01 Mar 2014
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Case Study: Gazelle's New Predators

Update: Faculty Weigh In

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Illustration by Istvan Banyai

Since 2006, Gazelle has offered consumers an answer to the question of what to do with their old electronic devices when they upgrade: Sell them to us. Customers can go to Gazelle's website; get a price for their used smartphone, tablet, or computer (working or not); and send it to the company via a prepaid shipping box in exchange for cash. After that, Gazelle resells the tech to individuals, wholesalers, and international buyers.

So far, so good: To date, Boston-based Gazelle has handed out $150 million to nearly 1 million customers. It was expected to hit $100 million in revenue in 2013, up from $58 million in 2012. And it touts a Net Promoter Score—a customer-satisfaction indicator—in the low 80s, saying it is "significantly higher than Apple and Amazon, and nearly 50 points higher than phone carriers." But naturally, the market has attracted competition. Some major players—like Apple, Best Buy, Walmart, and phone carriers—have begun to encourage customers to trade-in their old devices when upgrading.

The Question:

Gazelle's president, CEO, and cofounder Israel Ganot (MBA 2000), offered this "case study" query to alumni and faculty: "The reCommerce market grew significantly in 2013 due to the influx of new devices. Although the market opportunity is enormous (estimated to reach $14B in the United States by 2015), the companies entering the proverbial playing field are massive, with deep pockets. The question is, how should Gazelle position itself from a competitive perspective to continue its growth and stand out from the other industry players?"

The Answers:

"I would suggest looking at the business model and trying to extend the brand by extending the offering. Cellphones were a great start to establish the brand and generate the initial revenue push, but the critical move might be to redefine Gazelle around a model of exchanging a product for cash and then extending more product lines. That could lead to relationships with vendors, retailers, and manufacturers that might try to leverage the brand and expertise."
Stephen Saber (MBA 1994)

"For a pioneering intermediary like Gazelle, there are in principle two ways (not mutually exclusive) to sustain its advantage over the late but numerous entrants. One is to create network effects by moving to a marketplace intermediation model. The other is to create scale economies through sheer size and number of transactions.

Unfortunately, there are quite a few good reasons that the marketplace model doesn't work for reCommerce of used electronics (see my article in the March 2013 Harvard Business Review, 'Do You Really Want to Be an eBay?'). Thus, Gazelle probably has to remain a 'reseller,' taking inventory of products from users and reselling them to wholesalers. This means its advantage can only come from scale.

The problem then is that Gazelle's direct-to-consumer approach on its buy side places it at a significant scale disadvantage relative to competitors like Brightstar and Encore, which act as trade-in white labels for large retail chains and mobile carriers. Sure, these competitors lack Gazelle's brand in the eyes of consumers and Gazelle's website has a great NPS score, but I worry that these advantages are not sustainable if competitors decide to invest significant resources. Consequently, I think that Gazelle should seek one to two partnerships with large companies (e.g., Best Buy, Verizon, or Apple) on its buy side in order to take its scale to the next level. This will make it even more attractive to wholesalers on its sell side, which will allow it to offer better (higher) prices to consumers on its buy side and so on in a virtuous cycle."
Associate Professor Andrei Hagiu

"[I suggest] a modified TOMS Shoes model. From the customer/end-user side: When they want to sell their device, they'll also have the option to donate it. It's no secret that the devices Gazelle collects are important in many domains—ranging from education, to emerging markets, to women's shelters. The press around this could provide a needed boost."
Kathy Korman Frey (MBA 1999)

"One, they must generate awareness in the general public and advocacy from customers around their services and their outstanding customer experience. And two, they must live up to their promise of being extremely simple to use and providing great service. If they do this, they can capture customers before they have had a chance to realize that the major players do trade-ins. The other players will not be known for that part of their business and so their customers' voices will not be heard as loudly relative to what Gazelle can generate."
Armando Requejo (MBA 2005)

"How about differentiating Gazelle by focusing on the green aspect of reusing devices and the social good of getting lower-cost devices to those who might not otherwise be able to afford them? A $14B market would seem to have ample room for a niche player that focuses on corporate social responsibility while still being profitable."
Allison Sagraves (MBA 1991)

"Build on the high customer satisfaction indicator relative to competition—[and on the] elegant user interface/user experience, too."
Mark Crowther (MBA 2003)

"Finding popular applications and getting information from these applications should be their strategy. If they know a user has an iPhone 4, they could offer that user a discount on an iPhone 5 or a check. There are many applications that have the ability to offer both communication to the customer and information about the user—location, phone type, even carrier. It could give them a worldwide presence and streamline their business."
Freddy Sidi (OPM 42, 2012)

Got a case? To take part in a future "Case Study," send an outline of your company's challenge to bulletin@hbs.edu

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