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Innovation Fallacy #1: Your Existing Customers Can Guide Innovations for New Markets

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David Croslin explains why there is no such thing as an "average" customer, and why failing to take that into consideration can prevent your business from successfully entering emerging markets.
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Was I Cocky or Ignorant or Both?

Many of us have a very simple view of the world: “The rest of the world is very much like our world.” I have to confess that I was in this viewpoint category for many years. I’m not saying that I thought everyone was middle class. I knew some people were poorer and some people were richer. Some were sicker, some were healthier. But, in general, I believed that the world operated by the same set of innovation rules. I was very wrong. I’m not sure if I was just being cocky by thinking that everyone must think the same way as I do, or if I was just ignorant of the underlying diversity of thought from which many people operate.

I’m not talking about ethics or religion here. I am also not talking about common goals such as owning a home or getting a better education for our children. I am talking about the personal lifestyle priorities that each of us have and the things that impact those priorities. I am talking about the assumptions we all make that limit our vision and ability to innovate.

When we look at the United States as a whole we see an affluent people that are facing a set of new challenges (mostly created by ourselves). Many people in other countries assume that all Americans are arrogant, and to some degree they are probably correct. But, my contention is that everyone, in all countries, has that same underlying confidence in their beliefs that could be called arrogance. And it is this very confidence in their beliefs that limits the abilities of most companies to penetrate new markets.

Consumers Are Consumers

I spoke at a CTIA Wireless convention a few years ago and I had planned out my presentation to demonstrate this concept of how assumptions can greatly limit innovation. I asked the audience of over 200 vendors and telecom executives:  “How many of you would cry if your phone bill was unexpectedly $20 higher than you anticipated?” I wanted to demonstrate that financial shifts in how services are charged for can dramatically shift the value of a service to a consumer. Frankly, I expected no one in the room to raise their hand.

I had failed to consider the CTIA support team. In the back of the room was a young lady recording the session with a large video camera on a tripod. To my surprise, she raised her hand in response to my question. In the process of making that simple gesture, she threw my entire presentation out the window and gave me the perfect opportunity to demonstrate my point to the audience. I began to do the “presenter’s dance” up on stage.

She was very open about her pay, and it became apparent that she would have to work almost three hours to pay the extra $20 phone expenses. In an average full-time working month, this would approach 2% of her after-tax income. For her, any shift in expected costs for her phone service could prove catastrophic to her ability to pay other bills.

Most, if not all, of the audience participants operated under the assumption that “consumers are consumers.”  In other words, they assumed that it was possible to define an “average” consumer of their services.  It is this averaging of the consumer’s lifestyle that causes many companies to fail to penetrate the bulk of a market. It is the reliance on the definition of an “average” consumer that causes us to pretty consistently fail at selling to the “bottom of the pyramid.”

Extremes Beyond Our Experience

Until several years ago, I thought I had accurately dismantled the “average” consumer problem described above. It was at this point that I experienced the differences that exist within emerging markets.

I have spent many months in China over the last ten years and watched as cell phones and modern communications penetrated the everyday lives of the urban population. In many ways, it looked like China’s consumers were becoming average technology consumers.

Then I saw a man riding a motorcycle with three other people, who I presume were his family, all stuffed behind him on the seat of the motorcycle. I was riding in a car alongside the motorcycle riders. But the image became even more amazing as I watched. Strapped behind the family of four was a very large pig in a cage. The pig appeared to be dead and looked to weigh almost 200 pounds. It was then that I realized that the pig was looking at me and twitching its ears.

After the shock of being watched by a large pig on a motorcycle wore off, I noticed that one of the family members (I presumed the mother) on the motorcycle was texting on a cell phone! It was at this point that my world of the “average” cell phone user began to seriously collapse. But, more was yet to come.

Real-World Impacts on IT

I spoke at Mobile World Congress (MWC) in Macau regarding “Selling to the Bottom of the Pyramid.” I knew that I was going to have three co-speakers, but I did not know who they were prior to arriving at the session. Ominously, the MWC personnel had asked me before the event if I was “bringing my own security team.” I soon discovered why. It turned out that my co-speakers were the CEOs of the largest telecom providers in Afghanistan, Bangladesh, and Pakistan. Over the one-hour session it seemed as though I was attending a meeting of the United Nations.

