There may be no better exemplar of the need to modify business practices when expanding to another country than innovation. Quick check-ins just won’t cut it in India, for example. Instead, companies must understand that customers in emerging markets will not respond to a frivolous innovation but they will buy one tailor made for them, a frugal innovation. This author describes how to do it.
In recent years, companies looking to expand have shifted their focus to emerging markets. But if they are to succeed in these markets companies must understand that they will also have to effect another, highly important shift. They will have to change their approach to innovation.
For most companies in Western markets, innovation has meant the development of new products with more advanced features at premium prices. But in emerging markets, where their products must appeal to the millions who don’t have millions, companies will need to master the art of frugal innovation. However, understanding frugal innovation and learning how to practice it are much easier said than done.
Ten years ago, the late C.K. Prahalad and Allen Hammond described the potential benefits of creating viable products and services for the 4 billion people who earn less than $2000 per year[i]. This potential has become even more alluring, given the higher birth rate in poorer nations. But money is in short supply for the bottom-of-the-pyramid customers, so companies need to employ frugal innovation if their products are to offer the right value proposition. This article highlights the issues that companies need to manage well to succeed with frugal innovation.
Affordability is the key
While planning innovations for bottom-of-the-pyramid customers, affordability becomes the key issue. Companies need to understand what customers feel is an affordable price.
The answer can often surprise companies because the price point could be just a small fraction of prices in Western markets. For example, in India, small sachets of Tide are selling for one rupee, only ($1 = Rs. 50). The affordable sachet format is very popular in categories like detergents, shampoos, and even for products like coffee and tea. Though the cost per unit of volume/weight of the product is much higher for sachets, the price is considered attractive by the target customers. Grocery stores are able to push high volumes of sachets and consider it worth their efforts.
A similar approach has worked well in the cellular telephone service category. Brands like Vodafone have been able to penetrate the Indian market by selling pre-paid cellular phone service vouchers for as low as Rs.10. Reaching mass consumers has been made possible by selling the vouchers through grocery and convenience stores.
The challenge for companies is to use innovation to drive down the price to a level that economically disadvantaged consumers feel is affordable. This is what we mean by frugal innovation. Different approaches have been used to achieve this objective.
The Aravind Eye Hospital in India is a case in point. The hospital carries out cataract removal on more than 200,000 people every year, with an average cost of each treatment of $25[ii]. This drastically lower cost has been achieved by introducing process efficiencies and getting more output from doctors and nurses. In fact, for all poor people (60 percent of the patients) the operation is free. This is made possible by subsidizing Aravind’s cost, namely by charging the other patients between $50 and $300, which is still a fraction of the cost charged by hospitals in Western countries.
This affordability is also backed up by state-of-the-art quality. The infection rate (a key determinant of quality for medical cases), is lower than that for conventional Western hospitals. Therefore, frugal innovation needs to be driven by developing a model wherein affordability is the central issue. The business model needs to be structured and innovated upon, but only after taking into account the aspect of affordable pricing.
Another useful example of affordable pricing in innovations is the oft-cited GE Healthcare’s portable ECG diagnostic machine, the MAC 1[iii]. The machine is priced at $535 and the cost of a single ECG is just 20 cents. The GE team had zeroed in on the price point first and then found ways of developing a product of acceptable quality at the pre-determined price. The challenge for GE was to ensure the economic viability of the innovation and find out the best ways to sell to the segment that was craving for this product. But after the successful launch of the product, GE was able to sell it in over 100 countries.
Know your customer
Begin the journey by identifying target customers’ critical considerations. This implies that the companies must understand the real conditions under which the customer lives and uses the product. For example, when Nokia planned its low-price mobiles for emerging markets like India, it realized that the product had to be very rugged and withstand exposure to dust, high variations in ambient temperatures, and offer the facility of a torch, since large parts of rural areas suffered from frequent power cuts. The low price point was maintained but the aforementioned features enhanced the acceptability of the product for the economically disadvantaged customers in small towns and villages.
The water purifier Swach (a product of Tata Chemicals) is also a good example of a frugal innovation that considered the needs of target custsomers. The Tatas had figured out that the unavailability of safe drinking water for the economically disadvantaged people had been a worldwide social menace. Research undertaken by various Tata companies (such as TCS and Tata Chemicals) created the opportunity to develop an affordably-priced water purifier which used rice husk combined with silver nano particles for the filtration process[iv].
