October 25, 2011

For richer, for poorer – which consumers are the best bet?

Filed under: Demographics,Innovation — by xrematon @ 11:11 pm
Tags: , , , ,

I have been doing some research into the changing dynamics of consumer culture and got side-tracked looking into the growing impact of emerging markets. One facet that is particularly intriguing is ‘reverse innovation’, or as it was dramatically first known, ‘innovation blowback’.

It’s something everyone gets excited about – it allows us to talk about new ideas from new sources; rethinking the obvious; challenges to status quo; design paradigm shifts etc. It can take different forms. There are the ’emerging giants’ who make life difficult for established multinationals, as is the case with Brazil’s Embraer making regional jets to challenge Canada’s Bombardier, whilst Cemex from Mexio is proving to be a worthy competitor for the French Lafarge. The established global corporations are also learning new tricks. A leader in this area is GE, which has its very own Professor-in-Residence, Vijay Govindarajan, who acts as Chief Innovation Consultant. One of example of GE’s successes is with ultra-sound machines. In the US, the ultrasound machine is huge and bulky, costing anywhere from $100,000 to $350,000. GE created a portable low-cost ultrasound machine, somewhere in the neighbourhood of $15,000 that has opened up a huge market in China and India.

But what is there beyond the hype of this bubble? It is certainly true that the principles and approach behind creating these products are inspirational, but their application often has limited relevance. Here, in the UK, I don’t need a water filter that uses rice husks, nor am I interested in a little fridge (as in Godrej’s Chotukool). So what if it can run on batteries – I want something that is 50% bigger, not one that offers me a quarter of my usual storage space.  Amanda Jones, the co-founder of social enterprise Red Button, makes some interesting observations about why frivolous Western consumers like me will struggle.

‘Frugal innovation is about getting people to buy into reality, but [Westerners] don’t want to do that. Why? Because perceived benefit sells. Customers want those 25 apps that they’ll never use because they like to think they are the kind of person who will. For frugal to spread to developed nations, consumers will have to “give up that alternate reality version” of themselves in which they really are “efficient enough to work out what all the bells and whistles do.’

As a twist in the tale, if we look beyond products and devices to the FMCG sector, this is where frugality is perhaps starting to look more relevant. Consumers in Europe are facing continued economic uncertainty – in this environment, value offerings in day to day purchases appeal. One company that has noticed this is Nestle, which develops Popularly Positioned Products (PPPs) for emerging markets. It has recently brought some of these innovations back to developed markets, for example in Spain, where it has altered packaging and quantities to reduce prices.

The final twist: a recent article in The Economist talks of the limits to frugality and finds evidence of the challenge to be profitable serving low income consumers.

‘In the 2010 auctions for 3G telecoms licences, operators bid ten times more for a slice of the airwaves in affluent Delhi, with 18m people, than in east Uttar Pradesh, with 120m people…. That is not to say that selling to the poor masses, and inventing ways to cut prices in order to appeal to them, is not vital. It is, both from a moral standpoint and because India’s stability depends on it. But the big profits lie elsewhere.’


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