"
No profit means no value creation, the company is doing nothing. Profit isn't inefficiency, it is the incentive to remove inefficiency.
This is nonsense. I can make a lot of profit by mugging people - does that mean I've created value?
Likewise, I can volunteer my labour to build houses for the homeless, clean up a park... Since I wasn't remunerated for it, does that mean I didn't create any value?
Since the article was discussing a specific industry and company, and the OP responded by the incentives of companies, I figured it was safe to assume that the discussion did not involve coercion or charitable actions as they are very different actions with different reward structures. Within a marketplace for commodities, an actor is rewarded with profits for providing goods or services.
Mugging would be coercion, and doesn't seem to fit within the context. Charitable actions can obviously create and transfer value, but it also seems outside the scope of a discussion of commoditization of goods.
No profit means no value creation, the company is doing nothing.
This part isn't true. If you take inputs and combine them into something the market values more than the uncombined inputs, the process of combining them creates value, regardless of what price tag you put on the end product. The question then is who gets the value you created. If there is very little competition among producers, you might be able to charge a price well above your cost and keep most of the value for yourself in the form of profit (the buyers will still get some of it or they won't buy). If there is brutal competition, you might have to sell at cost just to avoid losing money from fixed costs (ex: property tax) that would have to be paid even if you sold nothing. If you combine the inputs into something the consumer values more than those inputs but charge the consumer the cost of the inputs, you DO create value by combining the inputs and ALL of the value you create goes to the consumer.
Profit isn't inefficiency, it is the incentive to remove inefficiency.
This part IS true. Profit is an (if not "the") incentive to remove inefficiency, though profit is not an inevitable consequence of removing inefficiency. If your competitors also remove the inefficiency, the extra value may not stay with the producers in the form of profit but go to the buyers.
Great points, thanks for bringing clarity to a rushed comment.
You're very right that increased competition could lead to losses. However, this is a short term destabilization with a maximum duration of capital reserves. It is the net profit of the firm that determines it's long term viability.
Would you also say that less profit is less value creation? I think that is almost self-refuting.
What about for-profit companies that convert some of their software over to open source? Does that stop generating value when it goes free?
And what about Comcast? They "earn" great profits, and they aren't dependent on state granted monopoly, regulated as a common carrier etc. But they'd create a lot more value as a utility with much lower profits.
Let's see if I can rephrase this: A company that is unable to generate a profit long-term has proven incapable of creating value for all stakeholders. So a company may be able to sell a product with a margin, but if that margin is not enough to compensate labor, landlords, supply chain, shareholders, etc; the the net value creation is negative. So a company that is not generating a profit is not creating value, but one cannot measure the amount of value created by just measuring profit.
Open Source: I think that the incentives and economics of open source get pretty complex. There are multiple reasons for a company to open source their code, but I think it's pretty safe to say that companies are not in the habit of open sourcing valuable trade secrets. Two ways a company can realize more value by open sourcing are 1) utilize "unpaid" labor (contributors are not paid by the company, but presumably are compensated through some other means) and 2) recruitment and PR boost (by open sourcing projects, the company has improved reputation giving it leverage in hiring and other practices). So, to answer your question, open sourcing code restructures the value calculation. Presumably, an open source project that provides no value is an orphaned project.
Comcast is a beneficiary of monopoly provisions. In order to incentivize the creation of infrastructure, telecoms were granted monopolies. For example, I can only purchase Comcast cable, not TimeWarner or any other provider. I suspect that your point is correct as regulating ISPs like utilities could decrease rent-seeking actions by the ISP. In this scenario, lower margins would generate more value (shareholders realize lower value but consumers realize greater value in the form of decreased prices). Rent seeking, like coercion, is a sign of a market failure.
For the last few years most programmers I know have thought everything has a technical (app-based) solution. But those easy wins are gone now. This is the next trend in tech - upending existing industries by using tech to drive efficiencies.
Start looking for "real stuff" you can improve with tech, rather than just software/apps that're hard to defend.
Start looking for "real stuff" you can improve with tech, rather than just software/apps that're hard to defend.
To that end, I often recommend that developers go and find jobs outside of traditional software businesses for a while. If you spend a few years writing code for a publishing house or an oil company you'll see more of the challenges that affect those businesses that you can apply software to. If you spend your entire career working in a software company it's unlikely you'll realise that these problems exist because (generally speaking) software companies have already realised they're a problem and addressed them.
This isn't just a good idea for those interested in improving or taking over an industry. It's also a good way to expand your own personal understanding of the world. I know from experience - I've worked for the USGS, for a sports advertising startup, for a newspaper, and for a beauty products marketing company.
They all have had very different outlooks on the world.
So true. I built a website for a company that works with heavy equipment rental business frequently, including going to their trade shows. One of the recurrent themes is how bad the software is.
