Whether fending off competition, protecting against economic downturns, or simply aspiring to grow faster, organizations can radically lower costs while innovating by leveraging the costovation methodology.

In this on-demand webinar, we speak with Steve Wunker—the Managing Director of New Markets Advisors and a member of the BTG talent network—about how costovation enables companies to find new ways to meet, and even exceed, customers’ expectations, cheaply. Watch the recording above read our lightly edited transcript below.

Highlights

• What costovation is and how it differs from traditional cost-cutting (05:13)
• Why now is the perfect time for costovation (07:54)
• How to break free of long-held assumptions (10:40)
• Who should lead costovation efforts (19:19)
• How to look through your customers' eyes (20:48)
• How to hone in on the most compelling innovations (27:24)
• Signs that a market is ripe for costovation (32:19)
• Where the biggest costovation opportunities are today (34:35)

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Transcript

Sandra Pinnavaia (00:02):

Welcome everyone. Thank you so much for joining today for our Costovation Conversation. I'm Sandra Pinnavaia, Chief Knowledge and Innovation Officer at Business Talent Group, the on-demand talent arm of the global leadership advisory firm, Heidrick & Struggles. For those of you who might not know us, BTG is the leading high-end talent marketplace that connects top independent business professionals with the world's best companies for projects, interim roles, and consulting.

Joining me today is Steve Wunker, the founder and Managing Director of New Markets Advisors, a boutique consulting firm that provides actionable recommendations specifically to help companies drive growth and innovation. Steve's work includes strategy definition, go-to market planning, and the creation of ongoing innovation capability across the enterprise.

As a former Bain consultant and as a longtime colleague and co-author with renowned Harvard Business School professor, Clayton Christensen, Steve has more than 25 years of experience advising companies worldwide on how to create and execute bold plans for growth. He's also the noted author of several award-winning books, including one which is the subject of our conversation today, which is called Costovation: Innovation That Gives Your Customers Exactly What They Want and Nothing More. Be sure to check out his new mini book, An Introductory Guide to Costovation at newmarketsadvisors.com.

I'm very pleased to say that Steve is also a member of the BTG talent network and has done phenomenal work with some of our top clients for years. Thank you so much for joining us today, Steve.

Steve Wunker (01:48):

Oh, it's great to be here. I was thinking earlier today, it's actually been a 10 year relationship with BTG and it's always great to do things with you.

Sandra Pinnavaia (01:56):

Well, we love working with you. So before we dive straight into costovation I thought it would be helpful for our audience today just to get a pulse from you, get your take on what you're seeing in today's kind of unusual market. What are companies grappling with? Where are the big opportunities? Could you just give us some general thoughts?

Steve Wunker (02:14):

Sure, you bet. Well look, number one, obviously cost pressures are really critical and those are cost pressures on a company from its inputs, its vendors, as well as of course the customer's sensitivity to price rises. A lot of companies have been able, frankly, to get away with price rises for a while. It is not clear, I think, to the corporate leaders that we work with that this is going to be a sustained pattern, and so there's concern about costs.

Secondly, a lot of our clients are saying this is the time to think boldly. They have made it through the pandemic, they've kept their heads above water, they've been on the back foot a lot over the past few years, and now is really the time to think about reinvention. The cost pressures just accentuate that pressure, but already there is so much disruption and there are so many big initiatives that were put on hold so now is the time to be more strategic about thinking, "What is the future of this organization going to be?"

And then finally I'd say prioritization is becoming even more essential than it was. So money may be a little less scarce—depends on the industry—but a little less scarce than it was. People are definitely scarce, and so prioritizing the attention that people give to various initiatives has always been important, but now it is absolutely critical and companies want to do that in a way that isn't just very inwardly focused, they want to be as customer-centric as possible in thinking about what they need to be focusing on.

Sandra Pinnavaia (03:59):

It's really interesting, all of those points. One thing that is counterintuitive, I think, to many people is that in a situation in a market like today, you do see companies trying to preserve—and in some cases even intensify—their focus on innovation. At some level you've answered that already, but why do you think that is?