Consideration of the context under which the target customers would be using the purifier is truly noteworthy. Tata managers were aware that most poor Indian families who would need purified water did not enjoy running water in their households. Also, the availability of electricity for these people could not be taken for granted, given the shortfall in the supply of electricity and poor infrastructure in rural areas. Therefore, Swach was designed in a manner that did not require running tap water or electricity. As well, the cartridge that enabled purification could be replaced easily by any householder without any technical assistance. All these conveniences, when coupled with the fact that Tata Swach is the world’s lowest-cost water purifier (at 10 paise per litre), uggest that it is a stellar example of frugal innovation.
Likewise, in the case of GE’s MAC ECG device, the R&D costs of product development were much lower, since the engineers were based in India. Further, by using the commercially available chips instead of customized processing chips, GE was able to reduce costs immensely. To ensure that the device would function smoothly in India, the team ensured that the dust from rural roads would not cause the device to jam. The battery was also redesigned to withstand the local conditions. All these innovations ensured that the product was accepted.
Another good example of frugal innovation is the launch of transfer of funds through SMS (short messaging service) in mobile telephony by Safaricom in Kenya. The fact that large segments of the sub-Saharan population were not using traditional banking services but were mobile phone users prompted Safaricom to launch M-PESA, a service which enables each user to transfer funds to another mobile phone service user[v]. In fact, the service is being used by both the banking and the non-banking population. For Safaricom, the fact that these customers had mobile phones and required funds to be transferred represented the dots that had to be connected. In fact, the M-PESA service is being used by customers for the safe storage of money as well, sonmething that is pushing up household savings. Many are using it to pay utility bills which otherwise requires travelling long distances. Needless to say, users have found the M-PESA service to be highly affordable.
Build a new value chain
Perhaps the biggest hurdle in crafting frugal innovations is the highly inflexible value chain. Though several companies pride themselves and feel that they possess exemplary value chains, the chains pose a serious hurdle when it comes to creating offerings for economically disadvantaged consumers. In fact, the value chain needs to be tweaked at both ends – suppliers and vendors as well as distributors and channels.
The success of GE’s ECG device was made possible through a well-crafted distribution model. Though GE Healthcare has been supplying high-end medical diagnostic equipment to the major hospitals, the value chain used for those customers is very different. To reach out to the rural doctors and the clinics that dot the countryside, GE had to develop a more appropriate channel. First, GE tied up with the State Bank of India (SBI) — which had a high penetration of rural markets — to provide no-interest loans for rural doctors. The sales pitch to the rural doctors explained how the device would pay for itself within 2 years by considering a certain number of ECG reports at less than $1 per patient. These innovations were needed to win the trust and credibility of the targeted segment.
The German multi-national Siemens has fostered a collaborative approach among engineers from various countries including India, China, Brazil, Europe and the US[vi]. The engineers work together in international teams and contribute what they do best, resulting in noteworthy frugal innovations. For example, the team has helped create a low-cost, energy-saving, waste-water treatment method, an innovation that augurs well for all emerging markets where water is scarce and most consumers have limited access to clean water.
Therefore, the value chain of an organization can be re-configured for facilitating frugal innovations, even by using internal resources and collaboration. A similar example can be cited for the Tata Swach innovation. The idea had originated in TCS and the product was created by a joint team of Tata Chemicals and TCS. To enable the mass manufacturing of the product, the expertise of Titan Industries ( a maker of watches and precision equipment) was sought. Also, the after-sales service backbone was created with the help of Tata Business Support Solutions and Tata Teleservices. With each collaborating organization lending their capabilities to the Tata Swach, the product offered the right value to customers.
The issues discussed above are virtually critical for companies hoping to penetrate emerging markets and serve the needs of the bottom-of-the-pyramid customers. The aspects of affordable pricing, addressing critical considerations of customers, and re-constitution of the value chain will decide the winners and losers in frugal innovation. The framework given in Figure 1 provides action points for companies that intend to succeed with frugal innovation. The toolkit given below should be used by companies to ask the pertinent questions that will guide them in their efforts related to frugal innovation.
QUESTIONS TO ASK
AFFORDABILITY – TAKING INTO ACCOUNT THE CUSTOMER’S POINT OF VIEW
PRODUCT FEATURES – CRITICAL CONSIDERATIONS OF THE CUSTOMER
RESHAPING VALUE CHAIN –
RE-CONSTITUTING THE VALUE CHAIN BY NURTURING NEW PARTNERSHIPS