Munich: The development of "frugal products" will play an increasingly important role for Western companies going forward, according to a new study by German strategy firm Roland Berger.
Frugal products are simple, affordable solutions that meet customer needs in emerging markets. Their contribution to sales is rising significantly faster than, say, that of high-tech products. But the development of frugal products is not simply a question of technologically simplifying existing products and offering them at a lower price. To achieve long-term success, companies must pay attention to six key product characteristics and align the entire value chain to specific market requirements. Major success factors are a comprehensive knowledge of markets and customer needs; and competitive prices. Roland Berger Strategy Consultants' new study, "Frugal products", presents a holistic approach to a successful frugal products strategy.
"Frugal products are technologically simple and affordable solutions that are suited, above all, to fast-growing markets in the developing world," explains Oliver Knapp, Partner at Roland Berger Strategy Consultants. "For Western companies, which tend to have a relatively weak presence in lower and mid-market segments, these products offer a strong sales potential and profit opportunities. But their manufacturers must first make the right changes to their value chain."
Sales share of frugal products set to double
Frugal products are becoming increasingly important to Western companies. They currently contribute an average of 12% to companies' sales, and this figure is set to nearly double over the next five years to 22%. As for profit, the businesses surveyed expect the share accounted for by their frugal products to rise from 10% to more than 18% by 2018.
Examples of highly successful frugal products can already be found across many industries. Ultrasound and X-ray systems are being built with reduced functionalities for use in rural areas of China and India. This no-frills technology can operate without difficulty in conditions of high humidity and even during power outages. Another example is the low-cost family car developed for the Indian mass market that can fill the gap between two-wheelers and the small car segment.
However, despite a stronger focus on frugal products, fewer than half of the companies surveyed are satisfied with the current performance of their solutions. "Most of the companies realize that these no-frills products have great potential but many of them are still fairly hazy about the actual success factors," warns Michael Zollenkop, co-author of the study. "We see this, for example, in certain products where there is a wide discrepancy between the product prices and customers' willingness to pay them in emerging markets."
Six product characteristics for success
Frugal products can best be defined in terms of six key characteristics: They must be functional, robust and simple to operate. They must be produced in large volumes and sold at affordable prices. And, finally, companies must ensure that these solutions really fit the local market requirements in emerging countries. Yet companies have a lot of catching up to do on two points in particular: "We find that a lot of companies pay too little attention to local customer needs in their target markets. And the products are too expensive for their potential buyers," comments Roland Berger expert Sebastian Durst.
A systematic approach is therefore needed if companies are to succeed in putting frugal products on the market. They should start by careful analyzing target markets and customers in order to derive the right strategy. "Businesses need to set the right course from the outset. This will avoid having to change the strategy later and face unnecessary costs," advises Roland Berger strategist Michael Zollenkop. And a manufacturer must decide whether it already has appropriate solutions for its market or should develop a completely new product portfolio.
Equally relevant is the question of product development. "Manufacturers of frugal products should look into the benefits of locally based R&D activities. This will enable them to take better account of the specific market needs," says Knapp. The experts also recommend greater use of modular processes for low-cost, high-volume production. And companies should consider bringing in local suppliers and opting for outsourcing their production and logistics.
Pricing needs careful attention. "When it comes to setting prices, both product properties and competitor price levels play a decisive role," Zollenkop points out. He adds, "Competitive pricing makes it all the more important for companies to keep a careful eye on their development and manufacturing costs to ensure that the final prices of their frugal products stay within set limits. Permanent cost controlling must be given top priority."