Frugal innovation, or removing non-essential and often costly features from a product or service, can be a win-win for business – because it’s a process which is sustainable, cost-effective, and potentially very rewarding in terms of extending reach to new consumers. At its heart, frugal innovation is about focusing on customers, observing their core needs and designing products, services and business models that meet these needs.
Not just for emerging market consumers
In the past, frugal innovation has been seen as an idea for emerging market consumers and indeed many impressive ideas have come out of emerging and developing countries.
- A great example of frugal innovation in an emerging market is that of the ChotuKool refrigerator. In India, Godrej and Boyce launched what has been feted as the world’s cheapest refrigerator. It retails for US$69 and was designed to target poor, rural consumers. In a country with 854 million rural inhabitants this market is huge. The ChotuKool refrigerator looks from the outside like a box, consumes half the electricity of a standard refrigerator, and, importantly in a country which suffers power outages, it also stays cool for hours with no power, due to its superior insulation.
But post-recession, frugal innovation is seen as a new way of wooing cash-strapped consumers in developed markets. Because of this, it is a significant rising trend, the subject of many recent studies, and is also explored in a book “Frugal Innovation: How To Do More With Less” by Navi Radjou and Jaideep Prabhu. Early proponents of frugal innovation, they argue that we are transitioning to a frugal economy, which consumer goods companies in developed markets must embrace to succeed. I am inclined to agree with this prognosis, and also subscribe to the view that there is increasing evidence of the principles of frugal innovation reaching a broader audience beyond the low-paid.
- In grocery retailing in many (but not all) developed markets, discounters such as Aldi, Save-A-Lot and Lidl are increasingly stealing market share from supermarkets and hypermarkets. In the USA, discounters grew 4.6 times faster than hypermarkets between 2009 and 2014, whilst supermarkets actually saw their sales decline by 2.3% in constant terms. In the UK, the figures are even more striking, with discounters growing their sales by 62% in constant terms between 2009 and 2014, whilst the UK grocery market overall declined by 1.6%. The discounters’ business model is based on selling fewer product lines than traditional supermarkets in a no-frills shopping environment. A notable example of a frugal service succeeding in many developed economies.
Retail Sales of Grocery Retailers and Discounters in Selected Developed Economies: 2009-2014
Source: Euromonitor from trade sources/national statistics
Note: Data are in constant prices
Prudence and principles are the driving force
Frugal innovation is finding a welcoming home in developed economies for many reasons:
- Weak post-recession income growth is just one of them. In developed economies, per capita disposable income only returned to pre-recession levels in 2013 and increased by just 0.6% in real terms in 2014. In 16 EU countries in 2014, per capita disposable income remained below 2008 levels. The impact on the EU consumer market is huge - together these countries accounted for 68.6% of consumer spending in the EU in 2014;
Change in Per Capita Annual Disposable Income in Selected EU countries: 2008-2014
Source: Euromonitor International from national statistics
Note: Data are in constant prices
- Depressed income growth is linked to unemployment, which has been slow to recover in many markets, and is compounded by underemployment – a particular concern following the financial crisis. For instance, in the UK, which at 6.2% in 2014, has one of the lowest unemployment rates in the EU, there are a further 5.9% who are working part-time hours but would like to work full-time – a much higher proportion than pre-recession;
- On a more positive note, frugal innovation also sits hand-in-hand with sustainability as it promotes using as few natural resources as possible. If sustainability continues to compete with price at the checkout, then frugal innovation could be the solution;
Consideration of Green Product Features When Purchasing Consumer Appliances: 2013
Source: Euromonitor International Middle Class Home Survey 2013
Note Question: When choosing a particular item of each type, to what extent do you give weight or consideration to 'green' features? Note: for the purposes of this survey, "green" is meant as an umbrella term for features such as being natural, organic, sustainably produced, fair trade, locally sourced, or environmentally friendly
- As the sharing economy increases in importance, with Millennials in particular placing less emphasis on owning “stuff”, the argument for pared-back design intensifies. Products that stand the test of time and the vagaries of multiple users are suited for collaborative consumption;
- Thrift was a key consumer trend to emerge from the recession and it has left a lingering mark on consumer attitudes. Conspicuous consumption is out for many, and conscious consumption is in. The “make do and mend” mentality – repairing, recycling and upcycling – sits comfortably alongside frugal innovation;
- Technology is also a key driver. Technological advancements in manufacturing and materials enable huge gains in resource efficiency. Technology also presents an interesting counter-trend which is also closely linked with frugal innovation. In an increasingly tech-centred world, there is a growing demand for low-tech, for instance “dumb” phones, which allow users to text and call but equally enable them to avoid 24/7 connectivity and live more in the moment. These phones and other technologies like them, which strip out costly resources, fit well with frugal innovation. They are also increasingly cool, dovetailing with trends such as nostalgia and retro, again trends which were intensified by the recession.
We’re all frugal now
Frugal innovation is proving to be not just for emerging markets or just for low-income consumers in developed economies. Today’s complex consumer, with conflicting priorities, is just as interested in a no-frills car or discounter or low-tech gadgets as they are in the latest iPhone. Simplicity can even demand a price premium. With sustainability increasingly at the heart of business, organisations must seriously consider incorporating the principles of frugal innovation into their value chains and corporate strategies.