Steve Wunker (04:22):

Well, look, I saw this back in 2008 and 2009, where we had a drop off in clients who were just sort of tinkering around the edges, the "Let's do an innovation workshop and let's see what ideas we can come up with." The clients that got serious got really quite serious about how they could reinvent themselves. There's been so much that's been put on hold over the past two years in terms of real strategic redirection, and so there are continuing disruptions—actually an acceleration of disruptions—that's been occurring. So people have to do that, and now with the cost pressures, the pressure to reinvent the business model—or to at least create alternative business models that have significantly lower costs—that has really risen up that priority list.

Sandra Pinnavaia (05:13):

Well, that's a perfect tee up to the subject of today. Let's turn to costovation and begin with a really simple question: what is costovation, and what inspired you to develop this methodology?

Steve Wunker (05:28):

We once had a client that was in the specialty chemicals industry, and it was the head of innovation in R&D, and he started out in our first conversation saying, "I don't want product innovation. We have thousands of chemicals that we produce. What I need is costovation." So we actually took the word from him with his permission. He wanted to bring the toolkit of innovation to the cost side of the business, so that they could look not just at the little cost cuts, but at radical moves in cost structure.

So that is the essence of costovation. In the book we use the example Planet Fitness as a way to sort of frame what costovation is. So Planet Fitness is the fastest growing gym chain in the United States. It leads the industry among major gym chains in customer satisfaction, and yet it costs only $10 a month, which is about 1/10th of what the Equinox next door to our office charges its members. So how does it achieve that kind of customer satisfaction, that kind of growth with such a low price point? That sort of frames the investigation that we had into costovation.

Sandra Pinnavaia (06:49):

Very interesting. And so just to be super clear, what's the difference between innovation and costovation?

Steve Wunker (06:58):

So costovation is a form of innovation, but honestly it's not what most companies think of when they do innovation. For most firms, innovation is product innovation and it's on the revenue side of the business. And of course that's important, but often when you're just focusing on the product, you're missing so many other levers that are possible to create costovation. When Henry Ford took over the automotive industry, it wasn't because the cars were so much better in quality or so differentiated from everybody else. But he looked at all the other levers in the business, whether it was the production mechanism or the way they worked with suppliers and vertical integrations, the way cars were sold. He was able to identify those elements that together could work in a much more transformative way.

Sandra Pinnavaia (07:54):

Got it. And so at some level—I mean that's a long time ago, Henry Ford, in his breakthrough innovations. Costovation is a current take on it in terms of why now? Why is it something that's back in fashion now and you're seeing clients need it today?

Steve Wunker (08:13):

Right. So I think there is a fear of sustained cost increases—and that's for the company's own P&L (profit and loss), and it's also for customers. So there is a need to break that cycle of just doing business as usual and having cost go up and up and up. You really need to look at that business model—the value proposition as a whole—and think about what can break that chain of sustained cost increases.

Cost cutting can only go so far, and typically at this point most companies are squeezing blood from stone, so you can't incrementally get your way to radical transformation of a cost position. And at the same time, look, there are unmet needs everywhere. There are customers who are being priced out of a lot of innovations. So there is a demand to bring innovation to a more accessible sort of price point with a business model where the company can sustainably make money—not trapped in the assumptions of before.

Sandra Pinnavaia (09:20):

I couldn't agree more. The idea that you don't have to settle for just cutting cost right now, but to see this moment as an opportunity essentially is actually really compelling. So let's start to talk a little bit about the approach—the difference in approach you take with costovation versus innovation. Can you give us some examples or some thoughts on that?

Steve Wunker (09:51):

To look at costovation you really need to have three elements come together. So first you need to develop a breakthrough perspective on the industry. So step back and really think about it in a highly critical sort of way, question the assumptions that might be there—and then out of that you can think about, well, what might you be able to change in those long held assumptions? Take a microscope then and zoom in and get very specific about what those levers are. And then finally you need to lure boundaries between typically distinct silos of a company or an industry and think about, by doing that, what new vectors of innovation open up?

Sandra Pinnavaia (10:40):

So maybe you could talk us through an example here, especially starting with how does a company start to break through some of those assumptions that they've carried with them for a long time about their products, about their markets?

Steve Wunker (10:54):

So it does not start with the financial statement. Obviously you want to look at the financial statement, but typically if there is a big line item calling for cost improvement on the financial statement, that has already been addressed. Of course you want to do that, but that's not how you're going to get to the radical transformative sorts of opportunities. Rather you want to start with looking at the customer and understanding how the industry is changing both around your company but also around the customer.