The flooring industry is another place that might be ripe for "disruption", the software often sucks.
>> The flooring industry is another place that might be ripe for "disruption", the software often sucks.
Actually anything in the building industry is ripe for disruption. I've worked with architects and every single firm has a different way of handling documents and change order requests.
There's actually a TON of companies that still use paper trails for change order requests. Some use dropbox, some use SFDC (salesforce.com), some use some archaic cloud storage solutions. It's literally all over the map. And every time one of my firms works with a new sub-contractor then they have to try and sync up how they all handle their project documents - its insane.
If someone developed a decent documents management company, based in the cloud, and integrated it with some nice mobile solutions, they would take a HUGE chunk of the market. I mean, think of how many companies are involved designing and building a house.
>> If someone developed a decent documents management company, based in the cloud, and integrated it with some nice mobile solutions, they would take a HUGE chunk of the market.
Not necessarily. Convincing people to fit their workflow into your new software, effectively running their companies around it, is not as easy as it sounds. Coding it is not the hard part.
Truer words have never been said. Selling your vision/workflow/business structure/data presentation is the hard part. Many of the things one may code as a solution will directly and negatively effect the job security of the exact person your are selling to, but that is the challenge. The secondary effect is a chilling of innovation by limiting the automation gains/improvements in some way to limit the impact of value depreciation of current workers.
As someone with a failed B2B company in CV, can confirm. Also, don't think that you just need to sign a contract with a suit — it's only the beginning. Your toughest challenge will be getting their lazy and unmotivated IT department to actually do anything.
Shoot, I work as a professional services consultant doing software setup/hardware installs for a major tech company (actually the market leader in our niche) and all the time I get pushback from the engineers I'm working with who are resistant to change. If I had a nickel for every time I heard "we didn't choose this software" or "management is making us use this", I'd just about double my salary.
I ran into a client where they preferred their home-grown Perl script to our million-dollar solution because grep searches faster than we do, even though we have literally a billion more features.
It's not just a challenge with your startup trying to get name recognition. It's a challenge for the major players, too. Inertia is hard to overcome.
> I ran into a client where they preferred their home-grown Perl script to our million-dollar solution because grep searches faster than we do, even though we have literally a billion more features.
Did they need any of those features, or did they need to search?
> If someone developed a decent documents management company, based in the cloud, and integrated it with some nice mobile solutions, they would take a HUGE chunk of the market.
I am doing maintenance for some software in roofing industry. The software was written 25 years ago and it sux in so many ways. My first reaction was that it would be very very easy to make much better version of this software and take the market (other solutions sux in same way).
After working on it for past 9 years I can say that the software might looks very simple on the outside, but then you find a lots of proprietary data that are really hard to get (say the information how many man-hours will take laying down the some kind of roof using some type of technology process) and some partnership that will make it quite hard do as an outsider.
I am not saying the disruption is impossible, but it could be very hard and just a better software itself will not help.
On a somewhat tangential note, I worked as a cook in a restaurant while in high school and it was an eye opening experience. If I ever have children I'm going to ensure they have similar life experiences early on.
Is there another way of immersing yourself deeply in Spanish without going to a Spanish speaking country? Not really. It's the same concept really, it gives you an entirely different outlook on things. There are complex problems out there that a lot of people in big companies still don't know that can be solved with software.
Also to say no apps or games will be able to hit it big... Well, just look at Pokémon Go.
Probably not. Niantec's previous augmented reality game, Ingress, was not even close to as popular, despite having most of the same gameplay characteristics. Working with the Pokemon franchise was a brilliant move.
It's not just the popularity of the franchise. The game would not have worked nearly as well with, say, the Star Wars franchise.
The reason it worked is because Pokemon itself is about traveling to different places and finding rare pokemons. That's literally the app - there is 100% congruence.
Like you said, it's about travelling and finding Pokemon. That's what kids who saw the anime and played the game wanted to be able to do. Pokemon GO delivers on that desire.
I think it also helps that Pokemon GO simplified the experience from Ingress which makes it more accessible to a wider variety of people.
I agree with both of you. I didn't mean to imply it was just any random franchise agreement that made the difference and that there were no improvements to gameplay. The integration with the pokemon world and improved game play accessibility are two things that made working with that franchise in particular brilliant. Working with the Star Wars franchise would not have been brilliant. Although with the success of pokemon go I expect there will be a lot more themed games in the future.
I think the success of Pokemon GO will open up people to the possibilities of AR apps and hopefully, we'll see more apps that use AR and the GPS in innovative ways.
I would say yes, as physically being on the inside gives you access to all of the nuances of a particular industry. Outside consulting companies and contractors have a hard time encapsulating these subtleties and, as such, is a major reason as to why enterprise software written for a specific industry is generally quite terrible.
