Business Model Innovation: How Dollar Shave Club Disrupted Gillette

Although most of our attention is captured by fancy high-tech innovations such as the iPhone or Teslas sleek electric vehicles, innovations do not need to be high-tech or radical to be successful. Until recently, Gillette, a company that invented the safety razor and the razorrazor-blade business model, dominated the $3 billion U.S. market for wet shaving with some 75 percent market share. Yet Dollar Shave Club, a young, 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 $67 billion, be beaten by a brash startup? Gillettes pattern of incremental innovation over time led to overshooting in the market, resulting in a product that was overengineered and too expensive.King Gillette invented the safety razor about 115 years ago. The company 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 business model is now widely adopted (think printers and cartridges, for example), and is called the razorrazor-blade business model commem-orating its origins. When introduced, the new safety razor was a radical innovation, allowing Gillette a tem-porary competitive advantage. To sustain this advan-tage over time, Gillette followed up with incremental innovations, mainly by adding additional razor blades to the razor, all the way from one blade to six. As a re-sult of this innovation pattern over time, one of Gil-lettes newest razors, 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 created a situation where Gillette exposed itself to low-cost disruption. One key is that the high-end, highly priced offering of the market leader is not only overshooting what the market demands, but also often priced too high. One wonders if a person really does need six blades on one razor, or wants to pay over $10 for one cartridge.Seeing this opening provided by Gillettes focus on the high-end, high-margin business of the market, Dollar Shave Club established a low-cost alternative to invade Gillettes market from the bottom up. With an $8,000 budget and the help of a hilarious promotional video that went viral with over 25 million views, the 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 membership within the first 48 "hours. It 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 ad-vertising 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 compa-nys name suggests, its entry-level membership plan deliv-ers a razor and five cartridges a month for just $1 (plus $2 shipping). The member selects an appropriate plan, pays a monthly fee, and will receive 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 need in the mar-ket for serving those who dont like to go shopping for razors and certainly dont like to pay the high prices com-manded by market leaders such as Gillette. Procter & Gambles competition also took notice. Unilever, P&Gs European rival, has long stayed away from the U.S. wet shaving market because Gillette was so dominant. But seeing how Dollar Shave Club dis-rupted Gillette, resulting in a rapid market share decline, Unilever saw its opening. The Anglo-Dutch multina-tional consumer products company, with some $60 bil-lion 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 a bad offer for a five-year-old startup. Michael Dubin happily accepted the offer and sold Dollar Shave Club to Unilever. With sales of razors and razor blades moving rap-idly online, Unilever is hoping to leverage this business model innovation to unseat Gillettes dominance in the U.S. market. But Gillette responded swiftly by offering its own subscription-based service (Gillette Shave Club) and by lowering prices up to 20 percent, an un-imaginable move in recent history. Successful innova-tions also led to imitations. A mere two years after Dollar Shave Club started, two entrepreneurs founded Harrys, also an online, subscription-based mail order business for shaving equipment. After Target invited Harrys to put displays in all its stores in 2016, its busi-ness took off. This was a smart move on Targets part because it allowed Target to put pressure on Gillette, which held more or less a monopoly position as a sup-plier with 75 percent market share. Similar to Dollar Shave Club, Harrys business is growing rapidly. As a consequence of increased competition, Gillettes mar-ket share in the $3 billion market for razors and razor blades has declined from some 75 percent in 2010 to about 50 percent by 2019, and continues to slide.

1. Prepare a SWOT Analysis.