1. Functional, robust and user-friendly: Frugal products give companies a key to unlock growth in emerging countries
2. 4.8 billion potential buyers: The world's middle class will triple by 2030
3. Slimming down complex products is not enough to exploit growth potential: Frugal innovation is essential
4. Roland Berger's four-point plan simplifies strategic approaches

Munich, June 15, 2015

In 2030, four out of five consumers will live outside Europe and the USA. 95% of cumulative population growth and 70% of real cumulative GDP growth between now and then will take place in emerging countries, whose purchasing power is experiencing a stellar rise. The OECD anticipates a global middle class of 4.8 billion people, a huge market indeed. Frugal products – simple products that meet basic needs – let businesses benefit from new markets and, in the long term, encourage customers to trade up to higher-quality products. Yet not all producers make optimal use of the available potential, as a new Roland Berger Strategy Consultants study shows: "Simply the best. Frugal products are not just for emerging markets: How to profit from servicing new customer needs".

Frugal products: A source of countless growth opportunities

"The market potential that companies can penetrate with frugal products is vast," says Oliver Knapp, Partner at Roland Berger and co-author of the study. Why? Because demand for consumer products driven by rising incomes in emerging markets is only part of the story. Untapped potential also lies waiting in Western industrialized countries' low-end and mid-range market segments. Financial crises, recessions, stagnating household incomes and high unemployment are increasingly shifting patterns of demand. In the USA, for example, only 44% of people still see themselves as middle class – 9% fewer than in 2008. In their own perception, 40% of Americans have slipped into lower income brackets. "When companies meet the needs of these people with frugal products, they could also be pre-empting potential rivals from emerging countries – effectively protecting their established home markets against competition," says Michael Zollenkop, Partner at Roland Berger and another of the study's co-authors.

Frugal products are complex new developments

A number of obstacles still have to be overcome if frugal products are to be launched successfully, however: "Many companies make the same mistake," Knapp notes. "To keep costs down, they simply remove certain functions from existing products and then put them back on the market. But frugal innovation is more than that: Products have to be rethought from the ground up and developed to suit the needs of each local market."

In many cases, firms do not know emerging markets well enough to tread this path. Nor are they familiar with local conditions, licensing procedures or even local working cultures. "The protracted development cycles and standard processes of high-tech companies in particular are often incapable of handling the requirements they face," Knapp says. That makes it difficult to set up fast, flexible production – and to collaborate with local authorities, financiers and developers.

Companies also frequently fail to nail down their target costs from the word go and then implement these targets during the development process. Zollenkop again: "Clear target costs and permanent controlling are imperative if implementation is to succeed. Every technical decision is also a cost decision that will ultimately affect pricing and margins."

Successful strategy for frugal products

The experts at Roland Berger have therefore designed a four-step strategy to help companies introduce frugal products successfully and profitably:

1. Market analysis: Careful analysis of target markets and customers' needs lays the foundation on which companies can select suitable customer segments, assess market and growth volumes and define product features. This step also involves defining product costs and the pricing strategy. "With frugal products, you have to know exactly what product features customers are willing to pay for and which ones they won't pay for," Zollenkop explains.
2. Product design: The second step is to produce a systematic concept for technical solutions. Specific product functions and performance parameters need to be evaluated and defined. The important thing is to keep a close watch on possible alternatives and constantly ask "Are we scratching where local customers itch?" and "Are we keeping to the defined product costs?"
3. Value chain: Step three is the make-or-buy decision: Clarify which aspects of development, procurement, production and logistics are to be handled locally but in house, and which are to be purchased from local sources. "Local capabilities and resources should be used wherever possible, because that normally gives you a better understanding of the customer, as well as offering cost benefits," Knapp points out. "On the other hand, this kind of decentralized approach can only succeed if your organization is kept fully informed and involved right from day one."
4. Change management: A roadmap should be plotted for the entire market launch process. Above all, it must make due provision for factors such as acceptance, risk management and flexibility.

"Our four-point framework can give useful guidance on how frugal product portfolios and corresponding business models can be introduced seamlessly, systematically and successfully," Zollenkop concludes. "Now is the time for businesses to seize the opportunities that are opening up on the world's markets."