This blog first appeared as Steve Wunker's piece for Forbes
By Steve Wunker
“Innovation” is a much-loved word, returning over 110 million Google results. Yet the mandate for companies to innovate can lead them in unproductive directions, adding features and complexity for their most demanding customers. Companies layer on these innovations to maintain or boost price points, so costs grow. Unfortunately, this cycle leads to much of the market becoming overserved. Mainstream customers may not want new enhancements. They don’t want featuring-adding innovation; they want another type of innovation – costovation.
Costovation is not the usual belt-tightening. Rather, it is a fundamental re-thinking of the business proposition in a way that delights the target customer while creating a major difference in the market. I thought about costovation recently on a long layover at London’s Heathrow airport. I had just taken a reliably disappointing trans-Atlantic flight that displayed belt-tightening throughout my experience. I had six hours before the next flight, and I faced this choice: should I haul myself over to the airport Hilton, pay nearly $200 for a few hours rest, and lose almost an hour in dealing with the shuttle buses to and fro? Or should I try the YOtel accommodations that were in the terminal, paying about $50 for a suitable bed to be used immediately? YOtel it was.
YOtel’s rooms are extraordinarily small, fitting just a bed and an airplane-like bathroom. But they feature a Monsoon shower, highly welcomed by travelers, as well as multiple power ports and free Wi-Fi. For a business traveler like me, that proposition – combined with a great location, fast automated check-in, and a sensible price – won the day. Let’s be clear: this is not commoditization at work. Airport hotels may be stacked up along the highway like planes lined up on the runway, but YOtel’s offering was truly unique.
Many industries need a YOtel – a company offering something at a radically lower price, for a well-defined customer set. Such costovations are increasing in number. Consider Medtronic, the leading medical device company that couldn’t conceivably be more different than an hotelier. Medtronic has created a costovation business, Nayamed, to sell simple (and perfectly functional) pacemakers and defibrillators in cost-sensitive European markets. Instead of having dozens of settings for overwhelmed physicians to manage, the devices adjust to a patient’s heartbeat and configure themselves. The units are sold only online, not through high-salaried sales representatives. Physician and nurse training and support is no longer in-person, but virtual. Costs are much, much less than in the mainstream business.
How can companies find costovation opportunities?
1. Determine the target customer – Had YOtel targeted traveling families, its proposition would be completely different. If costovation is to avoid becoming commoditization, it must have a tight focus on delighting a certain type of customer. Customer focus can also enable simplicity in operations, which in turn leads to radically lower costs. Moreover, this sort of focus helps to prevent negative effects on pricing in the core business by ensuring that the target customer for each proposition is truly distinct.
2. Draw inspiration from case studies – Look for businesses that use some of the levers which could be deployed to create a step-change in costs. IKEA, for instance, is an inspiration to many firms seeking totally different, low-cost ways to play in long-established industries. JetBlue shows how a cost leader can also be a quality champion along metrics that really matter for the target audience. Vanguard illustrates how a new business model (index funds) can thrive when established sales channels (brokers) despise the concept.
3. Look at the full context of the product – Nayamed’s self-setting pacemakers are ingenious, and not just technologically. Consider the target market – a European electrophysiologist who is in high demand. He needs every extra minute of his day, and he probably cannot bill for setting dozens of parameters on the device. The self-setting feature – like the fast, self-serve check-in at YOtel – is a simple delighter that makes the overall proposition highly compelling.
4. Design an integrated business model – It is remarkable how many companies approach cost from the standpoint of product design or formulation, while adhering to the same supply chain relationships, inventory management, sales approach, and other business model elements that are the true enemies of cost leadership. Costovation often requires integrative approaches to achieve its financial goals. A distinct business model can also help ensure that costovation does not vitiate profits in the core business by ensuring that customers and buying occasions are kept distinct.
5. Attack hidden cost drivers – “Waste” is seldom a line item lurking on a P&L, just waiting to be cut. Benchmarking P&L expenses against rivals makes sense, but that exercise can get you only so far. Frequently, costs are driven by hidden factors such as product proliferation, system complexity, and entire expense categories that may be unnecessary for particular target customer types.
Gee-whiz features often win industry headlines and lunchroom recognition. In some markets, they are imperative. Elsewhere, however, costovation is the real game-changer. It is tempting to look only at the riches that lie upmarket. Spend a moment pondering what lies beneath.