Big-name capital investments in coffee businesses are old news. The newest of this old news is an additional $25.75 million of investment secured by Blue Bottle Coffee (SF Gate, Business Insider).

James Freeman of Blue Bottle Coffee, looking like a colorized photo from the 1800sNews like this tends to elicit a mixture of validation (i.e., “Good coffee is serious business!”) and a little envy (i.e., “My business makes great coffee, so where’s my $25 million?”). So why Blue Bottle?

To read some of the explanations out there, it’s an investment in “slow coffee” or “craft coffee” (the latter term we avoid for potential confusion with “Kraft coffee” — aka, Maxwell House). We read about their “brand cache” and their “commitment to freshness” — which aren’t exactly unique.

Like any business, Blue Bottle also has it’s problems and flaws — over-extension beyond the reach of their quality controls being one big example (e.g., see our recent review of Fraîche.) But Blue Bottle is doing a number of things right, and we’re surprised that some of them aren’t being reported.

Outside-In vs. Inside-Out

How most roasters sell coffee to consumers is broken and outright wrong. This is rooted in an old industry problem we’ve long lamented here, which is approaching customers from an inside-out approach instead of an outside-in one. Past examples of this discussed here on this blog include coffee cuppings for layman consumers; we’ve gotten into long, drag-out debates on this topic with the likes of Peter Giuliano — co-owner and Director of Coffee at Counter Culture Coffee and Director of Symposium at the SCAA.

But it is symbolic of the coffee industry’s chronic inability to adopt a consumer-centric approach. Rather than think about how coffee is experienced by consumers, many coffee purveyors first try to shoehorn consumers into the perspective of industry insiders. Thus most coffee people today sell as if only to other coffee people — not to consumers.

The Blue Bottle Coffee Web site coffee listings circa 2012

Blue Bottle, on the other hand, exhibits one of the better examples of a coffee company that’s trying to fix that. One way to clearly see this is on their Web site. Last year, Blue Bottle sat down with the Google Ventures design team and an agency in Montreal to rethink their Web site. What they found is that most retail coffee Web sites emphasize things like a coffee’s origin — stuff that’s of great relevance to how people in the industry think about coffee but is often a meaningless descriptor to a consumer. That’s not how consumers buy coffee.

They discovered that primarily selling a coffee under the “Kenya” designation is a little like the early days of selling personal computers, where PC dealers emphasized things like processor clock speeds, memory cache sizes, and PCI slots. All of which made great sense to the way industry insiders thought about computers but were just gibberish to most layman consumers. Today’s ubiquitous Apple retail stores are successful, in part, because Apple addresses consumer needs without weighing it down with superfluous industry insider gibberish.

Blue Bottle Coffee's Web site redesign from 2013: so you have an Aeropress...

This could explain some of the popularity of Philz Coffee‘s Harry-Potter-like alchemy: the nonsensical labels on their coffee blends (e.g., “Ambrosia Coffee of God” or “Silken Splendor”) might be at least as meaningful to consumers as calling something “Kenya Nyeri Gatomboya AA”.

If you look at Blue Bottle’s Web site redesign, notice how it leads with the things that are most meaningful to consumers: how they brew their coffee and what devices they might have at home to brew it. Their Web site also emphasizes consumer brewing guides to complement this cause.

Queuing Psychology

Soup kitchen or Blue Bottle Coffee line?I’m not the only one who has either avoided or abandoned the long lines at Blue Bottle Coffee in San Francisco’s touristy Ferry Building Marketplace location. But some may be surprised that these lines aren’t entirely by accident.

Another smart thing Blue Bottle does (and they’re far from the only ones) is apply queuing psychology at such a publicly visible location to influence perceived demand and value — or what FastCompany last year called “The Wisdom of the Cronut.”

The painful morning wait for cronuts is likely to be contributing to the product’s popularity. The fact that people are waiting signals to others that they too should be in on the trend.

–FastCompany, “The Wisdom of the Cronut: Why Long Lines Are Worth The Wait”

What’s worse than a line that’s too long? A line that’s too short. We’re talking some Disneyland mental mojo here.

Think of all the tourists walking by in the Ferry Building, saying, “Do you see that line? That must be some pretty good coffee!” Or even the revenue-per-customer-transaction winner of, “If we’re going to wait in line this long, we may as well also pick up a Blue Bottle hoodie, a Hario Buono kettle, and a coffee subscription.”

Breaking Out of the Retail Point-of-Sale Model

On the subject of coffee subscriptions and how they’ve reportedly reached “trendy” status finally, Blue Bottle has been at it for quite a while. We may not get the point of adding another middleman for the brief window consumers play the field before settling down more with their favorite coffee purveyors. But we do like the longer-term prospects of buying direct from the roasters you do come to enjoy, which suits Blue Bottle extremely well.

Coffee subscriptions get Blue Bottle Coffee to Phase 3For Blue Bottle, coffee subscriptions have become where they make most of their money. Although revenue-per-customer is higher with prepared retail coffee beverages, so are the underlying costs. Because when you drink that latte, the main ingredient — and biggest contributor to the price of the beverage — is labor costs. For selling coffee subscriptions as a bean & leaf shop, the additional costs are little more than drop shipping.

This has transformed how Blue Bottle approaches coffee sales, as most coffee businesses still sell to consumers like most other real-estate-based point-of-sale businesses. Thus at tourist-friendly locations such as the Ferry Building, Blue Bottle is no longer suggesting that visitors take home a freshly roasted 12-ounce pack. Rather, they suggest that they sign up for a running coffee subscription shipped regularly to their home.

And when it comes to venture capitalists who are most familiar with funding software companies, investing in a subscription business gets them very excited. After all, virtually every software business has spent the past decade trying to shift consumers from retail purchases to subscription models.