In a 1937 essay, the economist Ronald Coase argued that the reason Western economies are organised like a pyramid, with a few large producers at the top and millions of passive consumers below, is the existence of transaction costs — the intangible costs associated with search, bargaining, decision-making, and enforcement. But with the internet, mobile technologies, and social media all but eliminating such costs in many sectors, this economic structure is bound to change.
Indeed, across Europe and the US, vertically integrated value chains controlled by large companies are already being challenged by new consumer- orchestrated value ecosystems, which allow consumers to design, build, market, distribute, and trade goods and services among themselves, eliminating the need for intermediaries. This bottom-up approach to value creation is enabled by the horizontal (or peer- to-peer) networks and DIY platforms that form the foundation of the ‘frugal’ economy.
Two key factors are fueling the frugal economy’s growth: A protracted financial crisis, which has weakened the purchasing power of middle-class consumers in the West, and these consumers’ increasing sense of environmental responsibility. Eager to save money and minimise their ecological impact, Western consumers are increasingly eschewing individual ownership in favour of shared access to products and services.
As it stands, nearly 50% of Europeans believe that, within a decade, cars will be consumed as a ‘shared’ good, instead of privately owned, and 73% predict the rapid growth of car-sharing services.
BlaBlaCar, Europe’s leading car-sharing service, now transports more passengers monthly than Eurostar, the high-speed rail service connecting London with Paris and Brussels. And the better-known service Uber is causing panic among taxi companies worldwide. Despite recent controversy, the company, founded in 2009, is valued at more than $40bn (€35bn).
This shift in consumer attitudes extends far beyond transport. The peer-to-peer home-sharing service Airbnb now rents more room-nights annually than the entire Hilton hotel chain. And the peer-to-peer lending market, which bypasses banks and their hefty hidden fees, surpassed the $1bn mark in early 2012.
The global market for shared products and services is expected to grow dramatically, from €15bn today to €300bn by 2025, without requiring any major investment. The European Commission predicts that peer-to-peer sharing, now an income booster in a stagnant labour market, will evolve into a disruptive economic force.
The nature of horizontal networks supports this prediction. Such networks begin working long before they reduce transaction costs. By enabling ordinary people to do at home what, a decade ago, only scientists in large labs could do, the internet economy is lowering the costs of research and development, design, and production of new goods and services in many sectors.
Thanks to low-cost DIY hardware kits, people are increasingly building their own consumer devices. Moreover, customers can now design and manufacture industrial-calibre products by using shared hi-tech workshops — so-called fab labs — equipped with CNC routers, laser cutters, and 3D printers.
Such changes are propelling the so-called maker movement: A legion of tinkerers who collectively can create products faster, better, and more cheaply than big companies can. Together, the maker movement and peer-to-peer sharing platforms are empowering once-passive customers to become active ‘prosumers’, thereby spawning a frugal economy that can create value in a more efficient, cost-effective, socially inclusive, and environmentally sustainable way.
A self-organising frugal economy could generate billions of euro in value and create millions of jobs in the medium term. But, of course, there will be losers: The large Western companies whose ‘more for more’ business models, backed by huge R&D budgets and closed organisational structures, are not designed to serve the needs of cost- conscious and eco-aware consumers seeking more — and better — for less.
In order to survive, these established companies will need to reinvent themselves as frugal enterprises that integrate digitally empowered prosumers into their value chains and strive to address market needs in a more eco-efficient and cost-effective way.
- Navi Radjou is a Silicon Valley-based innovation and leadership adviser and winner of the 2013 Thinkers50 Innovation Award.