Method Products, Inc.

a leading developer and designer of home care products

Case Study :: :: Authored by Jamie Dean and Jesse Purewal :: :: Berkeley MBA Class of 2007 :: :: May 2006

Method Products, Inc. Case Study, May 2006

University of California Haas School of Business

[2]

About This Case The Haas executive committee for the 2006 Global Social Venture Competition (GSVC) wished to create an innovative educational avenue for participants and others involved or interested in future Competitions. To this end, the idea of a GSVC case study was born. It was contemplated that a case study highlighting a successful social venture could help educate GSVC participants about solid business fundamentals, provide ideas for how to think about business planning, and indicate (to participants) the desired degree of relative focus on economic and social value creation. Further, a case study could be used within a social entrepreneurship and/or CSR curriculum at the undergraduate or MBA level within a business-school course of study. Finally, a thoughtful initial case could provide the foundation for a macro-level write-up to be used in a broader course such as Start-Up Marketing or Small Business Strategy. The following case highlighting Method Products is meant to be a helpful tool for anyone interested in or associated with social entrepreneurship or GSVC at Haas and other business schools. The content of the case serves to facilitate understanding and stimulate discussion not just of doing well by doing good, but also of how an idea moves from concept to product to customer through the execution of solid business fundamentals in a competitive marketplace. Any comments or questions on the case study should be directed to Jamie Dean (dean@haas.berkeley.edu), Jesse Purewal (purewal@haas.berkeley.edu), or Tamara Williamson (tamaraw@haas.berkeley.edu). Representatives of Method Products are not available to discuss the case without prior consultation with one of the three individuals named above.

Method Products, Inc. Case Study, May 2006

University of California Haas School of Business

[3]

Method Products, Inc. The buzz in the downtown San Francisco office of Method Products, Inc. was palatable. It was a Monday in early May, and a long, rainy winter had given way to a beautiful and sunny spring morning. The optimism of the Bay Area climate was reflected that morning in the demeanor of Adam Lowry, Methods co-founder and Vice President of Product Development. Lowry and his team were excitedly preparing to roll out the newest of Method Products line of home care products, and could sense that the companys approach to the nearly-finalized designs of both softening dryer sheets and disposable mopping technologies were going to have a significant impact on the market. Were continuing to blend good design and function, remarked Lowry, and we think its really going to be disruptive to these categories. History After attending high school together in suburban Detroit, Eric Ryan and Adam Lowry went their separate ways. Ryan focused his post-graduate experiences on advertising and branding as a member of Falloon and other agencies, serving clients such as Saturn, Gap and Colgate. Lowry, a chemical engineer, worked with a green plastics company in Michigan to develop biodegradable trash bags and paint that bonded to plastic. The two reunited as roommates in San Francisco in the late 1990s, and during the course of a road trip in 1999, realized that their common ambitions and complementary backgrounds would allow them to build a great business. The two believed that the consumer packaged goods (CPG) market specifically home products was the best place for them to begin. They felt that large CPG companies were creating products that catered to a sea of sameness, and both had a passion for creating change within a potentially exciting product family. As Lowry put it: You have all your domestic experiences in that house or wherever you live. And so from the furniture you buy to your kitchenware, you put a lot of thought and emotion into what you put in that space. Yet the commodity products that you use to maintain this very important space tend to be uninteresting, ugly, and toxic - and you hide them away. Why did that have to be? The team also believed that creating a brand based simply on increased health benefits would not be sufficient to compete with established companies. In order to differentiate itself to a customer with fixed buying habits, Ryan and Lowry argued that Method would need to offer something more. As Lowry said:

Method Products, Inc. Case Study, May 2006

University of California Haas School of Business

[4]