For example, we've been working with a very large health system integrated with doctor's offices and outpatient services and large teaching hospitals. They are looking at a transformation throughout healthcare, but let's take primary care as an example. We have Amazon making a big purchase moving into primary care. We have CVS vastly expanding its services moving into services like home health for instance.

In that sort of environment, this health system is looking at its traditional mechanisms for primary care and realizing those haven't changed in our lifetimes. So maybe it is a good time—to the point that we were talking about before of questioning those old assumptions—this is now a good time to really step back and think quite critically. Now, that usually means we don't change everything for everybody all at once. So in this systems case, they are looking at distinct use cases or patient types. The right answer for a 24 year old who thinks they're utterly immortal is different from somebody with three chronic diseases who is getting to the point of being on Medicare.

But offering very distinct patient experiences and medical service offerings for those individuals, meeting them where they are rather than forcing these patients into the very fixed constraints of how the healthcare system likes to deliver its healthcare, is a way to distinguish the organization. It's a way to get better medical outcomes, and by the way, it's a way to reduce costs in a very large service line for a healthcare institution that typically doesn't make money or actually loses some money in primary care.

Sandra Pinnavaia (13:16):

So I love that example. Let's dig into it just a little bit more. Obviously some of these trends that have been affecting healthcare and putting pressure on healthcare have been with us for a very long time. Cost has always been an issue and the changes in how patients or people are seeking healthcare have also been—there's been a lot of momentum around that for some time. So what do you think led to this particular moment where the system said we need to actually embrace this as an opportunity and to embark on something that's quite different from our regular ways of approaching our business change and transformation.

Steve Wunker (14:00):

So in this case, there was a confluence of things. So the competitive activity was a huge red flag. If Amazon thinks that it can totally do things differently in healthcare—having no healthcare brand whatsoever—then this institution with a century plus track record definitely should have the right to do it. It just needs the courage and the vision to be able to do that as well. So that was a big one.

But also looking at the financials of this industry, they weren't getting any better. So it comes time eventually to say, "Look, the way we've done things for 50 years, that is coming to a natural conclusion. We have to change." And you can always put it off and put it off and put it off, but competitive pressure did that. And then finally the emergence of the institution and the economy from the pandemic was also a good signal as well.

Through the pandemic, they were just trying to keep the lights on, but now it's never going to be over over, right? But at least we get to the point where you have to look beyond that and they can expand their horizons. We're seeing the same thing in movie theaters where they just got through the pandemic, and now they're confronting the threat of streaming and the reduced release calendar from studios. They have to change their business model.

Sandra Pinnavaia (15:30):

So it really sounds like the confluence of pressures around the economic change, the sort of era following the crisis of the pandemic, it really is a moment regardless of industry to pull up and think in this way about the opportunity for business model transformation and innovation. It sounds like you think the thesis applies really broadly across industries, not just healthcare or in movie theaters.

Steve Wunker (16:03):

Oh, absolutely. So we use an example in the book of a South African bank called Capitec. So Capitec was started by executives who came from the liquor industry. They had no banking background whatsoever, but they looked at very well established banks in South Africa who have been there 100-150 years, and they said, "This is utterly broken. We are paying in South Africa some of the highest fees in the world for banking, and yet the service experience isn't terribly good."

So they were able to reinvent a retail banking model, which has dramatically lower costs. They have become—in the space of about 15 years—the leading bank in terms of number of customers served in South Africa, and they have a return on equity over 20%, which is fantastic for a retail bank. So it is possible to do this, but it takes that bold vision of trying to reinvent what assumptions you've just sort of grown up with in an industry.

Sandra Pinnavaia (17:06):

And so do you think at this moment in time there's any industries or situations where it wouldn't be smart to engage in costovation?

Steve Wunker (17:15):

Where it wouldn't be smart?

Sandra Pinnavaia (17:16):

Yeah.

