That is, clever revenue

On my latest trip to the Nespresso store at the V&A, I was reminded once again of how amazing their business model is. You start off by buying the Nespresso machine, which is reasonably priced, and think that’s your big capital investment. It is the capital investment, but it’s not exactly the big one. It’s the monthly trips you’re making to their stores to buy Nespresso pods. Yes, I know you can buy other pods, but they don’t taste as good.

Furthermore, you can buy their machines at multiple places, such as @Home and Yuppiechef, but you can only buy the pods from them. Annuity revenue stream at its best! It’s what I call ‘clevenue’, in other word, ‘clever revenue’.

Immediately after being in the Nespresso store I went to Incredible Connection to buy a printer, and I used this knowledge to make what I’m hoping was a clever purchasing decision.

After looking at the different printers for sale and their prices, I asked to see the respective ink cartridges for each printer and looked at their prices (and number of pages you can print per cartridge).

A totally different consideration, especially when the cartridges cost 50% of the price of the printer. So I went for the slightly more expensive printer, with the significantly cheaper cartridge.

I now drink my Nespresso coffee while doing my printing and feel that the one decision counter-balances the other.

Another thing to be aware of is that the economic model of ‘low volume, high margin vs high volume, low margin’ doesn’t always hold. There’s no better example for this than the wedding industry, which thrives on over-charging and getting away with it as ‘price indicates value’ … apparently. When I was looking for a photographer for my wedding, I got a range of quotes, generally nothing less than R10 000. Then, I got one quote for R6 000. Same services offered but at half the price. I struck it off the list without giving it another thought.

Have we been conditioned to believe that price is indicative of value or quality? While some alternatives include an element of brand value, not all of them do. Perhaps we should stop and think … Maybe the cheaper alternative is just as good? Or maybe their ‘clevenue’ is just too clever for us?

Author: Gizelle Willows CA(SA) MCom Finance is Senior Lecturer in Financial Reporting at the University of Cape Town