In the dot-com days most programmers thought everything had a computer solution.
With the big jump with people learning to code and being able to build stuff themselves that they started looking and finding opportunities. Back then it was only a few million eyes and few hundred thousand with millions, now a days it's a few hundred million eyes and $100.
It'll only get worse with inflation. You have to compete 1.5x harder than 20 years before to keep up, so really you have to compete 2x harder to be ahead.
Looking for "real stuff" to improve with tech is so 2014, when everyone was pitching the Uber for X or Birchbox for X.
Here's a fun thought experiment: with "real stuff" comes real unit economics, meaning without magical exponential growth of low marginal costs of software to pad $250k comp packs for developers that means software developers and engineers in the middle are going to see their comp package normalize then drop.
And what does a software developer have to do with developing a software like Turbo Tax? The technical part is mostly trivial.
I honestly don't think it wise to go into any industry where you lack any kind of domain experience. Turbo Tax is mostly about accounting and tax law, not software development.
And the technical part of Twitter is somehow non-trivial?
I get what you're saying, but while developing software to handle "real stuff" might be more risky and more difficult, it's also going to have some real value.
Also, I don't see how anyone could ever do anything without going into an industry without domain experience. How else will you gain experience?
Communication, dating, and photo-sharing respectively. None of those businesses were the first to offer solutions to those problems. They're all incremental improvements to what was there before.
A lot of devs I know seem to think that Uber's big win was having an app. I think that's why I hear things like Tinder being labeled as "Uber for dating". I've seen a few devs that think you can just create an app that's really just a front-end to their product's webpage.
The app was helpful for Uber, definitely. But moreso, was the change in the way they handled service: ratings, payment, hailing, etc. The app just facilitated those changes.
Yeah, but you couldn't have done any of that without the app. At best, you could have done it all on a web page accessible by a regular PC, but that wouldn't have gotten anywhere because who's using a desktop/laptop PC while they're standing on the street looking for a ride? Having an app that runs on a portable communications device in your pocket made all those things (hailing, payment, ratings, etc.) possible to do. Really, Uber is just a naturally emergent business enabled by smartphones and the internet; the only thing holding it back was the taxi cartels and their laziness and also obsolete regulations.
This is a good point, but in my mind all of these changes come about because of the app. Suddenly you have a medium that allows you to do these things you couldn't before.
That's what I mean by facilitated. It wasn't having an app that made Uber successful, it was doing things that cabs couldn't. The app was just the means to the end.
I think there's a lot of "we need an app" thinking in the industry, but no thought as to what that app will do.
Honestly, I can see this being "the next big thing" in private equity. Buy a profitable (but, arguably, underperforming business) and improve / optimise it through smart use of technology.
If I had access to capital (large sums), I would do this. Take lots of staples or commodities everyone consumes and add design + tech efficiencies to boost margins, and repeat.
It's something I have thought about, but to really make it worthwhile, you would probably have to purchase significantly large companies. Doing an SME LBO wouldn't really be effective, since you'd actually have to be building these new technologies, which isn't cheap.
There will continue to be many app-based solutions that are successful. It's now just another business medium and less like a gold rush. There is still lots of value to be created in making apps.
The article seems to imply Dollar Dhave Club succeeded with the help of AWS. I don't get it. These guys aren't Google. It's a simple static site with a few dynamic forms. Anyone could've built that easily in 1998, let alone 2006.
Agreed regarding AWS being a non-factor. If any tech service gets credit here it's YouTube. They also leveraged ad-tech for precise targeting, re-targeting that was not possible in a pre-Internet era. Once they were doing very well online they were able to jump in with the big boys like P&G doing traditional media buys in TV, radio, etc.
I think that is the key here, Internet media helped them disseminate their message very rapidly.
I would also argue, easy access to capital was very important. Once that original video went viral, they had to really pour on the online ad-spend to acquire customers. Seeing as how their customer acquisition costs are high, the more customers they got, the more money they lost every month! Capital is key!
They were wildly successful before they were on AWS. I believe they started off on magento, then drupal before writing their own software (once they were having a lot of success).
They don't use Amazon for fulfillment. They used some other 3PL's and are now leasing and running their own distribution centers. In the beginning, Dubin was packing those razors up in his living room!
Drupal, then magento on Rackspace, then magento on AWS, then custom platform on AWS. DSC runs one of the most advanced ecommerce subscription platforms out there.
It's not a "simple" static site, and I'd be very surprised if it was "static" either, because there is guaranteed to be a database backend (how else would you track orders?). The frontend is written in EmberJS, probably with some fancy javascript backend.
I can rewrite any actual static site in Ember. That doesn't give it some magical dynamic properties it didn't already have.
