How can companies access poor consumers in rich markets?

January 13, 2016

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Professor Loïc Plé

Professor Loïc Plé

Based on an interview with Loïc Plé and his paper “Serving poor people in rich countries: the bottom-of-the-pyramid business model solution,” coauthored with Jaques Angot (Journal of Business Strategy, 2015)

In developing nations, companies adopt “bottom-of-the-pyramid” strategies to create and sell products and services to impoverished communities. Loïc Plé argues that companies in wealthier nations could learn from their methods. In particular, he emphasizes the significance of ‘frugal innovation’: a common sense strategy for finding new ways to use available resources to meet the specific needs of poorer consumers.

Since joining IÉSEG School of Management in 2005, Professor Loïc Plé has participated in a wide range of research and teaching activities. In 2012, he founded the Center for Educational and Technological Innovation (CETI), which drives evidence-based initiatives and research to improve and support IÉSEG’s teaching and learning expertise.

Definition of frugal innovation
Frugal innovation is a process that attempts to “do more and differently with less”.

The researchers carried out an extensive review of academic literature, books and online sources encompassing theory, conceptual models, outcomes and illustrative case studies of frugal innovation, both as part of bottom-of-the-pyramid strategies in less developed countries and as an approach to business development in affluent nations.

After years of economic crisis and global recession, the world’s economy is getting back on its feet. At least, that is what most politicians seem to claim as they cite a host of macroeconomic indicators that show a pick-up in global economic activity. But Loïc Plé is quick to counter with statistics that reveal a far from rosy picture, especially for poorer people.

He highlights the drop in household income in the US and disposable income in several European countries. Unemployment still remains high with weak employment growth. A recent paper written by Plé and his colleague Jaques Angot suggests that poorer communities should not be overlooked by private enterprise. He believes in a win-win situation where companies meet the needs of impoverished consumers while delivering social good.

Frugal innovation at the bottom-of-the-pyramid
In less developed countries, companies have long understood the need for ‘bottom-of-the-pyramid’ strategies to meet the demands of the poor. Here companies develop cheaper products and services around the very specific needs of the poor. Potentially low profit margins are compensated by high sales volumes for a viable business model. Plé has found that many of these companies follow an approach known as frugal innovation. “There are many different bottom-of-the-pyramid strategies out there, and people have published a lot of research in this area,” he says. “However, frugal innovation seems to be a dominant strategy among companies in developing countries.”

The idea is not just to do more with less, but to do things differently with what you have already. Characteristics of frugal innovation identified by the team include:
• “Good enough”: simplified, functional products that do their intended job with no frills or enhanced functionality/design
• Partnerships: teaming up to meld the intellectual property and resources of companies with the market access and consumer insights of not-for-profits, charities and local or small businesses
• Affordability: cheap products without any loss of core functionality or quality.
• Quality and performance: products retain their quality and their core functionality comparable to higher end products
• Usability: easy to use, necessitating no special knowledge to understand how it works. They also must be adapted to local use conditions (e.g. working with no electricity).
• Sustainable: products must be economically sustainable, but deliver social value

Why frugal innovation makes sense for most businesses
With these features in mind, Plé argues that frugal innovation makes sense for most businesses, not just the ones trying to target less wealthy markets. “In many ways frugal innovation is just common sense,” he admits, “but although many businesses know what they ought to do, they don’t actually manage it well. Consciously embedding frugal innovation could be a big step towards becoming a better business.”

Renault’s creation of the Logan is an example of frugal innovation at its best. The carmaker developed a no-frills vehicle using existing Renault parts and technologies. The new model focused on the essentials, not the optional extras. And it brought the possibility of owning a new car to markets that would previously have only contemplated buying second hand.

The frugal engineering of the Logan focused on the core features of a car: four wheels, an engine and seats to get you and passengers from A to B. Renault used what it already knew and its existing assets to meet the demands of a new sort of customer. Since launching the Logan a decade ago, Renault has embraced the frugal approach to extend its low budget range. These models now account for more than a third of global sales volumes. In 2014 Renault reported that its New Logan model, marketed under the Dacia brand in Europe and Renault in the rest of the world, was its third most popular vehicle.

How to apply frugal innovation
Plé and Angot recommend that companies should apply a frugal approach in the three key areas of their business models:
1. Value proposition: frugal innovation can deliver social value as well as economic value, but companies will need to adopt deep ethnographic consumer studies to really understand what their customers need.
2. Resources and skills: how can companies use their knowledge, skills and resources in new ways to reach new customers? How can they change processes to reduce costs, for example of manufacturing and sales?
3. Organizational: frugal innovation is more of an ethos than a set of procedures. Companies will have to alter the way they work, for example embracing partnerships and creating flatter management structures to foster employee participation and the dissemination of ideas and knowledge through the business.

Obstacles to widespread adoption of frugal innovation
Despite its clear benefits and common sense, the researchers admit that frugal innovation is unlikely to become mainstream any time soon. “Stripping products down to their functional minimum doesn’t look attractive or ground breaking or even innovative, especially given that innovation has historically been engineers’ reserved area” explains Plé.

“Companies also fear that cheaper products could cannibalize their high-end sales,” he adds. “It is certainly a risk, but one that can be avoided or managed if products are well differentiated with distinct value propositions that target the different needs of market segments.” Get it right, though, and you could get customers for life, as the French bank Credit Agricole discovered.

When customers finished with its Passerelle service – a service that aims to help lower-income individuals facing financial difficulties learn how to manage better their personal finances — the bank helped them to transition to its mainstream brand. These Passerelle customers remain loyal, which is perhaps a mark of gratitude for the bank’s support during their hard times.

“Frugal innovation can have huge benefits across a business,” Plé concludes, “but when it creates products and services for bottom-of-the-pyramid consumers it’s extra-special: this creates new markets and growth for the business and, at the same time, real social value, because these often-ignored consumers can buy affordable products that really answer their specific needs.”

Practical applications
According to Plé, companies that adopt frugal innovation and develop strategies for bottom-of-the-pyramid segments in top-of-the-pyramid countries will be ahead of the learning curve and should gain significant competitive advantage. “This is a great untapped consumer market,” he says.

“By embedding frugal innovation, companies can develop targeted products and services that meet the distinct needs and price points of poorer consumers, hence growing their customer base, expanding sales and improving the bottom line, while delivering social value at the same time. That’s a great story to tell and a real motivation for employees.”

As a first foray down the frugal path, Plé advises companies to team up with non-profit partners or more local businesses, who can provide insights on target audiences and offer in-roads into the new markets.