Low income markets

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By Colin Ramsden, January 2006.

Making money from the poor

 "Low income markets present a prodigious opportunity for the world's wealthiest companies to seek their fortunes and bring prosperity to the aspiring poor." says Dr C.K. Prahalad and S.L. Hart in their book titled 'The Fortune at the Bottom of the Pyramid: Eradicating Poverty through Profit'. Sounds to me like an apparent dichotomy of conflicting interests. Profiting from the poor to eradicate poverty? What the???

How can one profit from the poor
    and eradicate poverty at the same time?

They ask you to seriously consider the market possibilities presented by the relatively untapped 4 billion people living on less than US$1500pa. According to Prahalad and Hart, "well over a billion people—roughly one-sixth of humanity per capita income is less than $1 per day." Together they "represent a multi-trillion dollar market."

The bottom of the world economic pyramid (Tier 4) includes the mostly rural populations of countries such as India, Pakistan, Sri Lanka, Nepal, Vietnam, Indonesia, China, Mexico, Brazil, Uganda, Tanzania, South Africa, and the former Soviet republic states of central Europe, amongst others.

According to Prahalad and Hart in 'The Fortune at the Bottom of the Pyramid': "The real source of market promise is not the wealthy few in the developing world, or even the emerging middle-income consumers: It is the billions of aspiring poor who are joining the market economy for the first time." Indeed, they continue: "For companies with the resources and persistence to compete at the bottom of the world economic pyramid, the prospective rewards include growth, profits, and incalculable contributions to humankind."

Authentication

A closer look at the writing of Dr. Prahalad [pictured left] Professor of Business Administration at the University of Michigan Business School, demonstrates the development of an underlying dual purpose: that of enticing multi-national corporations to invest in low-income markets; and of improving the living standards for those living in that market society, the poor masses at the bottom of the pyramid (BOP).

He appears to have been a prolific writer, having co-authored several articles on business management in the late twentieth century, turning in the twenty-first century to bringing the potential value of the BOP to the attention of business mainstream as a viable marketing offering.

Some of his relevant writing includes:

• The Future of Competition: Co-Creating Unique Value with Customers (2004) co-authored with Venkatram Ramaswamy
• What works: Serving the poor, profitably (2002) co-authored with Dr. Allen Hammond
• Below the Bottom Line - An Invisible Market Opportunity (2002)
• Competing for the Future (1994) co-authored with Gary Hamel
• Multinational Mission: Balancing Local Demands and Global Vision (1987) co-authored with Y.L. Doz.

According to the 'Leaders In Dubai' website: "Professor Prahalad is widely acknowledged as one of the world's most significant forces in corporate thinking." He "has appeared within the top ten of management strategy surveys worldwide for the past 10 years" and is "known as the inventor of the concept of core competencies." He currently is "specializing in corporate strategy and value propositions amongst top management in large, diversified, multinational corporations" and "He is also the Chairman and Founder of The Next Practice, a company dedicated to helping big business make money by tackling global destitution. In addition, he serves on the Board of Directors of NCR Corporation, Hindustan Lever Limited and the World Resources Institute. Prahalad is a member of the blue ribbon commission of the United Nations on Private Sector and Development".

Now that we've established his credentials and direction, let's explore the message he's preachingthat there's a fortune at the bottom of the pyramidand the question I raised in the opening paragraph: How can one profit from the poor and eradicate poverty at the same time?

Creating markets

The enticement appears to be that even the very poor have some money, or the potential to earn some money, and that because there are many millions of the very poor, that many millions of a little adds up to be a lot. However, unlike existing markets, it's not a simple matter of providing the poor with a product and parting them from their money, little though that may be. They individually don't have enough to make a purchase of more than a few dollars. They don't have banking facilities, and don't know how, nor have enough income, to save. They don't or can't accumulate assets, as all their income is spent on their 'daily bread'.

Furthermore, there are many social considerations and customs, beliefs, superstitions and problems to overcome when dealing with low-income societies. Generally, through past bitter experience, low-income earners do not trust strangers, let alone corporations and governments. Many live in regions and "countries that still don't have the modern infrastructure or products to meet basic human needs" says Prahalad and Hart. 

The 'The Fortune at the Bottom of the Pyramid' message is based upon the idea that by helping those low income earners to improve their asset base and their earning ability creates the potential market for return where no market existed before! It's not a consumer market in the classic sense that can just absorb finished products. Instead it's a potentially productive market of micro-businesses that can buy materials and earn an income by assembling those materials into the finished product themselves.

For example: "Arvind, the world's fifth-largest denim manufacturer, found Indian domestic denim sales limited. At $40 to $60 a pair, the jeans were not affordable to the masses, and the existing distribution system reached only a few towns and villages. So Arvind introduced 'Ruf & Tuf' jeans, a ready-to-make kit of jeans components (denim, zipper, rivets, and a patch) priced at about $6. Kits were distributed through a network of thousands of local tailors, many in small rural towns and villages, whose self-interest motivated them to market the kits extensively. Ruf & Tuf jeans are now the largest-selling jeans in India, easily surpassing Levi's and other brands from the U.S. and Europe." Prahalad and Hart say that: "Given the vast number of people at the bottom of the pyramid, the production and distribution approach must provide jobs for many, as in the case of Ruf & Tuf jeans from Arvind Mills: It employed an army of local tailors as stockers, promoters, distributors, and service providers, even though the cost of the jeans was 80 percent below that of Levi's. As Arvind demonstrated, MNCs [Multi-National Corporations] need not employ large numbers of people directly on their payroll, but the organizational model in Tier 4 must increase employment intensity (and incomes) among the poor and groom them to become new customers."

