WORKING PAPER

How AI Can Make Costovation Happen

Costovation demonstrates that companies can redically lower costs while delighting customers

Breakthrough perspective: Use AI to challenge industry assumptions

Relentless focus: Simplify and prioritize customer needs with AI

Blur boundaries: Re-define value chains with AI

OVERVIEW

Why Costovation?

Innovation and cost-cutting have long been treated as opposing forces in business. Executives often believe they can either invest in breakthrough innovation or pursue efficiency by cutting costs — but not both. However, "Costovation," the concept of cost innovation developed in our 2018 book with that title, demonstrates that companies can do both: radically lower costs while simultaneously delighting customers.

In today’s business environment, with economic uncertainty high and cost pressures looming, Costovation is more relevant than ever. Fortunately, AI makes Costovation not only possible, but also easier and more scalable than ever before.

Breakthrough Perspective: Use AI to Challenge Industry Assumptions

Relentless Focus: Simplify and Prioritize Customer Needs with AI

Blur Boundaries: Re-Define Value Chains with AI

The Future of Costovation in the AI Age

Breakthrough Perspective: Use AI to Challenge Industry Assumptions

A breakthrough perspective is the foundation of Costovation: the ability to challenge deeply embedded industry assumptions that silently drive cost and complexity. The paper argues that most industries are constrained by “sacred cows” about features, service levels, pricing, and customer segmentation. AI dramatically lowers the cost of questioning these assumptions by analyzing vast datasets, identifying non-obvious patterns, and surfacing unmet or overserved customer needs. By reframing industries through Jobs to Be Done and alternative value-chain logics, AI enables firms to uncover radically simpler, lower-cost ways to deliver superior customer outcomes without incremental optimization.

Suspend assumptions at scale: AI allows leaders to test “what if” scenarios (e.g., removing 90% of features) without costly pilots.
See the industry as a first-time entrant: Pattern recognition models reveal which norms no longer create value.
Redefine customer segmentation: AI shifts segmentation from demographics to Jobs to Be Done and usage contexts.
Expose hidden complexity: Machine learning highlights features, processes, or policies that add cost but little customer value.
Learn from edge behavior: AI detects unintended product use and workaround behaviors that signal new value propositions.
Examples in action:
- Lemonade uses AI to eliminate manual claims processing.
- Hopper challenges static pricing with predictive models.
- LegalZoom reframes legal work as document automation.
Strategic payoff: Cost advantage comes from redesign, not efficiency—AI makes redesign faster, cheaper, and more defensible.

Breakthrough Perspective: Use AI to Challenge Industry Assumptions

Relentless Focus: Simplify and Prioritize Customer Needs with AI

The Future of Costovation in the AI Age

Breakthrough Perspective: Use AI to Challenge Industry Assumptions

Suspend assumptions at scale: AI allows leaders to test “what if” scenarios (e.g., removing 90% of features) without costly pilots.
See the industry as a first-time entrant: Pattern recognition models reveal which norms no longer create value.
Redefine customer segmentation: AI shifts segmentation from demographics to Jobs to Be Done and usage contexts.
Expose hidden complexity: Machine learning highlights features, processes, or policies that add cost but little customer value.
Learn from edge behavior: AI detects unintended product use and workaround behaviors that signal new value propositions.
Examples in action:
- Lemonade uses AI to eliminate manual claims processing.
- Hopper challenges static pricing with predictive models.
- LegalZoom reframes legal work as document automation.
Strategic payoff: Cost advantage comes from redesign, not efficiency—AI makes redesign faster, cheaper, and more defensible.