What I learned from my distinguished co-speakers was that the traditional telecom provider could not function within these countries. Not because of technical challenges. Not because of a lack of capability. They would fail because the rules are so drastically different that the assumptions they normally operate under would destroy any possibilities of success.

Here are a few of the differences that my co-speakers pointed out (these are extreme examples intended to reflect the broad diversity of a “consumer” among different markets):

  • You can’t expect your equipment to exist tomorrow. Terrorists would blow up cell towers or strip the equipment for black market sales. My co-speaker’s company had to use helicopters to fly in new cell tower equipment in order to maintain services.
  • The average consumer’s daily disposable income could be less than ten cents US$. My co-speaker’s company had to create entirely new billing systems that could work with the consumer to maximize service utilization while working within the consumer’s income flow.
  • The average potential consumer does not understand the advantages of the technology. My co-speaker’s company had to create training classes in local villages and open a store since there were no other venues to push sales. In many cases this store became one of the major employers within the village.

Corporate Consumers

When I speak of consumers I am including corporate entities as consumers as well. There is little or no difference between the rules that drive an individual consumer to purchase a particular product and a multinational corporation that purchases a new IT system. Each type of consumer--corporate or individual--is driven by the benefits that a product will deliver in broad categories of: 1) saving money, 2) saving time and 3) simplifying lifestyles (personal or business).

However, there are differences in how a company selling their products perceives a corporate customer and an individual consumer. Most companies will start out selling to the bottom of the corporate customer pyramid because the complexity of the product needed is much lower. Then, over time, the company will add one innovation after another to their product and shift sales emphasis higher and higher within the corporate customer pyramid. After all, almost everyone believes that it is easier to sell 10 copies of a software package for $1 million each instead of selling 1,000 copies for $10,000 each.

It is this continuous shift upward that often makes it impossible for companies to sell effectively into emerging markets. The company’s products have gone far beyond what would generally be considered a “good enough” product in order to satisfy the very specific needs of their largest customers. The original foundational product that the company initially sold has long since been buried under what have become negative or even destructive inventions of new features.

If a company cannot break loose their intellectual property and repurpose it to sell to the bottom of their current corporate consumer pyramid, why do they expect to succeed in selling into emerging markets where even the basic assumptions of the product could be wrong?

Transformative Value

How the consumer perceives and utilizes a product and then how the consumer subsequently values the deployed product determines whether the product is merely competitive with existing products or is innovative to some degree. This could be summarized as a product’s “transformative value” or “transformative impact.” In other words, how much does the new product transform the consumer’s life or business?

If you go to an Internet search engine and enter “wacky patents,” you will discover the true breadth of human ingenuity for creating inventions with little or no transformative value, like the “Bird Diaper” for use with un-caged birds (U.S. Patent # 5934226) or the “Spider Ladder” that will provide spiders a means of escape from a bathtub (U.K. Patent #2272154).

I seriously doubt that the inventors of these and other seemingly wacky patents felt that they were bizarre, niche inventions. They were confident they “Had a winner!” Otherwise, they would not have gone to all the trouble, spent all the time, and invested all the money of filing a patent. I am also confident that they did not think a great deal about the size of the market for their inventions or the transformative value to those markets. After all, how many people would want to let spiders escape from the bathtub to roam the house again?

A consumer or enterprise will have very specific reasons for considering whether a particular product is worthy of their money. The perceived value of a product can be impacted by many factors including:

  • Cost of the product. Lower cost expected for most products but higher cost accepted and maybe expected for luxury products.
  • Quality of the product. Are you getting the quality you are paying for?
  • Aesthetic properties of the product (color, smell, taste). Does the cheaper version taste like cardboard?
  • Quantity of the product. Will you ever use all of it?
  • Reliability of the product. Will it do the job it is purchased for?
  • Ease of use of the product. Are the instructions in a bizarre, compressed language and where is “slot A’?
  • Flexibility of the product. Can the product be used in multiple roles or situations?
  • Brand name of the manufacturer. Is Gucci butter actually better butter and do I need better butter?
  • Consistency of the product. Is the product consistent from one purchase to the next? Fast food comes to mind for most people.

Transformative Value Chain

There are many ways that the transformative value of a product or system can be impacted. Even things such as a shift downward in the stock market can impact the disposable income of a consumer group and cause those consumers to change their consumption priorities, shifting the transformative value of a product.

