Mocking the latest smartphones, Jon Stewart recently quipped: "I wonder if there's an app for making a phone call." He has a point. There's no question that today's smartphones are marvels of innovation, but not all innovation is about bells and whistles. It's ultimately about value to the customer. Certainly, smartphones and the business models built around them have been successful in delivering value to hundreds of millions of customers.
Consider, however, the recent success of TracFone Wireless, which offers basic phones along with no-contract plans under brands such as Straight Talk. While wars between Androids and iPhones have dominated the headlines, TracFone has quietly built a U.S. subscriber base of 18 million customers. In one recent quarter, TracFone signed up more customers than Verizon Wireless. Quarterly revenue clocked in at nearly $800 million, growing at a vibrant 62 percent rate. It's now a top-five provider that piggybacks as a "virtual carrier" on the major telecom networks.
TracFone's value stems from simplicity and affordability. The company caters to recent immigrants, senior citizens, and lower-income families. These customers might be considered undesirable to big players who are trying to sell app-rich phones for $300, while locking in consumers to spend $3,000 or more over a two-year subscription period.
Yet the company is no mere scrappy startup. TracFone is a subsidiary of América Móvil (AMXA:MM), Latin America's largest phone company and the biggest source of wealth for the world's richest man, Carlos Slim. As a student of business, Mr. Slim has no doubt seen this movie before.
Established players often overshoot the market. As a result, they expose themselves to disruption by simpler or lower-cost entrants. That's because products often improve far faster than most customers can absorb their benefits. This happened when Southwest Airlines (LUV) disrupted the major carriers, when Craigslist disrupted the classified sections of big-city newspapers, and when CVS Minute Clinics (CVS) disrupted hospitals and doctors' offices.
Serving Underappreciated Consumers
My colleague Clayton Christensen, a pioneer in defining disruptive innovation, has pointed out that innovation often emerges at the fringes of existing markets in response to the needs of underappreciated people. Often they're what we call "non-consumers." As with immigrants and seniors with cell phones, they need cheaper, simpler, or more accessible goods and services. Out of these needs, new markets are born.
In all these cases, it's often hard for established players—accustomed to serving what they believe to be ever-more-sophisticated customer segments—to imitate the upstarts. It's far easier to overshoot by adding functionality to a simple product than it is to take cost or functionality out of a complex offering.
True, customers on the economic fringe are typically less profitable. But profits can flow after a company has gained a foothold in a sector—if the business model is smart. In the case of Southwest Airlines, the business of selling no-frills, no-assigned-seating flights for short, underserved routes ended up delivering higher profits than the major carriers earned. TracFone is profitably pursuing its disruptive path, moving up-market as its customers increase their usage. The company is even starting to offer smartphones though a partnership with Nokia.
Looking across the business landscape, we can see other big markets that are ripe for similar disruptions at the low end. Health care will continue to experience disruption, with neighborhood clinics starting to deliver more and more services at a fraction of the cost offered by hospitals and traditional doctors' offices.
Education is another such sector. At Innosight, we created Guaranteach, a simple, video-based learning tool for K-12 math students that is cheaper than private tutors. We recently sold it to Sophia.com, a leader in building online learning platforms that will transform education.
For Value, Define the Un-Met Job
The overall value to the customer of such low-end innovations is not measured in terms of bells and whistles. Rather, as with all successful business models, the value is measured in terms of one key metric: What is the unmet job to be done?
For immigrants or low-income families, buying a $20 phone and a $15 prepaid calling plan does the trick. They don't need the complexity of an apps store. The major carriers have priced them out of their markets.
In airlines, Southwest began by seeing the job to be done as other than providing service to existing fliers at major airports. Instead it focused on serving those who normally take buses between smaller cities.
In education, the job isn't to build and sustain school districts or college campuses. The job is to deliver lessons effectively. Online learning tools have already embarked on a disruptive path that is starting to call the education world's ballooning cost structure into question.
As these examples suggest, simplicity and elegance can drive the formulation of great customer-value propositions. Understanding the appeal of simpler products and services doesn't require an advanced degree. The power lies in clarity. Concentrate on the job that the customer needs done, rather than on bells and whistles, and you can find great swaths of underserved or ignored customers.