Steve Wunker (17:18):

Good question. I don't think so. I mean look, we have seen this in life science companies who have been taking a look at their sales force. Oftentimes a life science company is spending more on sales and marketing than it is on R&D—and this is a very good time to reconsider things, particularly as the pandemic teed up opportunities. In financial services, this is also a really good time. It's an industry obviously under some pressure right now, but the pandemic opened doors to have customers, whether they're business customers or retail customers, really reconsider how they typically interacted and did business with the financial institution. We have seen in industry after industry these opportunities.

So let me tell you a story about Clay Christiansen. Clay would preach the gospel of disruptive innovation for years and years. One time in his business school class, he had a student raise his hand and say, "But Professor Christiansen, I see all these industries you've given an example from, but I can't think of a single example in hotels where there's disruptive innovation."

Clay was a really humble man who always loved to learn, and it really stopped him and he went to his consulting partners and said, "I think that guy is right. There is not a disruptive hotel." And he thought about it and thought about it, "What is it in the cost structure or the business model of the hotel that prevented that?" Then along came Airbnb and it showed, okay, it's not an Extended Stay America, it's not a Motel 6, it's not necessarily just a cheap hotel, it is a totally different way of doing business. So in industry after industry after industry, you do find those opportunities. Sometimes they take a while to emerge, but it does happen.

Sandra Pinnavaia (19:19):

That's a great example. Thanks for digging in on that a bit. Such a broad range of industries. So let's turn to a little bit more about tips and tricks for first of all, getting started in costovation. Could you start us off there and as you do, add a little bit about who drives this. What types of leaders inside the company can initiate this and how do they do that?

Steve Wunker (19:51):

So there are not many Directors of Costovation out there.

Sandra Pinnavaia (19:56):

Oh, shocking!

Steve Wunker (19:57):

I know, rats! But what we do find is that general managers are really the ones who sponsor these initiatives. They may involve an innovation department. They would certainly involve people like marketing and ops. But because looking cross-functionally is so important, it's the general manager as a sponsor that could be really critical.

So a few steps that we lay out in the book as well as in the mini book that you'll make available to people. First thing is that you want to step back and examine that industry from afar, view it through the lens of somebody who's seeing it for the first time, and try to identify assumptions that may no longer hold. Get comprehensive. There might be 10 or 20 common assumptions you have there. Think about if you suspended those assumptions, what would happen?

Sandra Pinnavaia (20:46):

So I'm going to just jump in here.

Steve Wunker (20:47):

Sure.

Sandra Pinnavaia (20:48):

That feels so important right now in the post-pandemic Zoom era that we all are experiencing, where if you think back even to February of 2020, how we lived our lives was so different from how we are today. So could you just talk a little bit more about the opportunity to re-look at those assumptions?

Steve Wunker (21:09):

Sure. You want to do it from the standpoint first of all of the customer and different customer types. So how did Planet Fitness get to this $10 a month price point and lead the industry? They looked at different customer types—the execs behind Planet Fitness—and they settled in on the casual exerciser, which was not the focus of Equinox and Gold's and the other people who sort of dominated the gym industry at the time. So these are the people who may only go once a week or once a month and may not always carry through with things, and they felt intimidated by the structure of a gym, by the personal trainers offering classes, by the complexity of some of the machines. So they thought, what would an experience be like for this person that would really make them feel, as Planet Fitness says, in a "judgment-free zone" where they can be content with not being the fittest person out there but still doing something about their fitness.

And so there are no complex classes. There are no commissioned personal trainers. There's no pool. There are typically no complicated free weights or other exercises that require a whole lot of training. It's very simple. Now, by doing that, they were also able to strip out a lot of the complexity of a typical gym and a lot of the staffing. Planet Fitness doesn't offer towels in its gyms typically because towels mean that they have to have a laundry facility and they have to have all the plumbing associated with that. So they really looked at that and they thought, "Not only what does that customer require, but what don't they require? What are those assumptions we can suspend and thereby really reduce the cost?"

Sandra Pinnavaia (22:55):

Got it. So now's the moment. Step back and really think about what customers need today. So what's the next step?

Steve Wunker (23:05):

So then you get out the microscope and you really focus in on the elements of the business that you think you can strip out cost from. For Capitec in retail banking, they took cash out of the bank branch. By doing so, they didn't have to have security. In South Africa, security can be a big expense, a big thing. But they could also totally transform the customer experience. You don't need the traditional teller counter, which—I mean, if you see movies about the Old West, it's exactly the same. That hasn't changed in 150 years.

