Exploiting New Markets in the Growing Economies

Blueprint a new business model, focusing particularly on the customer value proposition

A business model consists of four components, key resources (brand and people, for example), key processes (R&D, for example), a profit formula, and the customer value proposition (CVP).

Within these four, there are a range of levers, including distribution chain, revenue model, which can be one where the customer pays one time up front (purchase model) or month by month (leasing model).

Successful entrepreneurs have long found success when developing new products by conceiving of offerings that are somehow more convenient, affordable, accessible, or simpler than anything that currently exists. In developing markets, we’ve found that affordability is key, of course, but equally critical is improving access.

Take ChotuKool’s potential customers. Their low incomes and living circumstances—for example, they changed residences frequently—meant that affordability and access were important barriers to consumption. In blueprinting its new business model for ChotuKool, Godrej started with price first, as the key that would unlock the access issue, and then worked toward the cost structure, and finally the processes and resources required to develop and distribute the product.

Where the growth lies

It’s no secret that most companies are looking to emerging markets for future growth. According to the Economist, Western multinationals expect to find 70% of their future growth there—40% of it in China and India alone. But there’s no longer a simple entity called ‘emerging market’. Markets are changing and a key to growth is learning how to create opportunity from those changes.

In trying to transplant their domestic business models, companies end up slashing margins or confining themselves to the higher-income segments, which aren’t big enough to generate sufficient returns.

One often overlooked opportunity is targeting a certain group in the huge middle market of consumers. These consumers are stuck in the limbo that our colleague Clayton Christensen calls “nonconsumption”; many of their basic needs are being met very poorly by existing low-end solutions and they cannot afford even the cheapest of the high-end alternatives.

The story of a little red refrigerator called ChotuKool shows the powerful opportunities for companies when they target this frustrated segment of the middle market. Chotukool was developed by Indian multinational Godrej & Boyce, with our help at Innosight.

Godrej is a diversified manufacturer of everything from safes to hair dye to refrigerators and washing machines and was faced with a pressing growth dilemma: traditional compressor-driven refrigerators had penetrated only 18% of the Indian market because of the high cost to buy and maintain them. But rather than developing a stripped-down version of a standard refrigerator—offering “less for less”—the company ended up creating a category-defining product by fundamentally reconceiving its business model.

The process they followed consists of three basic steps: identify an important unmet job a target customer needs done; blueprint a model that can accomplish that job profitably for a price the customer is willing to pay; and carefully implement and evolve the model by testing essential assumptions and adjusting as you learn.

Identifying the “job to be done”

A small team at Godrej & Boyce was assembled and assigned to conduct detailed observations and open-ended interviews to help identify the job to be done for that untapped market. The semi-urban and rural people the team observed typically earned 5,000 to 8,000 rupees (about $125 to $200) a month, lived in single-room dwellings with four or five family members, and changed residences frequently. Unable to afford conventional refrigerators in their own homes, they were making do with communal, usually secondhand ones.

The shared fridges weren’t meeting these people’s needs very well, but not for the reasons one might expect. The observers found that they almost invariably contained only a few items. Their users tended to shop daily and buy small quantities of vegetables and milk. Electricity was unreliable, putting even the little food they did want to preserve at risk. What’s more, although they wanted to cool their drinking water, making ice wasn’t a job for which these people would “hire” a refrigerator.

So why would this group of consumers “hire” a refrigerator? The team concluded that what this group needed above all else was to stretch one meal into two by preserving leftovers and to keep drinks cooler than room temperature. Clearly, there was no reason to spend a month’s salary on a conventional refrigerator and pay steep electricity prices to get the simpler job done. Nor was the solution a cheaper conventional fridge. The unmet job would require an entirely new product, supported by a new business model.