New innovation models required

22 August 2011

ZURICH: Companies seeking to serve consumers at the "bottom of the pyramid" should embrace new innovation models, a study by Credit Suisse has argued.

The investment bank reported that 4bn people, or 60% of the world's population, earn under $3,000 per year and thus fall outside taxation systems and GDP estimates, instead constituting a huge "informal" economy.

It suggested new technology could improve popular access to sectors like financial services and healthcare, often cutting out the "middlemen" who frequently serve to inflate costs.

Price is the first concern to be addressed, such as by delivering single-serve laundry and soap packages affordable for shoppers typically only able to "pay for products on a per-day basis".

Goods must also be easy to use, repair and maintain, made using materials available locally, and scalable so that the needs of large numbers of customers are effectively met.

A potential innovation option is "leapfrogging", as emerging markets miss out one or more of the developmental stages experienced by mature economies.

An example of this is in the telecoms industry: many consumers have moved straight to the mobile category for making phone calls and going online without using a landline or PC first.

"They benefit from the absence of older established legacy systems, which greatly helps to facilitate the adoption of new technologies," Thomas Kaufmann, an equity sector research at Credit Suisse, said.

Credit Suisse predicted the "next billion" mobile customers are set to come from emerging markets, where there were 3bn subscribers in 2010, rising to 4.4bn in 2015, figures standing at 780m and 850m respectively for developed nations.

Another R&D strategy is "frugal innovation", which does not look to sell goods based on features and performance, as in Western countries, but focuses on simplicity, affordability, reliability and "elegant solutions".

"Frugal innovation postulates the application of the Pareto principle to product development: 20% of the features are good enough to meet 80% of the demand," Kaufmann said.

The pay-offs from this approach can include "reverse" innovation, where offerings created for emerging markets are rolled out in nations like the US, as has been experienced by General Electric.

Data sourced from Credit Suisse; additional content by Warc staff