But at a Capitec branch, you have the teller sitting next to the client and they're looking at a screen together. They realized that the client that they were targeting, which was typically excluded from the Apartheid era banking system, was a little intimidated by the banking environment, and they wanted to just be very welcoming and easy where people are on sort of a more equal footing. So they thought about the cost, but they thought in tandem about that customer experience through a microscope in this case saying, "What if we took cash out? What could that enable?"

Sandra Pinnavaia (24:13):

Fascinating. Okay, so what's the next step? You open up the assumptions, get out your microscope, kind of look through the customer's eyes—what's the next step?

Steve Wunker (24:25):

Right. Well, so I should mention as you look through customer eyes. The book that I published before Costovation is called Jobs to Be Done, also from HarperCollins. That is one way to understand really what are those root motivations, and it's a way to suspend those assumptions. So once you've done that, then you want to try to blur the boundaries and reframe the way that you might be viewing customers and segments. But also what you might be able to do by going across the business model as a whole—like Henry Ford did, as Capitec did.

They looked at the operational model, they looked at the customer experience, they looked even at what a bank account was. A Capitec bank account isn't a checking account and a savings account and a loan account—they have the one account. It's all one thing, which looks very different from a typical bank account, but it's rooted in what the customer needs and it lowers the complexity for the customer to actually access all of these services whenever they're demanding. So by blurring boundaries, thinking about the product, but also thinking about the customer experience, the operational model, the ways that it makes money, they were able to create a very differentiated proposition, which is very low cost—and by the way extremely profitable.

Sandra Pinnavaia (25:47):

Fascinating. Okay, and you just held up a title that I think is an important concept in one of your other recommended next steps, which is looking at Jobs to Be Done. Do you want to talk a little bit about that?

Steve Wunker (26:00):

Of course. So by the job to be done, we mean what are people fundamentally trying to accomplish in their lives? Which is...

Sandra Pinnavaia (26:10):

Customers?

Steve Wunker (26:11):

That's right. What are the customers [trying to accomplish]? Which is not to buy your product—it is to do something else. By the way, this applies very much in a B2B as well as in a B2C context. So a physician is not trying to learn just which patients are indicated for this new drug that's about to be launched. Yes, they want to know that, but they want to be able to deal with patients in a more efficient manner, they want to deal with the hard questions, they want to feel confident in their recommendations, they want to feel like they're maybe on the cutting edge. They have functional and emotional jobs that they are trying to get done.

And that exists in even the most dry, seemingly functional industry. There are always emotional components to it because companies are people, and so you have to recognize that people are not robots. By doing that, you have a lot of levers at your disposal to reinvent your sales process, your value proposition, the customer experience, so many things that together create value but also drive a lot of cost.

Sandra Pinnavaia (27:24):

Got it. So thank you for sharing a bunch of those steps to take in getting costovation started. It does sound like as you get open the floodgates there and start reframing things and getting into the customer's mind a little differently, you run the risk of unleashing too many ideas. How do you ultimately hone in on the innovations that are going to be most compelling to customers?

Steve Wunker (27:52):

That is a great question. So there are three lenses that you would want. First, always start with the strategy even before you get to the customer. What do you think is special about the company? What is your unfair competitive advantage? And have that lens with everything that you do.

Second, be really rooted in understanding the customer. That means not the customer on average, but the customer segments often defined by Jobs to Be Done where you can really create a differentiated proposition in accordance with your strategy, so that you're not just foisting things on them that they have to accept—as typical cost cutting might—but things that they actually want to embrace as Capitec does, as Planet Fitness does.

Then third, really understand the hidden cost drivers in your business. So by that I mean things that may not appear on a P&L. What is the cost of product complexity, for instance? Or serving a lot of different types of customers or having a lot of different sales scenarios. By understanding that, you often find there is quite a lot of cost that's being driven by different forms of complexity, and parsing that out, you can really identify the key levers to focus on.

Sandra Pinnavaia (29:16):

And so just to quickly take us back a little bit to where you started, this is not simply to be applied to product innovation, right? It goes well beyond that. I was wondering if you wanted to confirm that and then offer another example of how a company used this to accomplish both meeting a customer need better and reducing cost in the process.

