Innovators–be they individuals or corporations–frequently view patent protection as the key to capturing value from the time and money invested in creating a successful product. Indeed, conventional wisdom dictates that a patent covering a true innovation will make it difficult, if not virtually impossible, for a competitor to legally provide a knock-off product to the same customer. Time and again, however, a successful product introduction will be followed by appearance in the market of a substitute product that provides the same consumer benefit but that also does not infringe the innovator’s patent rights. In such a case, the innovator is not only faced with competition, it must now play in an increasingly price-eroded market, where such price erosion is likely more painful for the innovator because it made an investment that the knock-off company did not make.
A familiar example of a product where the innovator’s patents failed to protect a successful product from knock-off products is illustrated by the popular Keurig K-Cups(R). The proliferation today of increasingly lower cost coffee “pods” even in view of an aggressive patenting program by Keurig should indicate that the company (now Keurig Green Mountain) failed to properly protect that aspect of the pod innovation that customers value when they use a Keurig Brewing System.
While those of us who use the product would probably articulate what they like about the pods slightly differently, generally, the value provided can be characterized as a “dummy proof” good cup of coffee (or other hot beverage) by the cup as desired. Keurig Green Mountain was the innovator that brought this value to consumers originally Today, however, this value can be provided by both the K-Cup branded pods of coffee varieties such as “Columbian Supremo” that sell for $9-10 a dozen or by the generic version that I can buy at Aldi or Costco for about $5 for the same number. As long as I like “Columbian Supremo” (which I do), I get the same value from the generic product for a lot less money. While there are some people will pay extra for a brand name and the perception of quality provided by the K-Cup brand, there are a whole lot of other people (like me) who desire the value provided by the Keurig Brewing System innovation overall, but who don’t think it’s worth an extra $4-5 per dozen (or about 40 cents per cup) added to an already expensive cup of coffee.
Keurig Green Mountain must be feeling the pinch of its patent strategy failure. First, walking through the grocery one will see different types of deeply discounted K-Cup branded products on special each week. These typically are branded coffees such as Seattle’s Best Coffee(R) or Starbucks(R), which signifies that Keurig Green Mountain is currently generating significant revenue from these licensed sales, likely on a percent of revenue. However, competition from generic pod suppliers–that do not have to pay the licensing fee–likely means that both Keurig Green Mountain’s licensees (e.g., Seattle’s Best, Starbucks etc.) are in danger of missing the revenue projections that dictated the decision to enter the K-Cup market in the first place. It follows that Keurig Green Mountain’s licensees may be re-thinking their reliance on the K-Cup brand to sell their already-branded coffee in pod form. This is especially true when consumers like me can obtain a comparable “dummy proof” cup of coffee to use in their Keurig Brewing System for a lot less money elsewhere. I am not the only person predicting that the company’s fortunes are likely to decline in the future.
Notably, the Keurig Brewing System is a true innovation that created a wholly new market segment because the system allows one to obtain a virtually limitless variety of hot beverages just by placing a pod into the machine and pushing a button. Moreover, one can get a small, medium or large cup as desired. While I don’t know the specifics of how this works, I can imagine that it took the company’s product development team many years and a whole lot of money to figure out. Indeed, it is somewhat miraculous that one can get over 400 different beverages from the same machine and system. Nonetheless, I don’t care how they give me a “dummy proof” hot beverage on demand, I care about the beverage itself. In other words, the “job to be done” by Keurig Green Mountain is giving me a great hot beverage on demand by the cup. To keep me as a premium-paying customer, Keurig Green Mountain’s patent rights must come as close as possible to preventing their competitors from doing the same job for me. If not, the company will not be able to recover the full scope of value created by its investment in the Keurig Brewing System innovation. In this example, because Keurig Green Mountain failed to do so, other companies can now leverage the innovator’s hard work and investment to their own benefit without making a comparable investment in R&D and marketing. In short, Keurig Green Mountain’s failure to obtain real patent protection provided competitors with a road map of how to generate profits without paying the upfront costs usually required to create truly innovative products. While this may not seem fair to those at Keurig Green Mountain, it is not stealing if they did not adequately protect their innovation, which it clearly did not.
It should be noted that, as of today, there have been no knock-off Keurig brewing machines, which indicates that the patents covering the device are likely still solid. However, Keurig Green Mountain sells the machine once and those profits are taken. The real money is in the “razor and razor blade” business model, an area in which the company appears to be in danger of substantially losing market share to generic pod suppliers.
So, what did Keurig Green Mountain do wrong in generating its patent rights to the Keurig Brewing System innovation? As alluded to above, when crafting its patent rights, the company focused the claims on the how it provided the value, not the value itself–that is, the “dummy proof” cup of coffee or other hot beverage on demand. Hindsight is certainly 20-20, but it is fairly straightforward for me to see how Keurig Green Mountain could have prevented the competitive coffee pods using a patent strategy that aligned with the “jobs to be done” by its brewing system. In a subsequent post, I will provide guidance to innovators in this regard using Keurig’s K-Cups actual patent filings as an example.http://postimg.org/image/ww8hsu671/http://postimg.org/image/ww8hsu671/