Costovation is innovation in pursuit of cost leadership. Rather than innovating in order to differentiate a product and earn a price premium, companies employing Costovation are able to offer radically lower prices for a well-defined customer set. Objectives are to improve utility and decrease expenditure, to enable entrance into new, cost-sensitive consumer groups, and to optimize company revenue.
Successful Costovation disproves the notion that innovation requires more features, more functionality, and more sophistication. Often, the needs of cost-sensitive and emerging markets are much simpler, and require radically different products than the luxury sector.
Costovation is also a variation of disruptive innovation, as it undermines dominant cost structures and opens up new markets and opportunities for teams willing to pursue it. Costovation is an essential skill for companies looking to succeed in the rising markets of price-conscious consumers and developing countries, as well as those hoping to erect safeguards in an unpredictable economy.
How is Costovation applied?
Applying Costovation begins by outlining a distinct customer set. This often requires companies to set aside their high-end or niche market aspirations and embrace selling to the low-end, whether locally or in far-away emerging markets. Serving an entirely new level of customer demands a clean-slate approach, often best initiated with Jobs to be Done methodology. By completely rethinking customer types, companies may simplify or refine current products to suit newly uncovered needs, or create entirely original ones.
Processes can be made more cost-effective by probing and innovating around hidden cost drivers. These drivers can be embedded anywhere from supply and distribution to personnel and marketing. The most effective Costovation strategies will be integrative, incorporating cost-saving strategies across multiple facets of a company’s business model. For example, IKEA’s Costovation strategy involves efficient use of personnel as well as a unique sales and distribution method: the company ships its units unassembled, which shifts the final labor costs to consumers and allows for flat-packaging and lower shipping costs.
Costovation in action
Companies like YOtel have mastered the art of selling a unique, low-priced service to a specific customer set. YOtel has established itself in and around international airports like Heathrow and JFK to service the ubiquitous time-conscious business traveler. The company recognizes the priorities of this group (a decent bed, an excellent shower, free WiFi, and most importantly, proximity to their next flight) and has tailored its offerings to address these needs directly and cost-effectively.
Unlike typical airport hotels that are accessible only by shuttle, YOtel often offers accommodations directly on-site. The rooms are much smaller than a typical hotel room, allowing the company to save on real estate, and automated check-in kiosks and food-vending walls erase the need for extensive personnel. These Costovation strategies enable YOtel to offer rooms that are much less expensive than a typical hotel, and much more appealing to time-starved business travelers looking for a place to clean up, plug in, and rest before the next leg of their journey.