Steve Wunker (29:44):

Of course. Totally right, it's not just the product or the service. It's how do you make the product? How do you deliver the product? How do you sell the product? What's the ecosystem around you for the product?

Let's take the example of Medtronic. Medtronic, a big industry leader in medical technology, they actually invented the pacemaker back in I believe the 1960s. They are a market leader still in pacemakers, but you know after 60 years, the pacemaker is actually really good. And there are a lot of people who were being overserved by Medtronic pacemakers, which would have over, I believe, 80 different settings that a physician could configure. And you know that average physicians, so 50% of physicians in planning these pacemakers, can you guess how many settings they actually did configure in those patients?

Sandra Pinnavaia (30:42):

I don't know if it's anything like my phone, very few.

Steve Wunker (30:45):

Yeah, zero is the number. Zero.

Sandra Pinnavaia (30:48):

Zero? Oh my...

Steve Wunker (30:48):

They would implant it with the default settings right out of the box. And so Medtronic looked at this, and they said, "Well, we need to develop an offering, not just a product, but an offering that caters to those doctors. We've got the other ones covered, so that's great, they can do the high end. What do the rest want?" And so there was a little bit of configurability that those doctors want, they just couldn't take the time to look at all of what the patient needed and do the settings—and so there are automated configurability options on some of the pacemakers that the company brought out. It's actually an older generation pacemaker that they brought out because it didn't need all those settings. Even if you did three, that was more than zero.

Sandra Pinnavaia (31:40):

Interesting.

Steve Wunker (31:41):

But they sold it in a different way. They did not sell to doctors. They sold it directly to hospital purchasing organizations. Typically, in medical technology, you have very highly compensated sales reps who can even be in the OR during say an implantation procedure, none of that. If people needed service support for instance, they were billed to call the service line. And then there were propositions around inventory management, which really mattered to the purchasing organization that was a big customer, not just the doctors. So they thought all about what they were offering, not just the product itself.

Sandra Pinnavaia (32:19):

Really interesting. So obviously a simpler product, but a completely different sales channel and inventory strategy all in one example. Great, that makes a ton of sense. As I think about the market that most of our clients are facing right now, again, it just comes back to what an opportunity to use the challenges that we have today around cost to drive innovation.

So as we're starting to wrap up here, I wanted to ask just a couple more questions. The first is, when should companies really put this on the front burner? What are some signs that it's time to do so? That a segment is ripe?

Steve Wunker (33:05):

Right. So in the book we actually list out and explain seven signs. I'll tell you what they are at the high level. Expensive features, are there features that drive a lot of product complexity and cost? Expensive customers, sometimes customers are expensive not only because of the features they demand, but in the way that you have to sell and service them. Expensive sales, as we saw in the Medtronic example for instance. How do you take the sales rep out of that in this case for Medtronic? Products that might be over standardized, and because they're so over standardized, they're delivering a lot of features to customers that those particular customers aren't terribly looking for. Think of Planet Fitness, right? The over standardized gym versus the focus gym.

Over standardized sales approaches. Customers are different, and sometimes you don't—as in Medtronic's example—you don't need that highly compensated rep. Cost imbalances between the high cost to deliver some features or service experiences, for instance, versus the real benefits that customers derive from them. This is one reason why that customer understanding is so critical. And then finally, contingency creep. We see this in product roadmaps in generation after generation. You had this and that—what if the customer wants to do it this way or that way—and that is often one of those hidden items in a cost structure where it actually drives through that complexity a lot of underlying cost.

Sandra Pinnavaia (34:35):

Got it. Thank you Steve, that's really great and super helpful. So we've had a couple of questions come in and I'm going to turn us now to the Q&A session of our time together today. And the first one that's up is literally where do you see particular opportunities for costovation today—in your work as you're looking across your clients and just as you're reading the paper?

Steve Wunker (34:49):

Sure. Well look, we see it all around, but I will tell you one, take a big sector of the economy. Business to business sales has a huge opportunity in costovation. It has been a very costly function for a long time. The pandemic taught a lot of customers that they didn't need to rely on, for instance, a field sales force. But even if it's not a field sales force, B2B sales is often not customized to what a customer's real needs are, and it can be very expensive versus the value the customer actually derives from that.