I suspect what he meant was that it's not a site that requires or makes use of any client side wizardry. Even if it does, it certainly doesn't need to - it's a web fronted database; a CRUD app.
Linode, Slicehost, Rackspace, and other good hosts have been around way before AWS and offer very good VPS services that one can scale with ease. Auto scaling is not unique to Amazon. It isn't a cloud thing either. One could scale quite flexibly for at least 20 years now.
Unfortunately all the misinformed boot camp coding hipsters don't know their history but love to be plenty opinionated about technology as an artistic movement. And you get these wide reaching grabs for whimsical awe, full of misinformation.
Dollar Shave Club was nothing but a marketing success. The tech has absolutely nothing to do with it. Cute narrative attempt, I guess.
Digital Ocean wasn't around before AWS, but yes, VPS's were a thing before AWS. Cloud services weren't nearly as complex though, usually only offering VPS's and not much more.
Edit: other guy beat me to this. Either way I agree that AWS wasn't integral to DSC's success.
I wasn't really in the cloud world in 2006, but AFAIK EC2 was pretty inventive/original/game changing in that it allowed anyone to immediately fire up and use VPS. Although there were (small) exiting services, these had enterprise entry level requirements, where you had to be approved as a customer before hand, provide all code that you wanted to run on their machines, and contact humans on the provider's end in order to up/down scale. Open to correction.
No, AWS was not unique. It became well-known because a) Amazon had the money to pump into marketing it, and Amazon was already a strong brand and b) aggressive integration of additional non-hosting services like S3 and Route53 made it a simple one-stop shop. They had the brand credit to get enterprise clients on the hook. As the rest of this thread is stating wrt DSC, the success is really only slightly related to the technology.
Linode and other hosts have had online billing since their inception. You could always launch a VPS on linode in seconds. Even shittier hosts like HostGator or Dreamhost never required human contact to launch new servers.
EC2 was game changing for certain reasons but what you mention sbout 'enterprise' was never an issue.
> that can be bought on zero marginal cost websites and shipped to your home directly there is no reason to charge more
The author's point about AWS was not really well articulated, but the above is his main point. All that's "changed" is the distribution model for retail - also known as E-Commerce.
The profound effect of this disruption can already be seen happening on a smaller scale if you observe the marketing space in the recent years. Small brands can now compete without fat advertising dollars. Content marketing is becoming more relevant than ever. I recently got in touch with a small marketing agency which is publishing interviews with athletes for one of their clients, a sports sock manufacturer.
You don't need billboards, flyers or TV ads to drive awareness, you can leverage free and paid marketing channels to build your business without burning loads of cash. Marketing today is less about budgets but more about how you can effectively execute on various parts of digital marketing - social media, content, paid ads and SEO. I can guess it will be a big win for consumers in the upcoming years; not so sure about incumbents.
Once BigBrand will have realized that billboards and flyers are not effective anymore, BigBrand will redirect its money towards the new channels: I guess it will be a big win for google and facebook.
I am not so sure it will be a win for consumers once most available content will be biased ("sponsored") by BigBrand money. To prevent such nightmare we need laws to force some kind of transparency on sponsored content.
At the risk of being considered overly pedantic; is offering a better product in the marketplace to the detriment of your competitor called 'disruption' now? Isn't that exactly how the free market is supposed to work?
For me, disruption is the creation of a new product or service in a very well established market, that is very different than the established one. For example, Uber and the taxi world, AirBnB and hotels, DSC and Gilette.
All have actual impact on the original established market players because without a big change they can't compete.
As the article explains, the product is actually worse, but much cheaper, and in absolute terms it's "good enough" since the better product is over-serving its market.
This is pretty much the textbook definition of disruptive innovation.
Is it "disruptive innovation" though? It's textbook competition, and textbook efficient markets, but the product is exceedingly similar, and the subscription model isn't what's causing the shift. This just looks to me like competition in a formerly-monopolized space.
I think his article actually uses the term disruption a lot more aptly than most others. The implication is that the entire business model of these major conglomerates is now threatened. The cushy budgets P&G, et. al., have used to their great advantage for the last 70 years now look vulnerable when faced with competitors with business models like DSC's.
A pizza in a restaurant, a pizza in a supermarket and a pizza delivery are all pizzas, but they're not the same product and differences in price is only one factor.
> A pizza in a restaurant, a pizza in a supermarket and a pizza delivery are all pizzas, but they're not the same product
If the product is "pizza", then of course they are the same product.
Lay out a salami pizza from a restaurant, supermarket and delivery next to each other on plates and they will (mainly) differ only in quality and price.
OK. What differences do you see between three plates of salami pizza that is not purely a difference in the quality of their ingredients (floor, water, cheese, tomato sauce, salami, etc) and the composition of these?