I knew as a chemical engineer that there was no reason we couldnt design products that were non-toxic and used natural ingredients. It would be more expensive to do it that way. But that was okay as long as we created a brand that had a premiumness about it, where our margins would support our extra investments in product development and high quality ingredients. The company set out to develop at least one product for every room in the home. Its first line of products was a set of five spray cleaners (see Exhibit 1) designed by California photographer and designer Michael Rutchik. The company made its first sale to a Mollie Stones store (a Bay Area chain of upscale grocery stores) in Burlingame, California in February 2001. Surprised by the volume of the retailers first order, the co-founders acted fast to get the products on shelves. We wiped down half-used bottles, topped them off, and drove to the store, said Lowry. Methods success at Mollie Stones allowed it to bring 20 additional stores on board in 2001, which in turn gave the company an audience with national retailers. In order to gain management expertise, private sector savvy, and brand start-up experience, the company in 2001 hired as its CEO Alastair Dorward, an ex-Bain consultant who had launched a soup brand in the U.S. several years prior. Methods first win outside the Bay Area came with an agreement by Albertsons to stock the companys products, and Method soon expanded to Safeway, Wegmans, and Ralphs. To control its costs as it achieved national scale, the company contracted with local manufacturers and avoided substantial advertising. Then, in April of 2002, Method convinced lifestyle retailer Target to conduct a 100-store trial run of its products. The trial generated so much demand that, by February of 2003, Target was selling Method in 1,100 stores nationwide. We sold it before it was designed, and we shipped it before they even saw it, Lowry said of the original trial. Today, Method Products is a profitable, nearly $40MM company offering a differentiated family of products in a $20B U.S. market. The company employs over 50 people in its San Francisco and Chicago locations. As of 2006, Method designed and developed six principal families of products: all-purpose cleaners, specialty surface cleaners, dish soaps, hand and body care products, laundry agents, and aircare products. Its products can be found in such diversified retailers as Linens n Things, Costco, Wal-Mart and Sams Club, Target, and Safeway. The company also distributes its family of products on a company website.

Method Products, Inc. Case Study, May 2006

University of California Haas School of Business

[5]

Methods Strategy The company targeted sales of its products to the progressive domestic, a younger, professionally-employed, female-skewed customer. This customer tends to view home as a refuge, thus spending short periods of time cleaning different surfaces in the home on several days during the week as needed. Method labeled this approach Hip Not Hippie, in order to differentiate between the companys target market and the historically traditional customer who was believed to engage in bi-monthly house-wide cleaning efforts. Based on the notion of the home as a refuge, Ryan and Lowry believed that their customers could be excited about the prospect of cleaning their homes. They further believed that it was the onus of the product and brand to help create this excitement. As Ryan put it: The category talks about cleaning as a chore. But there are a lot of people out there for whom cleaning is an enjoyable act. I thought: What if Nike talked about jogging as a chore, something you needed to get done with as quickly as possible? Because the development of safer and more environmentally friendly products would take a good deal of investment, the company knew it was taking a risk. To help mitigate this risk, Method elected to price at a 15-20% premium relative to competitors. This premium reflected the companys comparatively higher input costs and per-unit distribution charges. The founders believed that Method would be successful if it could harness the operational capabilities of a large CPG company and draw on the creative prowess associated with a premium brand. Exhibit 2 illustrates the manner in which Method thought internally about this opportunity to differentiate. Product Development To achieve operational excellence, Method adopted what the companys founders referred to as an orchestral model of product development, wherein the role of the conductor (product manager) is to coach, inspire, and develop a spirit of teamwork among departments (see Exhibit 3). In this model, all product development functions occur simultaneously (rather than in a linear fashion), and relationships between respective functional areas become collaborative in order to foster innovation and creative, diverse thinking. While adhering to this orchestral model, the company continued to completely outsource its supply chain, integrating horizontally to ensure quick time-to-market and access to value creation outside the companys core skills.

