How to design a low-cost product and create a huge demand?

If we study business history, we notice that entire industries are revolutionized when a company introduces a low-cost variant or a premium or luxury version that has never existed before.

A low-cost product or service dramatically increases demand, not just marginally but significantly.

Examples include the Ford Model T, McDonald's, and Southwest Airlines.

In a market like India, there is always a huge demand for low-cost product variants, but businesses often lack an effective way to introduce them.

I have learnt that we need to focus on two key areas to introduce a low-cost product that sells in high volumes while maintaining healthy profit margins:

1. Product Design
2. Business System Redesign

Richard Koch, a management consultant, has written an insightful guidebook called "Simplify," in which he introduces a framework for price-simplifying your business.

Price simplification involves designing your business model and product to reduce costs dramatically, which creates massive market demand.

The easiest way to increase demand is to offer discounts and run promotions, but while this reduces costs for customers, it significantly affects the profit margins of a business.

To significantly increase market demand, it is important to get into the core of the product offering and make strategic tweaks.

Here is a step-by-step approach shared by Richard Koch in his book "Simplify," along with case studies on designing a low-cost product.

Step 1 : Subtract features

Subtracting features involves focusing on essential features that customers need and eliminating anything superfluous.

Here’s a case study of how Henry Ford did it in the automobile industry.

Henry Ford: Simplifying the Automobile

Back story: In the early 20th century, automobiles were luxury items, handcrafted with numerous custom features, making them expensive and inaccessible to the average person.

Approach: Henry Ford revolutionized the automobile industry by introducing the Model T and the assembly line production method. His key strategy was to subtract features that did not contribute to the car's essential function of providing reliable transportation.

Ford understood that the core purpose of a car is to move people from point A to point B, and removed all unnecessary features that didn’t contribute to this main purpose.

Key Actions:

1. Standardization: Ford standardized parts and manufacturing processes, reducing complexity and costs.
2. Assembly Line: Implemented the moving assembly line, which drastically increased production efficiency and lowered costs.
3. Limited Options: Offered the Model T in only one color (black) and with minimal customization options, further simplifying production.

Outcome: The Model T became affordable for the masses, and Ford's innovations in manufacturing significantly lowered the cost of production. By 1924, the price of the Model T had dropped from $850 to $260, making it accessible to a broad customer base and revolutionizing personal transportation.

Step 2 : Reduce variety

Reducing variety is a powerful method for price simplification that focuses on streamlining product or service offerings to reduce complexity and cost.

You reduce the variety and start offering a universal product.

This approach involves offering fewer options to customers, which can lead to significant efficiencies in production, inventory management, and service delivery.

By simplifying the choice set, businesses can lower costs and pass these savings onto consumers, while often improving the overall customer experience. Let's explore how Southwest Airlines has successfully applied this strategy.

Southwest Airlines: Single-Class Travel

Back story: Southwest Airlines, known for its low-cost business model, has long utilized a single-class seating arrangement to simplify its service offering. This approach contrasts with traditional airlines that offer multiple classes (economy, business, first class) and various fare structures.

Approach:

1. Single-Class Seating: All seats on Southwest flights are economy class, eliminating the need for different seating configurations and service levels.
2. Uniform Fleet: Southwest operates a fleet composed exclusively of Boeing 737 aircraft, further simplifying maintenance and operations.

Key Actions:

• Single Fare Type: Southwest offers a straightforward fare structure, often with no hidden fees and free checked bags, simplifying the booking process for customers.
• Open Seating Policy: Rather than assigned seats, Southwest uses an open seating policy, which speeds up the boarding process and reduces turnaround times.

Outcome:

• Operational Efficiency: The single-class model reduces the complexity of cabin services, from meal offerings to boarding procedures, leading to significant cost savings.
• Reduced Maintenance Costs: A uniform fleet simplifies maintenance and training, resulting in lower costs and greater operational flexibility.
• Customer Appeal: Simplified pricing and fewer add-on fees make Southwest appealing to budget-conscious travelers, helping to maintain high load factors and profitability.

Benefits of Reducing Variety

1. Cost Savings: Simplifying product or service offerings reduces production and operational costs, which can be passed on to customers in the form of lower prices.
2. Operational Efficiency: Fewer options streamline operations, from supply chain management to customer service, enhancing overall efficiency.
3. Improved Customer Experience: Simplified choices make decision-making easier for customers, potentially increasing satisfaction and loyalty. A single universal product also reduces your marketing and sales costs significantly.
4. Consistency and Quality: Standardized offerings lead to more consistent quality, which can enhance brand reputation and customer trust.

By reducing variety, businesses can streamline their processes, reduce waste, and create a more straightforward and appealing value proposition for their customers.

Step 3 : Add cheap benefits

Another way to price simplify is to offer benefits that cost very little to the company but provide great value to the customer.

Back story: IKEA, the global furniture retailer, is renowned for its cost-effective and stylish home furnishings. The company has added several low-cost benefits to enhance the customer experience while keeping costs low.

Cheap Benefits Added:

1. Flat-Pack Furniture: IKEA’s flat-pack furniture design reduces manufacturing and shipping costs. Customers appreciate the ability to transport and assemble the furniture themselves, which also adds a sense of accomplishment and personalization.
2. In-Store Play Areas: IKEA stores feature play areas for children, allowing parents to shop more comfortably. This benefit is inexpensive to provide but greatly enhances the shopping experience for families.
3. Low-Cost In-Store Restaurants: IKEA’s in-store restaurants offer affordable meals, encouraging customers to spend more time in the store. The low prices create a positive shopping experience and increase the likelihood of additional purchases.

Outcome:

• Enhanced Shopping Experience: These benefits make the shopping trip enjoyable and convenient, encouraging longer visits and more purchases.
• Cost Savings: The flat-pack design significantly reduces storage and transportation costs, which are passed on to customers as lower prices.
• Increased Sales: Affordable dining options and child-friendly amenities attract more customers and increase the time they spend in stores, boosting overall sales.

Finally, I would like to share with you another interesting case.

Aravind Eye Care System, founded by Dr. Govindappa Venkataswamy in 1976 in Madurai, India, is a remarkable example of price simplification in the healthcare industry.

Its mission is to eliminate needless blindness by providing high-quality and affordable eye care to all, regardless of economic status.

Aravind performs a high volume of surgeries, which significantly lowers the cost per surgery. By streamlining processes and focusing on efficiency, Aravind has reduced costs without compromising quality.

They have standardized surgical procedures and use assembly-line techniques to maximize efficiency. This approach reduces time and resources spent per patient, enabling them to serve more patients at a lower cost.

It’s fascinating to see how McDonald’s emulated the assembly line from the car industry within the fast-food sector, and how Aravind Eye Care has adopted a similar approach in healthcare.

If they can do it, I believe the assembly line approach can be adopted in other industries as well.

https://www.rajeshsrinivasan.com/