None of these points matter when the three pizzas are already in front of you, on three separate plates, which is why I brought up this particular scenario twice.
I think it is obvious that we (including the other participants in the thread) have vastly different points of view on this topic.
To me, the "pizza" example is simply about the end result: what you shove in your mouth.
To the other participants, the pizza is much more than that. For example, you mentioned "atmosphere" with restaurant pizza. To me, that has nothing to do with the pizza; the dining experience is an entirely different product itself (a service), and applies to various non-pizza dishes as well.
To emphasize why I believe this, and as food for thought (no pun intended), here in Austria, virtually all pizza delivery services are operated by pizzerias. In other words, in this particular case, the restaurant pizza and the delivery pizza would be identical. The difference would lie only in the mode in which you acquire the pizza -- the service product.
While I obviously still favor my point of view, I can also understand why you favor yours.
Is it really worse? Are 5 blades really better than 3? If they are, they aren't much better. It was all marketing and mark-up because they had the market.
One (sharp) blade is better than three. I haven't shaved in years, but when I did, I gave up on the disposable multi-blade razors that cost far too much and degraded too rapidly, and got an old style Schick injector razor, along with about $20 worth of good-quality, German, replacement blades. I've still got quite a few left from that purchase - you could use one blade for a month of daily shaving with the slightest amount of care.
It's slightly easier to cut yourself (this depends on the type of blades you pick and your experience with them)
In all other aspects they are actually better. There is no proprietary cartridge handle, they last quite a long time and the best part is that they are very cheap.
Particularly weird since DSC didn't offer a better razor. They looked at the existing state-of-the-art, scaled back marginally, and dropped the obscene markup.
Realistically, this is about breaking a monopoly thanks to easy consumer outreach.
I don't know all the details here but by what definition of "better" are we using?
I think there are two disrupters here, DSC applied a different business model and distribution model to razors and blades. Dorco, possibly because of DSC money, showed that they can mass produce good enough blades in multi-blade cartridges cheaper than Gillette, who builds billion dollar machines to manufacture them. If blade count is "better" then Dorco is on par or better. If it's the coatings and springs and the whole package then maybe Dorco is merely good enough. Either way, Dorco is able to compete at a quarter of the cost and that seems disruptive.
DSC found a great partner though, that has been key. I suspect Gillette has oversold their innovation too.
I guess I was treating "better" as "delivers a better shaving experience". That's subjective, but I don't know anyone who reports that DSC razors, even the top-tier ones, are more desirable than a decent line from Gillette. Pretty much across the board, the conclusion is "not enough worse to care about".
I do wonder how much Gillette oversold their innovation, or at least made advances that could be copied just by looking at their product. They certainly seem to have been throwing a lot of R&D at near-zero returns on actual quality.
Definitely worse enough for me to going back to buying Gillette blades at the drug store, after spending $9 a month for at least a year on DSC's best razor.
That was my experience too. I eventually traded for a good electric razor, and I'm considering a straight razor. But DSC's blades just weren't good enough to keep me as a customer - Gillette still has the market cornered for disposables that work for me.
Right. And I don't have the numbers at hand but I don't think I spend more than $15-20 every couple of months on blades, so I'm not really losing on price either.
To me the disruption involved the new supply chain and marketing channels made possible by tech that drastically undercut the incumbent. The actual product differences are mostly irrelevant.
Not much, but that may be because of an intense dislike of the word; in common usage though I would define disruptive when used in the context of an event taking place in the marketplace as applicable only to situations that cause not just stiff competition to the extent of dislodging an incumbent party, but also a clash with existing laws, regulations, and societal conventions on a significant scale.
The razors-as-a-service model was the big win here. Microsoft moved office to subscriptions. Apple now sells iPhone via a hardware subscription. Amazon has product subscriptions and on-demand buttons you stick on your washing machine that you can press once for a refill.
Gillette doesn't do direct sales so it misses out on subs. It must rely on retailers to execute subs. If Gillette did subs for $10 they could greatly impact their "base" dynamics, essentially: low churn, consumer inertia, recurring and predictable revenues, direct channel to consumer for marketing and cross/up sells, streamlined billing, etc.
"Club" has been used to describe subscription products for as long as I can remember. Columbia House/BMG's mail order CD business were called record clubs, for example. There was (is?) also the Book of the Month Club and plenty of other "X of the month" clubs that probably existed way before the world wide web.
Perhaps "joining a club" sounds more positive/marketable than "subscribing to a mail order service."
Maybe something changed, but DSC was not yet profitable, so concluding that their service is a big win is premature. DSC was still burning cash which is important to consider in determining if they were sustainable.
