Magazine article Ivey Business Journal Online

Frugal Innovation: The Key to Penetrating Emerging Markets

Magazine article Ivey Business Journal Online

Frugal Innovation: The Key to Penetrating Emerging Markets

Article excerpt

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. …

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