Sandra Pinnavaia (35:39):

Oh, interesting. Here's another one. I'm just going to turn to another question—and please folks keep the questions coming in, we can add them real time. Is costovation primarily an offensive play?

Steve Wunker (35:56):

It is both. It is offensive and defensive. So you can definitely take the offense and seize and redefine an industry—and I've given you examples of that. But look, for instance, at Nordstrom. Nordstrom, it was the high end department store, wonderful customer experience. But they saw the discounters coming in and taking the clothes that weren't selling, and things would be at a real steep discount to what they had in the normal store. And so they created Nordstrom Rack, which was their own way to dispose not only of their remainder merchandise, but also to bring in labels that they might not have in a Nordstrom. Nordstrom Rack is actually more than half of Nordstrom's overall sales now, so it has been a huge success. It was initially defensive, but they realized, Nordstrom realized if they didn't do this themselves, somebody else was going to do it to them.

Sandra Pinnavaia (36:57):

Fascinating. It's interesting to think about that combined with your B2B example earlier just before this, any thoughts on being defensive in a B2B situation?

Steve Wunker (37:08):

So obviously you don't want to alienate your customers, but we have found that... I'm at a client's site today where we've been doing customer interviews, and customers have said, "Yeah, I feel these [reps] are like used car salesmen," and this client sells very complex million dollar machinery, "and we don't really get the story." And what these customers actually need is they need to be empowered internally in the large organizations in which they work to sell the story internally.

Sandra Pinnavaia (37:45):

Oh, interesting.

Steve Wunker (37:46):

Now by doing that, it's actually a lot cheaper than having—I don't like to call them used car salesman, but these very highly compensated B2B sales reps. The company's able to have a very differentiated proposition and they're going to take a lot of cost out of their business as well.

Sandra Pinnavaia (38:08):

Fascinating. Okay. Here's just a really interesting question, I think. If a company is innovating in one area and cutting costs in another area, is that costovation, and how could you connect them to make them more valuable?

Steve Wunker (38:08):

Look, standard day-to-day cost cutting is always something that's going to take place, particularly in a recessionary environment. I would certainly hope that the company continues innovating as well, because the market doesn't stand still. But it's a very different thing to start uniting those and say, "Let's take," as the commandment was to us initially from that chemicals company, "let's take that toolkit of innovation that we typically just confine to the revenue side of the business and move it over and look at the cost opportunities." Not looking at can we take 1% here and a half a percent there, but how can we make a step change? How can we take 5% or 10% out of a cost structure by doing so, and that is typically that cross-functional sort of endeavor.

Sandra Pinnavaia (39:18):

What type of person does it take to make that happen inside a company?

Steve Wunker (39:22):

Again, the general manager is really the person who can drive that. Now that being said, we have seen commercial leaders in sales and marketing, we've seen people in ops do this as well. There are very creative things that people can do. You have examples in the book for instance, about how PepsiCo has teamed with Daltile to ship product. Tiles are very compact and very heavy, bags of potato chips are very bulky and very light. So together that's actually a very much more efficient way to ship things, and that is totally on the Ops side of the business.

Sandra Pinnavaia (40:03):

Fascinating. Okay, here's another one. Many companies set sizable cost-cutting targets as a strategic initiative. I imagine that's going to be super popular as we go into 2023, driving a chase the numbers exercise that can cause immense organizational disruption. How have you dealt with those situations?

Steve Wunker (40:29):

So you can go looking for your 1% here and your 2% there and get it up to 10%. You probably do want to think about what that means, but typically you're going to be making the experience worse for your employees—and staff retention is really, really important more than it ever has been before. You're going to make things worse for customers, and they're going to remember that. So you can look at what the implications are, but I would say at least in parallel, set a mandate for, okay, is there a much more radical way that we could take 10% out? That's when you use that strategic lens, when you think about the hidden cost drivers in the business and you think in depth about who you're serving and why and how. Look at those seven signs of an opportunity for costovation, and at least at a high level scan it could tell you there's this customer set that may be radically overserved by what we're doing today, and there's a significant opportunity there for cost.

Sandra Pinnavaia (41:34):

So let me just ask a follow-up on that one. If you had a magic wand and could design a process that allowed a company to try and protect and think about that in the midst of a major cost takeout exercise that's causing disruption everywhere, how would you actually execute that? Who would be in the room? How would you sort of try and insert that into the process?