The sale is a win for investors if they ended up with a good ROI. The article says the DSC brand cost $57m, but I've frequently seen numbers closer to $200m.
DSC alone may not have lasted, but if it has access to Unilever's product lines and resources, it can move beyond razors.
I'm quite surprised there's been so little focus on the shaving experience. I really wanted to like Dollar Shave Club. I went with them early. Their prices were great and I really enjoyed their marketing.
But after trying most of their razor models for months, they were far worse than even the Mach 3 razors I had. It was painful to shave with them, the handles had a bad design, the lubrication strips weren't working, etc. Maybe they're better now, but I get several months (or more) out of Mach 3 razor cartridges. I don't pay much at all for them and have little incentive to switch.
I thought the same thing when I tried Harrys (which is a "higher class" version of the Dollar Shave Club's model, yet still cheaper than buying brand name razors). I also dropped over $100 on a nice electric razor and hated it.
Finally, I spent about $40 on a nice stainless steel safety razor and 100 blades for $11 on Amazon. Each blade lasts me probably 2-3 weeks of shaving every other day. It's a bit more time consuming and it takes a little practice at first to keep from getting nicked, but it's worth it in the long run. I find it sort of funny that I'm most satisfied with one of the oldest, simplest, and cost effective shaving systems.
Safety razor is the only thing I recommend to people looking for a high quality shave. However, I also make sure to emphasize my best analogy which is that of driving an automatic vs. a manual car.
It's cheaper to purchase a manual and you gain more control, but the average person will lose convenience and speed. It takes practice.
In my experience, you need to spend more than $100 to get a nice electric shaver.
I bought a Braun Clean n Charge 7000 series back in 1999 or whenever they first came out, it was $200. I loved the thing. It lasted me over 10 years. When the battery pack finally wore out, (after trying and failing to replace the cells), I threw it out. I was feeling frugal, and compared the various Braun CnC models and couldn't understand why the top-end 700 series was so much more expensive than the 300 series which seemed to have all the same important 'features'. Sure, it lacked the fancy LCD and some of those touches, but I figured it would shave just as well, and for $100 less. (IIRC it was around 80-100$ for the 300 series and close to $200 still for the top-end 700 series).
I used the 300 series (I think a 370cc) for over a year and hated every minute of it. Finally I wised up, cut my losses, chucked it, and spent the damn-near $200 for the 700 series.
The 700 is made in Germany vs Mexico for the 300. The 700 is heavier. The materials feel better. It looks nicer. The motor feels like it runs twice as fast.
I found my Harry's shave and experience to be entirely comparable to the old Mach 3 cartridges, personally. I know people love advocating for a safety razor, but I tried it for six months. I never found the shave superior enough to justify what I saw as additional hassle.
I did Dollar Shave once then ordered direct from Dorco and now use Harry's. It's so difficult to do comparisons because you tend to use the blade for different lengths of time.
Two months ago I tried switching from the Gillette Fusion Manual to what they call The Executive (6 blade inc. nose/sideburn trimmer). It was approximately a $1 cost saving per blade relative to Gillette on Amazon (both buying in bulk).
As you quite correctly said, the lubrication strips are simply terrible. It felt like using a really old Fusion blade where the lubrication strip had worn away, and razor burn increased noticeably. No cuts or nicks from either one, just discomfort.
The nose/sideburn back trimmer was also terrible. I use it regularly on the Fusion to, uhh, get under my nose and straighten my sideburns. On The Executive it felt like using a cheap disposable own brand blade.
I also want to mention the poor blade casing. On the Gillettes there is a gap between blades allowing the waste to easily escape, they clog a little but not much. The DSC's Executive had the blades much closer together, which caused waste to clog between the blades and it needed to be washed out frequently.
I wanted to like DSC's offerings. I wanted to switch. But after trying two The Executive blades, I've now switched back to Gillette. I'll happily give DSC another shot, but improvements have to be made.
Some quick tips for someone interested in using a safety razor (you should!): Get a stainless steel razor so it lasts, and buy a variety pack of blades to determine your preference. I personally find the Feathers to be too sharp, but I don't have tons of coarse facial hair.
Same here. About $30-35 for an Edwin Jagger razor and $8 for a 100-pack of Derby Extra blades; I've been using that same pack now for about 4 years! I still have 25 left.
However, be careful: if you're not used to using a double-edged safety razor, it has a high learning curve. You'll probably cut yourself when you're first learning. Read online tutorials about how to do it right, and very importantly, don't be in a hurry. Once you've gotten the hang of it (after a month or so), it's pretty easy, but it does take time to learn the proper technique.
Have you ever tried a razor cleaner like a RazorPit or BladeBuddy (product names)? One where you clean a commercial razor on after use? I still use Gillette, etc razors for convenience, but they last many times longer when I clean them with such products. They usually cost less than a single fancy blade cartridge.