Unfortunately, many companies make two mistakes when they attempt to expand their product innovation efforts:

  • If the company sells directly to individual consumers, then the company will ignore the impact of suppliers and partners (both internal and external) when determining the best way to innovate their products.
  • If the company sells products/services to other companies, then the company will largely ignore the end consumer of their customer.  The company focuses on who they directly sell to and fails to consider the transformative value their product delivers to the end consumer via their customers.

In each of these cases the “consumer” is assumed by the company to be the best area to attack in order to drive the best innovations. This often causes the company to misinterpret the majority of their market and to sell the wrong product in the wrong way. Determining how to best innovate products requires an understanding of the impact of the product on all the participants in the transformative value chain. This includes suppliers, manufacturers, distributors, resellers and of course all types of consumers that receive value from the product, either directly or indirectly.

The problems I mentioned earlier concerning penetration of telecom companies into Afghanistan, etc. is a perfect example. Because equipment could be destroyed at any moment, the network management and provisioning systems must be far more dynamic than traditional systems that manage more stable, reliable networks.

Further, the fact that consumers have highly volatile and yet small disposable incomes requires a unique approach to billing systems, especially since most consumers would not have any form of credit card or bank account. Also, education levels may dramatically impact the level of training that support and sales personnel require in order to provide customer service.

The low existing utilization of new technologies in some emerging markets requires training, and potentially new products, for the end consumers in addition to the corporate customer.

In this case, the optimal IT package for the telecom company might include features such as:

  • Micro-billing facilities through individual agents or representatives (without the need of a store front) within local villages. Assist your customer in overcoming their challenges.
  • Dynamic network provisioning to adjust signal loads due to frequent equipment or power outages. Meet the specific needs of a small customer, not just the large customers.
  • Free software/training provided to the corporate customer’s final consumers to drive business to the corporate customer. Create revenue streams for your customer.
  • Joint sell through support so that risk is shared between the company and its corporate customers. In many cases the corporate customer is doing a similar risk sharing with their customers.

In other words, it is important to drive up the transformative value to the corporate customer through unique features and capabilities and opportunities. The IT provider must become an integral part of their customer’s entire transformative value chain.

Become Your Customer’s Competitor

We all talk about being and acting culturally correct. Different views exist positively and negatively about giving someone a thumbs-up sign or even shaking with the right hand. And when we travel to emerging markets we try to follow these cultural rules.

Why then, when we are attempting to sell into these same markets, do we not first understand those markets to the degree needed to become our potential customer’s trusted advisor or competitor? If something as subtle as a thumbs up could prove to be offensive, then other cultural differences and environmental issues like small, unstable incomes within the emerging market could severely damage sales efforts.

I tell people that the best way to understand your customer is to become their competitor. Not literally, of course, but in regard to how you understand your customer. To start, assume that you are already a competitor in your current market and now you want to enter their market, which is an emerging market. Ask yourself these kinds of questions about your customer while viewing them as a competitor:

  • How can I steal their customers?
  • What do their customers want that is not currently being provided?
  • How can I deliver a better product than my competitor (who is actually my customer)?
  • What are the problems I will have to overcome to defeat my competitor?
  • What is different about their customers and my current customers? Compare this new emerging market to my current market.
  • What can I do to create a broader market than my new competitor?

Each of these questions is intended to help you think like your customer and to understand how your customer will assign value to your product. When you do not take this type of perspective, you are restricting your relationship with your customer to that of a vendor rather than as a partner. Vendors can be replaced. Partners are generally considered to be there for the long run.

By figuratively becoming your customer’s competitor you can isolate how to innovate your product in order to maximize your product’s transformative value on your customer’s products. It is this understanding and the resulting transference of transformative value from your product to their products that will allow you to repeatedly and optimally innovate.

Summary

The important take-aways are:

  • Understand all participants in your product’s transformative value chain, including the end consumer--even if they are not your direct customer.
  • Become your customer’s competitor (figuratively).
  • Maximize the transformative value of your product by maximizing the transformative value for all participants in your transformative value chain.  If your customer utilizes your product to create other products, then your innovation efforts should assist your customer in driving up the transformative value of their products.
  • Isolate your intellectual property so that it can be repurposed optimally while leaving behind all the great enhancements that are perceived to be of no or little value in the new market.
  • Meet the needs of the small customer, not just the large customer.
  • Innovate the future of your products by throwing away assumptions.

Oh, and one more thought: Watch for pigs on motorcycles. It might be important.

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