You've probably heard of these startlingly low-cost products: $100 laptops, $20 intra-European airfares, $2,500 cars. What matters is they're not isolated cases. Low-cost thinking is starting to drive innovation across a broad array of industries.
By focusing on lower costs during the early stages of design and development, companies can seize a huge opportunity. In emerging economies, many previously impoverished people are now living in low-wage households and are eager to consume a variety of goods and services—if those offerings are priced right. Meanwhile, in developed markets, we're seeing a new frugality, with recession-weary customers demanding greater value at lower prices.
Recently, some forward-thinking companies have scored major successes by designing an entirely new low-cost product. The no-frills, $2,500 Nano car—which Tata Motors (TTM) launched in India last year and plans to introduce in Europe—is one apt example. I had the chance to travel in one recently in Delhi and could not have been more impressed at the relative quality of what has been developed. The Nano will be giving developed-market competitors a run for their money soon, too.
Other innovators have taken products that are successful in one regional market and adapted them for another. GE Healthcare (GE), for instance, developed an extremely small electrocardiograph machine for physicians working in India's countryside. Thanks to its efforts in developing the low-cost version in India, GE now can offer a similar product to U.S. doctors for just $1,000—a fraction of the larger machines' cost. Indeed, a recent review at the World Economic Forun in Davos, which I participated in, concerning innovations in health care saw many of the best ideas coming from emerging markets.
How do such innovators manage such feats? They apply the following practices, gleaned by my Accenture colleagues and myself from our research and work with companies worldwide:
Reexamine your design assumptions, and don't give up.
To design for costs, you may have to monitor incremental improvements over a long period before you can make your move. Take automated teller machines. These turned retail banking on its head, but processing checks, until recently, remained costly for banks. After experimenting for years with evolving ATM technology, Wells Fargo introduced roughly 2,000 new machines in California boasting optical character recognition and faster chips. These ATMs can print receipts showing copies of checks that had been inserted in the machines, easing customers' fears of lost deposits. And the machines are great for banks, too: They cut the cost of processing checks by 72%.
Empower employees to transfer good ideas from emerging to developed markets.
Probably more people in your company than you think have great ideas that can be turned into affordable offerings. GE's adaptation of its EKG machine is an excellent example. The idea for the new version of the machine emerged when a project manager who had been conducting market tests in China came back to Wisconsin—and she began describing the advantages of such a device to customers.
GE's culture supports this kind of process: Local growth teams have the leeway to develop their own strategies, products, and even their own value chain—from sourcing to sales and service.
GE calls the process "reverse innovation." You can observe this approach in numerous industries, where it is more than simply a matter of stripping off costs and features from a developed-market product to sell in an emerging market and then selling a newly modified version in existing developed markets. Instead, you need to start from scratch with a fresh paradigm and build to the new cost parameters. This will create breakthrough thinking that can then be exported back to the developed world with real value added, not just subtracted to save costs.
Set your price low enough—and keep it there long enough.
The process of identifying prices that will appeal to cost-conscious consumers begins when a company concludes that market incumbents have grown complacent and that there are enough customers who will snap up a basic offering if it has an outrageously low price. But beware: To make this strategy work, the company must achieve a sufficiently large difference between its price and those of its competitors through a real difference in cost structure. And it must be able to maintain that difference for a long enough time—i.e., it must be sufficiently profitable at the new, low price point.
If the strategy fails on either front, it may catalyze a price war that can ultimately lead to a company's demise. This is precisely what happened to PeopleExpress Airlines, an early U.S. discount airline. PeopleExpress's fares were lower, but not by enough to discourage larger carriers from entering the fray. They simply cut their own fares. A several-months-long price war erupted, depriving People Express of the cash flow it needed to service its monstrous debt. The crippled airline was acquired by Texas Air and then merged into Continental.
Observe customers in action.
By observing how people live, work, and use products, your company can gain a wealth of reliable information that it can't get from formal focus groups. Panasonic used such "lifestyle" research from its local marketing teams to plan a line of appliances for low-wage families in developing markets. For example, the research showed that consumers in Vietnam use a lot of ice. Accordingly, refrigerators sold in that country need large freezers that can make ice cubes quickly. But they don't need the six doors that many fridges sold in Japan have. By adapting the product's design and manufacturing strategies to satisfy Vietnamese preferences, Panasonic can compete against local bargain brands. Similarly, while I was in India, I heard of fridges designed with a fan rather than a compressor, because the key requirement is coolness, not freezing.
Take your cost modeling to the next level.
To understand the cost structure of the components in your company's offerings, you'll need to take a sophisticated approach. You can gather some data from public sources, such as market prices for commodities. But you should also get a detailed breakdown of cost components by talking with your suppliers when possible.
Moreover, pay close attention to your product's life-cycle cost to the end user. This is the sum of all costs—from purchase to maintenance to disposal—carried by users. Reducing life-cycle cost benefits customers, though you'll need to communicate those benefits through sustained marketing. For example, if you're an appliance company headquartered in the U.S., you'd want to earn the federal government's Energy Star certification to help market an energy-efficient washing machine. In addition, it would be important to tell consumers that they will save 19% of life-cycle costs—and that those savings amount to more than half the machine's purchase price.
Use your current offerings to satisfy more market segments.
Cost-led innovation can create new markets by making products affordable to users who have always wanted them—like the Nano car for users who could really afford only motorcycles. But it can also be used to introduce new options to customers who might not have previously considered the product category.
Nestlé, for example, had long sold its Maggi dried noodles in rural India and Pakistan for 20¢ per serving. In 2008 the company started selling a version of the product in Australia and New Zealand that had no oil, less salt, and no MSG. Its marketing campaigns emphasized not just the noodles' affordable price but also their health benefits, attracting a new segment of buyers who valued it for those benefits and found the affordable price a bonus.
Tough economic times and new emerging-market consumers have made price a priority. By giving customers new products and services at a much more attractive price, enabled by the right cost structure, your company can thrive, not just survive, in any business climate.