The article highlights Dollar Shave Club's 2012 introduction video[0], which is funny and fantastically frames the reality of the razor market. I don't know why I missed this a few years ago...
That video has to be the most profitable marketing campaign in terms of investment vs. reward. It single-handedly built DSC's initial customer base and its brand. And all while making people laugh.
I dont see this as "disruption", they wisely competed in a space with a huge mark-up on product cost. Something like this wouldnt work on an already lean industry.
This is actually the textbook example of "disruption" as described in The Innovator's Solution. The generally accepted definition of disruption is capturing a market from an incumbent by introducing a product that meets most of a customer's needs at a much lower price and/or higher availability.
The beauty is that the big players are structurally unable to compete, because they have baked in a high cost structure and are dedicated to serving ever-higher customer needs (think five blades).
Thanks for that definition and its context, I was unfamiliar with it even though I have seen the used often. I viewed it perhaps in a more old school way of simply exploiting their weakness of those baked in costs. Your definition helps me understand more now how the term is used,I appreciate that.
We consider companies like Facebook or Twitter to be tech companies because tech is their differentiator even though they're really social media companies. In this vein, DSC is a marketing company. They are really good at convincing people to buy their razors which are totally normal razors that you can actually buy elsewhere.
If Gillette was Apple and someone else decides to buy up Chinese-made tech gadgets, throw it into a USPS Priority box, give up margins as marketing, and create a quirky new brand would that also yield a similar result in 4 years?
Also, there must be quite a lot of ad agencies up and down Madison Ave laughing out loud because in their monthly pitch sessions to P&G they must have offered something similar to DSC on a silver platter for much less than a billion dollars.
Apple locks in its users far more than razor companies do. A Gilette customer can switch to DSC at basically no cost. They're buying razors regularly anyway, so they start saving money the moment they switch. The only question is how well the new razors actually work for the customer.
For an Apple customer switching to the Apple version of DSC, first they're probably dropping a significant chunk of money to switch. Yes, the Apple-DSC will be cheaper, but phones aren't a consumable product the way razors are, so there's also the possibility of just spending nothing and keeping your current Apple phone. Then if you do make the switch, you lose all your apps, you lose the ability to iMessage and FaceTime your friends, you lose easy access to your iCloud photos and notes, and more.
One big difference here is that if you decide to dump Apple, you can resell your overpriced iPhone on the used market to get a good portion of your money back. You can't do that with razors. The main problem with dumping your iPhone is, as you pointed out, all the software and online services you might be tied into. That's where most of the lock-in is. People who avoid all that crap are in a much better position because they can switch phones easily at any time.
If they did offer that to P&G, then P&G was right to reject it. P&G have nothing to gain from this as incumbents, they'd just be throwing money away. The article covers this, saying Unilever was only in a position to buy because they had no existing product in this area.
i agree. this way unilever is getting a foothold in another category in which they can undermine P&G's profits, even though in a bit by bit fashion. they will surely bundle DSC concept with existing personal care portfolio. on the contrary, p&g is galaxies far from hurting unilever's profit maker : ice cream business. still it is clear that gillette acquisition was the best thing p&g did in its his entire history. they wouldn't have survived profit-wise otherwise.
IMHO, DSC model (subscription based company directly owning supplier to consumer chain, offering nice price + convencience) is the way to disrupt incumbents in consumer goods even though they will never get as big or as strong. there are lots of products which we do not care which brand we purchase as long as a certain level of quality and on-time sufficient delivery is ensured. i would definitely subscribe to a service which analyzes my consumption and delivers all "non-critical" products to my home/work location.
Xiaomi basically does something pretty similar with regards to many consumer electronics categories, on a global basis. And in 5-10 years, i wouldn't be surprised to learn you could buy most electronics form them at grea value.
Xiaomi aspires to be an Apple knockoff but really will end up being a Muji knockoff. Exporting fast fashion and lifestyle goods will be more profitable than low cost tech.
I recall people complaining about Dorco raising prices after Dollar Shave Club came about. The conspiracy theory was that DSC reached an agreement to keep DSC competitive. This is unsubstantiated, but you can use the Internet Archive to look at prices on dorcousa.com and see that prices have gone up. For the Pace 4 Cartridge Refills FRA1040
It's interesting, comparing the Dollar Shave Club 4X to the Pace 4 Cartridges it's actually cheaper on DSC. Plus it's handy that it automatically ships.
It's generally poor form for a wholesaler to sell direct at a price that undercuts their distributors. That's what 'recommended retail price' is about.
What seems to be missed in this analysis starts here:
> That worked as long as P&G’s other advantages in technical superiority, advertising, and distribution held, but were they ever to falter, it was eminently viable to sell cartridges for less and still make a healthy margin.
