As nations and companies around the world struggle to get themselves out the socioeconomic quagmire that has plagued them for more than half a decade, innovation becomes more than ever vital to the survival of individual businesses. Within innovation however, disruptive innovation , has become an increasingly attractive and I would even say dangerous, method of appropriating value in our fiercely competitive and ever shrinking global market. We have seen many examples recently: Uber advancing on the turf of taxi companies, Airbnb disrupting the millennia-old hotel business, and Coursera rendering cumbersome and expensive academic institutions irrelevant.
There remains one industry that has remained untouched even as waves and waves of disruptive innovation ravage its neighbors. As you may have guessed from the title of this article, I am talking about high-end fragrance, also known as perfume. How is it that a $100 bottle of Chanel No. 5 can remain a best-seller almost a century after its inception? To what extent are millions of dollars spent in marketing can boost sales of … a scent? I don’t have all the answers, but in this article I present a thought experiment in which I attempt to hypothetically disrupt this market.
The first tool I will use to analyze the fragrance industry is called the value stick, which essentially decompose the retail price of a product unit into its cost or value components. The value stick for a typical bottle of high-end perfume may look something like this:
I would say the basic inputs to the product such as packaging (bottle), raw materials (scent production) and SG&A have pretty much been optimized and there isn’t much room to work with. But let’s look at the other components. Scent creation, what is that? Believe it or not, for every new fragrance that debuts in the last few decades, there is usually a team of experts, “scent designers” they are called, who spend an immense amount of time “inventing” the scent, i.e. deciding which ingredients should go be mixed at what proportions under which conditions to arrive at the final product. Scent designing often goes hand-in-hand with advertising, because the identity of a scent is not only its physical properties but the spiritual presence it projects on the user. Taking the example of Lancome’s “La Vie Est Belle”, its spiritual presence is commonly expressed with a theme (“freedom”), a message (“Life is beautiful, live it your way”) and an icon (Julia Roberts). These ideas then become ammunition for the expensive advertising campaigns that follow. I don’t know about you, but if I were to hypothetically disrupt the fragrance industry, Julia Roberts and the scent designers would be the first ones out the door.
That said and done, is there anything else that could be optimized in the value stick? Selling costs could potentially be interesting. To understand this area better, let’s sketch the value chain of the fragrance industry:
Here we can see roughly how each actor in the value chain work with one another to deliver the fragrance to the user, where an arrow represents the flow of products and services in exchange for cash payment. A disruptive innovator will try to find alternative routes to users, while industry incumbents will try to defend those routes through technological, regulatory or operational barriers. The latter may decide to forward or backward integrate  as necessary.
Looking at value chain however it is not immediately clear how we might be able to disrupt the market. The advent of online retailers such as Amazon has helped lower the selling costs for the industry as a whole, but I believe they have reinforced rather than undermined the loyalty that the customers owe to the fragrance producers. An alternative business model might be one where the materials suppliers connect directly with the users through an create-it-yourself model much like that of online bag retailer Timbuk2. Will it work? The only way to find out is to get our hands dirty!
And that concludes the first part to this article. In the second and final part, we will shed more lights on the fragrance industry through using two additional tools, value driver reinvention and non-customer acquisition.
Continue with the second part here.
 Disruptive innovation is a type of innovation that uncovers a new market, consumers and consumer needs, disrupts existing markets and market boundaries, and fundamental changes the value chain and the positions of and relationships between the various actors in that chain.
 Forward (backward) integration refers to an actor moving right (left) through the value chain through M&A activities and competing directly against former customers (suppliers).
Image source: Flickr
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