Method Products, Inc. Case Study, May 2006

University of California Haas School of Business

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Method believed that its true competitive advantage lie in its design and branding. Having adopted the mantra People Against Dirty, the company pushed to link sustainable production with attractive and functional packaging. Believing that it had the required expertise in-house to execute on the former, Method called upon renowned designer Karim Rashid. We sent him an email and said, Heres a great opportunity to reinvent this iconic shape that sits on every sink across America, recalls Ryan. Rashid designed a 25-ounce bottle (see Exhibit 4) that the Method team used to win the 2002 trial at Target, which was the first retailer outside the drug and grocery channels to provide Method with placement. Consumers association with Rashid as the purveyor of design to the masses1 and Rashids experience in designing other products on Targets shelves were cited as reasons for the success associated with his involvement. Sustainable Practices According to Method, its commitment to sustainability is a notable, differentiating component of the companys strategy. Ryan and Lowry recognized early on that they would only be able to reach a small niche group of customers if they espoused only the products environmentally beneficial qualities. By focusing on product design and quality to reach out to a broader customer base (with sustainability in the background), Methods products can reach a larger audience. Method has chosen to adopt the definition of sustainability set forth by the UNs Commission on Sustainable Development: Development that meets the needs of the present without compromising the ability of future generations to meet their own needs. As such, Method takes a holistic approach to sustainability. It does not simply view sustainability in terms of the products it produces, but rather, considers the actions of the entire company. Its vision is to be fully sustainable in all facets, from products and processes to people and profits (see Exhibit 5). This view indicates Methods desire to go beyond the goal of not inflicting harm (i.e., minimizing negatives) to reach a goal of maximizing social and ecological benefit. Method attempts to achieve this goal by focusing on six crucial areas: 1) Zero waste recycling industrial scrap, 2) Eliminate toxics creating biodegradable products, 3) Renewable energy purchasing renewable energy for office and facilities,
1

Attributed to Nish Nadaraja, Home and Garden Online, 9/25/2004.

Method Products, Inc. Case Study, May 2006

University of California Haas School of Business

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4) Close the loop using biodegradable packaging, 5) Inform and educate participating in a lecture circuit, 6) Redefine commerce developing laundry detergent 3 times as strong as others. Method also recognized that its customers are a diverse group that will react differently to marketing and available information. The company therefore developed a framework for talking about its green activities to four different consumer groups that it has defined. This framework aims to inspire believers through communicating a vision for sustainability, speak to skeptics by conveying the value of pursuing a triple bottom line, educate information seekers about the importance of being green, and inform the mass consumer with its basic advertising campaign, People Against Dirty. Competitors Broadly speaking, Methods competitors can be divided into three categories; traditional CPG companies, environmentally friendly cleaning-supply companies, and niche companies with some similar product offerings. The traditional cleaning brands that historically offered largely undifferentiated products are Methods most obvious competitors. These include P&G, Clorox, Colgate-Palmolive, SC Johnson, American Home, and others that make few, if any, claims about environmental stewardship. Most of these competitors do not offer a significant number of products that blend usability and sustainability, though a few (most notably Clorox) are beginning to introduce cleaners to compete with Method. Method is also competing against small- to mid-sized companies that offer environmentally friendly home products. Two such companies are Seventh Generation and Planet, each of which has been in business for over 15 years. Both companies take a strong outward stance on environmental issues and their efforts to create a greener world. This approach differs from Methods less consumer-facing commitment to environmental efforts that are no less integral to its business. Finally, a number of skin and body care companies (e.g., The Body Shop and Bath & Body Works) can be considered competitors. These companies offer some products which overlap with Methods offerings such as hand and body care products and aircare products.

Method Products, Inc. Case Study, May 2006

University of California Haas School of Business

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Marketing In order to communicate to progressive domestics, Method generally stayed clear of traditional means of advertising, believing that 30-second television commercials and single-page magazine advertisements would dilute brand value. Instead, the company has attempted to create an experience around its product through strategic advertising placements, a pop-up store concept, an informational website, and informational booklets placed in lifestyle magazines. Print. Method has been sought by and featured in a diversity of niche print publications including Food and Wine, In Style, the Los Angeles Times, the New York Times, Business 2.0, and Forbes.com. Though these spots rarely expound upon the chemical details of Methods products, they do highlight the brands ability to disrupt a category historically dominated by large, established players with an extremely large minimum efficient scale. Method initiated contact with many publications early in the companys life by sending targeted press releases, and fielded proactive interest from others after placing product in an episode of NBC Televisions now-defunct situation comedy Friends. Pop-up Shop. In August of 2004, Method opened a temporary retail space in the high-fashion Union Square shopping district of San Francisco. This pop-up shop served to introduce customers to the product and brand in a setting otherwise unlikely to be sought for the purchase of home care products. Said Ryan: With the pop-up shop, we wanted to continue to build awareness by surprising customers who dont expect to see cleaning products in the fashion center of Union Square. We want to create buzz and spread the Method word. We want customers to crave our products. The pop-up shop took on the look of a gallery, encouraging customers to view the products as works of art while learning about the diversity of their potential applications. Website. Method developed a humorous, image-laden website on which visitors may learn about the companys lines of products, read about its history, and directly order shipments. The site is designed to be consistent with the Rashid-inspired containers in which Method products are sold, and according to the company, is focused on the experience of the progressive domestic customer (in contrast to the websites of larger CPG companies, which tend to diversify content to include product descriptions, coupons, raffles/prizes, and other such mass market tactics).