For Dollar Shave Club there was no real technical superiority, and AWS disrupted the distribution. Is drafting off of others' technical innovations replicable? Sure, but you're not alone. AWS is a resource now available to almost anyone. Are "viral videos" replicable? Hardly. DSC hasn't even managed it themselves.
Until someone disrupts creative direction then the kind of disruption referred to in this article is a long ways off.
Honestly I really start to wonder if big TV ads for already popular products really make a difference in sales nowadays, or if it's just a matter of "sitting" the dominance of mainstream, known products.
Because you can start to question how ads work, and if big companies are just wasting that money to maintain the "classic" media system.
Yep. I jumped on that small bandwagon around 4 years ago, and though the initial learning curve was a little steep, I stuck with it and I wouldn't go back. My total cost for 4 years: around $35 (I think) for a premium Edwin Jagger DE razor handle, and about $8 for a 100-pack of Derby Extra blades (which I've only used 75% of so far in 4 years). That's just over $10 per year, and about 3 cents per day. And most of that cost is in the razor itself, which doesn't wear out. So over 10 years, I expect the total cost per day to be around 1.5 cents.
I had trouble getting past the "shockingly low" valuation. Gillette is a terrible comparison since leaders earn premiums, Gillette's distribution is unparalleled, included awesome brands Duracell & Braun and makes its own products.
DSC is a mediocre brand that primarily resells a crappy product at cost.
Speaking of disruption, I really hope Robinhood's business model catches on for individual stock trading. It's absurd that most brokers still charge $10 per trade and makes it very restrictive for people trying to just get in. The parallel with Dollar Shave Club's rise hopefully pans out.
Hmmm, wasn't aware of this broker, I'll have to look into them. May be nice to diversify across both services for my stocks and hold an IRA with IB. Thanks for the tip.
Or is it a sign of an overheated stock market where traders are looking for positive signs of anything positive and are willing to pile in money to established players who are "adapting" to these new, incredible models of razor distribution.
If Unilever wanted to get into the shaving business they would've bought Dorco and not the distributor. The $1b is for the mailing list to which Unilever can upsell Axe and Dove for Men.
> That’s exactly what had happened with the Mach 3, Gillette’s previous top-of-the-line model: Gillette increased blade and razor revenue by nearly 50% with basically no change in underlying demand, easily making back the $750 million it cost to research and develop the razor
That number is staggering. How can that possibly be right?
> According to the traditional way of measuring marketshare Dollar Shave Club only has 5% of the U.S.; the discrepancy is due to the massive price difference between Dollar Shave Club and Gillette
So what fraction of shavers use Dollar Shave Club versus Gilette?
Then, of course, cartridge share presumes Gillette and DSC uses consume cartridges at the same rate.
Why not just compare actual user metrics? I guess it's hard to figure out how many people actually use a store-bought razor; not as hard in the online world (though it may be proprietary information to DSC).
The real disruption will come when the non-bearded come to learn all the joys of not shaving. Then we will be reading on the front page of HN how Dollar Beard Club disrupted DSC and Gillette.
My skin and facial hair suck. The only razors I can shave with comfortably are Gillette Fusions. I know that they're incredibly overpriced, but the big package from Costco lasts me a year. I still get some mild irritation occasionally (even on the first shave with a fresh cartridge). I'm considering some form of permanent removal for my facial hair because it looks terrible and I will never grow it out under any circumstances.
You tried DE and it didn't work? I'm a little surprised. Men have been using DE razors for generations (they first came out in WWI). Are you sure you just didn't give yourself enough time to learn to do it right? Also, there's different blades out there, and different razors, some more aggressive than others. Many recommend getting a variety pack of blades and trying them all to see which work best for you, and many have serious preferences for the razor (handle) too, because their design and the distance between the safety bar and the blade can have a huge impact.
These words, they are not what is happening.
Value is the thing the shaver gets from having a razor. P&G doesn't get any value from giving you a razor, that's why you have to pay money to get them to do it. You have to transfer some of the value you get back to them in cash form.
If razors now cost 25% of what they used to, there is still exactly the same amount of value in existence. There are the same number of razors and the same number of dollars, only now more of the dollars stay with the customer. Probably there is more total value because at a lower price people will buy more of the thing.
This may be more easily confusing because we have become used to measuring the economy by stock prices. But stock prices are a measure of the inefficiency in the economy. They're a measure of the return on capital. The amount more that companies skim off the top between what the customer pays and what was necessary to produce it.
A company that makes products for $5 and sells them for $5 may have a negligible stock price while creating an enormous amount of value. A company that buys products for $1 and sells them unchanged for $10 may have a high stock price while creating no value at all.