Steve Wunker (41:58):

Right. Typically, we would say if you had six weeks say, you would understand different perspectives on that from the company so that it's not the first time they have the conversation in the room, you would bring to bear knowledge about what's happening. But you would also bring in external case studies that get people to think really differently about what they could do—relevant, very on target case studies, but external case studies. And then you convene them together and you go through a set of hypotheses about are there particular customer types that might be overserved? Is there an over-standardized sales approach? Is the customer experience or the service experience over-standardized as well? And you start generating hypotheses and then you can match those up with what the strategic imperatives are, with the accumulated knowledge in the room, with the ingoing perspectives that people had. And then at least you'll have some fairly targeted places to go hunting where you take that microscope and you really get in detail about what the opportunities might be.

Sandra Pinnavaia (43:02):

Yeah, it actually... It sounds like preserving a little safe space, and it sounds like a relief, and it could be really fun in the midst of all the other trends.

Steve Wunker (43:15):

Innovation is fun. This is why I do it, Sandra. I love it.

Sandra Pinnavaia (43:18):

I do too! [inaudible] the innovation bucket. Okay, here's another one, which I think is super timely. How do you see the disruption of remote work and global freelance workers contributing to costovation?

Steve Wunker (43:33):

Look, it's a huge disruption—and not just for real estate. I am in this wonderful corporate headquarters now, which might have 5% of the desks being used today. So obviously there are reasons to pursue that, but it goes way beyond that. It enables you to start tapping into very different ways that teams can work together, the structure of teams, the skills that you have on teams. Right? There is so much cost driven by labor, which is driven by very typically dated models about how work gets done. So we have been seeing this in software clients for instance. That's been playing out for a while, but now it's playing out very differently in highly distributed locations, not just some big outsourcing location in India, for instance. Oftentimes that actually improves the quality of the work because you get various diverse perspectives in ways that you weren't before. It is inherently less hierarchical, and so you just can move faster and more flexibly, but it can also be lower cost as well.

Sandra Pinnavaia (44:46):

Got it. That one seems like it's a common one to add to the list of all the other triggers that you suggest for costovation.

Steve Wunker (44:54):

Yeah, that'd be great.

Sandra Pinnavaia (44:55):

Thinking about the labor transformation. Okay, great. I think at this point, Steve, we're going to just ask you for one big takeaway for the audience after this fantastic discussion. Can we just ask if people were going to take one thing away from this conversation in today's marketplace, what would you make sure that they do?

Steve Wunker (45:17):

So let me go back to the chemicals executive who first raised the term with us, costovation. He's a British guy and so he had British reference points, but he made it very clear, "Look, I don't want Ryanair. Ryanair, British, Irish Airlines."

Sandra Pinnavaia (45:34):

The cheap version. Yeah.

Steve Wunker (45:36):

Oh, it goes beyond cheap. They have tried charging people to drink water. They've charged people to go to the bathroom. So think about Ryanair, which is the cheapest of the cheap, versus JetBlue, which also has very low operating costs, but has extremely high customer satisfaction. And JetBlue can do that because they've been very focused on a particular traveler type. There is—except on a few routes—there is no business class. There is no underlying changing of a baggage. There are no pets in a cargo hold. All these little cost drivers actually drive a lot of complexity, and JetBlue was able to create an airline that has quite low operating costs, but a great customer experience. So try to be JetBlue, don't be Ryanair.

Sandra Pinnavaia (46:30):

Okay. That is an aspiration that we can all individually take away. So thank you Steve for this fantastic set of examples and the framework that you've created. I would like to remind everybody that if you'd like to learn more about costovation, the methodology and how you might put it to work in your business, please visit newmarketadvisors.com or pick up a copy of Steve's book, Costovation: Innovation That Gives Your Customers Exactly What They Want and Nothing More on Amazon.

If you want to explore a project with Steve or with one of thousands of other highly skilled independent business professionals, please visit businesstalentgroup.com. So thanks again for joining us today. I hope everyone has a great day. Steve, good luck on your client work now, and we'll talk to you soon.

Steve Wunker (47:27):

My pleasure.

Sandra Pinnavaia (47:28):

Thanks everyone.

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