This blog first appeared as Jennifer Luo Law's piece for Small Business Forum
By Jennifer Luo Law
If you ask them, customers have a lot of needs — they want bigger, faster, more efficient, more variety. Most companies chase after this laundry list of to-do’s, churning out solutions that are increasingly elaborate and feature-laden. Sometimes they end up with a bullet train; other times, you get green-colored ketchup.
On the other end of the spectrum, we’ve seen companies direct their innovation efforts towards finding radical ways to do less — which correspondingly allows them charge less to their customers. These businesses are veterans at making tough trade-offs; they relish in ruthlessly and imaginatively funneling down to the bare bones of what their customers need. There are many ways to go about this cost-cutting, but the end result is almost always a transformative approach to the industry. We call this Costovation.
An example of this down-market innovation is Omenahotelli, a Scandinavian chain of budget hotels where just two things are guaranteed: a cheap rate and a central location. Anything else — like a lobby, receptionist, or even housekeeping services — is not part of the deal. Guests receive passcodes to unlock the front door and then self-service their way through their stay in highly-standardized rooms. Omenahotelli runs on a simple concept — price and location above all — and is as innovative as it is lean. It’s perfectly suited for budget travelers exploring an expensive part of the world.
Here are two key lessons about innovation that we at New Markets Advisors have gathered from businesses that excel at Costovation.
Lesson #1: Innovation doesn’t have to be about more.
We live in a world of ever-expanding phone display screens and 1000 flavor soda fountains, but catering to our ever-evolving whims comes at the expense of simplicity in the back-end supply chain. In contrast, one technique for Costovation involves rallying around the single most pressing customer need. It’s the opportunity to do just one or a handful of things very well.
Trader Joe’s, for example, handily dismantles the assumption that consumers want to pick from a dozen pasta shapes made by five pasta brands. The average Trader Joe’s shopper just wants decent, cheap pasta, and the store capitalizes on that by offering a single brand. In doing so, Trader Joe’s dramatically simplifies its inventory and requires less shelf space per store, leading to savings that it passes down to its loyal consumers. Costco plays a similar game — no one goes to Costco for its toothpaste selection, but the toothpaste they do carry is reliably well-priced.
Recognizing that retailers voraciously compete with each other to deliver both selection and price, Trader Joe’s and Costco cherry-picked what they perceived to be the single most important purchasing trigger in grocery — price. Then they designed revolutionary business models around it, from the ground up. In time, consumers found (perhaps unintended) value in having fewer choices, which streamlined and took decision-making out of the shopping experience.
Lesson #2: Look beyond the product when it comes to innovation.
It’s all too common for companies to fixate their innovation efforts on the most visible parts of their business: their products or services. But by focusing so intently on today’s solution, teams can easily overlook new and financially-rewarding ways to make, deliver, and sell. It’s like spending a lifetime studying the deep inner mechanics of a piano in a misguided attempt to become a musical virtuoso.
Consider parbaked bread, which questioned the precedent that bread should arrive at stores fully prepared and ready to sell. Parbaked loaves are half-baked and frozen; it’s up to grocery stores to finish baking and packaging, which makes it safe to say that parbaking does not make a grocer’s life easier — though it does make the bread cheaper. What makes parbaked bread stand out is that it offers a unique value proposition for grocers thirsting for ways to differentiate themselves: freshly baked bread in their stores, all throughout the day, and without the labor costs of artisan bakers. Bread manufacturers win as well, since longer shelf life allows for less frequent deliveries and produces less waste.
When asked about what solutions they want to see, customers aren’t very creative — they usually point to an enhanced version of what they see today. A team focused on creating a better bread product might have designed unique packaging or recommended a new flavor combination, but would easily have missed out on the opportunity to redefine the relationship between retailers and manufacturers. As a result, it’s important for innovation teams to drill down into the jobs that customers are trying to get done. Stores don’t just want to sell better bread. Unspoken, underlying jobs might include demonstrating freshness, visually showcasing the bread, and creating a warm customer experience. Retailers deeply value solutions like parbaking and in-store bakeries that directly address those jobs. That’s why seemingly laborious — but money-saving — solutions like grind-your-own peanut butter stations, bulk food bins, and fruit-on-the-bottom yogurt have succeeded in a culture where convenience is a perennial trend.
The power of Costovation is that it unites what is so often at odds: innovation and cost-cutting. This makes it a key strategy not only for creating industry disruptions, but also for preparing defenses against economic downturns.
Luckily, companies that have excelled at Costovation have left clues for others to follow. Start by relentlessly focusing on a core set of jobs to be done. Remember that more is not always better. And take care to innovate in all areas of the business.
Read more about how to find Costovation opportunities here: http://www.forbes.com/sites/stephenwunker/2013/12/10/377/#48e658b120a5
Browse all of our writing on Costovation on the New Markets Advisors blog: http://www.newmarketsadvisors.com/business-blog/category/costovation