Method Products, Inc. Case Study, May 2006

University of California Haas School of Business

[9]

Booklets. In 2004 and 2005, Method placed an informational 20-page booklet in magazines such as Real Simple, Organic Style, and Lucky. The booklet explained Methods approach to doing business and offered a starter kit for sale. Although the content is not necessarily revolutionary, the idea of engaging a customer around a cleaning-supply company was. According to Ryan, Everyone told us we were crazy to dedicate a 20-page book to the subject of cleaning. This advertising campaign cost $2 million, a sizable investment for the company, but according to Method, the move precipitated an immediate increase in sales of 10 15%. Method believed that its methods of advertising were paying off. According to the company, in 2005, 45% of all customer communication fell into the compliment category, compared with just 15% being considered complaints. Furthermore, many individual blogs and formal review systems on retail websites such as Amazon.com rated the company highly for value for the money, cleaning power, and enjoyable brand. In general, customers commented that Methods products required the use of a bit more physical effort (elbow grease) than those distributed by larger manufacturers, but that the aesthetics and non-toxicity of the product made this tradeoff worthwhile. Some customers, mostly younger buyers and students, commented that they could not afford to buy the product in the face of a limited budget, but some of these potential buyers termed Method an aspirational brand. Another phenomenon was the tendency of buyers to associate Method products with the Target brand rather than a standalone company.

Method Products, Inc. Case Study, May 2006

University of California Haas School of Business

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Looking Ahead In 2005, Lowry said that Method had crafted a master brand in home care. Though the companys success to date was undeniable, a number of challenges awaited Ryan, Lowry and the rest of the team as they looked ahead. Among the questions that were being considered: How will companies like Clorox, American Home and P&G respond in the longer-term, if their margins or market share are truly threatened by Method? What challenges and opportunities would a reaction provoke? How should Method react to imitators? Can the company adapt its approach to fit the needs and demands of large retailers in the U.S. and beyond? Will it want to? What will Method need to do in order to secure the best talent in product development, consumer marketing, and other functions? Will it recruit individual contributors from larger CPG companies who want to move to a more entrepreneurial space, or will it focus on hiring people with small-company experience? What distribution channels remained untapped? How should they be opened? Can Method use its sustainability efforts to garner further price advantages? If so, how, and to whom? Do enough customers truly understand the benefit (over and above the psychological brand connection)? These questions churned in the back of Lowrys mind as his assistant knocked on the door of the companys modernly-decorated conference room. The team from Bentonville is on line two, Adam, she said, as Lowry focused his attention back to the speakerphone in the middle of the table.

Exhibit 1: Method's First Spray Cleaners

Exhibit 2: Method's Essential Differentiation

Method is a Hybrid: Operational Capabilities of a Mass Company + Creativity of a Premium Brand

Ability to service major customers but cannot offer differentiation

Ability to create unique & premium brand experiences but do not scale at the mass level
Skills: - Creativity - On-trend - Design talent - Speed & agility Limitations: - Dont scale - Weak balance sheet - Entrepreneur quirkiness - Unable to invest in custom tools

BEST OF BOTH WORLDS Our company is a unique hybrid in its ability to service major customers and deliver on-trend products & brands.

Exhibit 3: The Orchestral Model of Product Development

Exhibit 4: Rashid's 25-oz Bottle Design

Like this one

Exhibit 5: Method's Vision for Sustainability

Our Vision for Sustainability Our Vision

OUR MISSION
Method will become the global leader in home care and personal care through its commitment to its customers, people, product, and processes. Method believes that environmental responsibility and economic viability are not opposing forces, but one in the same. We seek to reconcile trade offs between what is environmentally sound and what is economically advantageous using thoughtful and intelligent design as our tool. We will create Economic, Social, and Environmental benefit by focusing on the products we make and the processes we use. Well lead by example and validate by results, including profits, and be restorative through our power of influence. Well create an organization where people are afforded respect & dignity, and the opportunity to learn and develop