Multinational corporations, says Prahalad and Hart: "can also play a role in distributing the products of Tier 4 enterprises in Tier 1 markets, giving bottom-of-the-pyramid enterprises their first links to international markets. Indeed, it is possible through partnerships to leverage traditional knowledge bases to produce more sustainable, and in some cases superior, products for consumption by Tier 1 customers. Anita Roddick, CEO of The Body Shop International PLC, demonstrated the power of this strategy in the early 1990s through her company's 'trade-not-aid' program of sourcing local raw material and products from indigenous people." "More recently, the Starbucks Corporation, in cooperation with Conservation International, has pioneered a program to source coffee directly from farmers in the Chiapas region of Mexico. These farms grow coffee beans organically, using shade, which preserves songbird habitat. Starbucks markets the product to U.S. consumers as a high-quality, premium coffee; the Mexican farmers benefit economically from the sourcing arrangement, which eliminates intermediaries from the business model. This direct relationship also improves the local farmers' understanding and knowledge of the Tier 1 market and its customer expectations."

In 'The Fortune at the Bottom of the Pyramid' Prahalad and Hart state: "According to the Labor Organization's World Employment Report 2001, nearly a billion people—roughly one third of the world's work force—are either underemployed or have such low-paying jobs that they cannot support themselves or their families. Helping the world's poor elevate themselves above this desperation line is a business opportunity to do well and do good. To do so effectively, two interventions are crucial—providing access to credit, and increasing the earning potential of the poor."

"Commercial credit historically has been unavailable to the very poor. Even if those living in poverty had access to a bank, without collateral it is hard to get credit from the traditional banking system. The vast majority of the poor in developing countries operate in the 'informal' or extralegal economy, since the time and cost involved in securing legal title for their assets or incorporation of their micro-enterprises is prohibitive. Consider the experience of the Grameen Bank Ltd. in Bangladesh, one of the first in the world to apply a micro-lending model in commercial banking."

"Grameen Bank's program is designed to addresses the problems of extending credit to lowest-income customers' lack of collateral, high credit risk, and contractual enforcement. Ninety-five percent of its 2.3 million customers are women, who, as the traditional breadwinners and entrepreneurs in rural communities, are better credit risks than men. Candidates for loans must have their proposals thoroughly evaluated and supported by five non-family members of the community. The bank's sales and service people visit the villages frequently, getting to know the women who have loans and the projects in which they are supposed to invest. In this way, lending due diligence is accomplished without the mountain of paperwork and arcane language common in the West. With 1,170 branches, Grameen Bank today provides micro-credit services in more than 40,000 villages, more than half the total number in Bangladesh.  Grameen Bank had achieved a 95 percent repayment rate, higher than any other bank in the Indian subcontinent."

Having people on the spot enabled Grameen Bank to identify other business opportunities: "Historically, the bank was an entirely manual, field-based operation, a structure that undercut its efficiency. Today, spin-offs such as Grameen Telecom (a provider of village phone service) and Grameen Shakti (a developer of renewable energy sources) are helping Grameen Bank build a technology infrastructure to automate its processes. As the bank develops its online business model, profitability should increase dramatically, highlighting the importance of information technology in the acceleration of the micro-credit revolution."

Avoiding mistakes

Providing new essential services in developing countries is an opportunity to utilize renewable resource technologies and avoid the environmental mistakes which were made in the developed countries in the past.

For example: "A U.S.-based NGO (Non-Government Organization) the Solar Electric Light Fund (SELF), has creatively adapted technology and applied micro-credit financing to bring electrical service to people in remote villages in Africa and Asia who otherwise would spend money to burn hazardous kerosene, candles, wood, or dung for their light and cooking. SELF's rural electrification system is based on small-scale on-site power generation using renewable resources. A revolving loan fund gives villagers the financial means to operate these electrical systems themselves, also creating jobs." Low cost renewable energy technologies and product innovations developed for Tier 4 markets may prove their practical use and find acceptance in the other market tiers as well, replacing unsustainable technologies used in developed countries. For example: "The success of SELF and other NGOs focused on small-scale distributed energy solutions has begun to attract the attention of Western companies such as the U.S.'s Plug Power Inc. (fuel cells) and Honeywell Inc. (micro-turbines). They see the logic in moving into a wide-open market in Tier 4 rather than trying to force their technology prematurely into applications for the developed markets, where incumbents and institutions stand in their way. With several billion potential customers around the world, investments in such innovations should be well worth it."

According to 'What works: Serving the poor, profitably' by Prahalad and Hammond, the poor welcome new technologies: "Poor rural women in Bangladesh have had no difficulty using a GSM cell phone, despite having no prior experience with phones of any type; many of the Grameen Telecom village phone entrepreneurs, despite their illiteracy, have memorized country codes and proudly help customers call anywhere in the world. In an experiment in Andhra Pradesh, in India, Swayam Krishi Sangam (SKS) a community organization, fitted Palm Pilots with smart cards and organized village women to start a savings scheme. The smart card became the bank passbook, keeping a record of all transactions. The villagers had no trouble understanding how the little smart card held all their transactions, and their willingness to replace a century-old system of bookkeeping with hi-tech new devices leads SKS to be believe it will be able to scale up operations in the near future. Telecenters in El Salvador operated by Infocentros provide Internet conferencing to poor businessmen to negotiate sales of their crops. In Kenya, NairoBits is successfully training slum teenagers to be Web page designers. In an experiment in coastal villages in India, local women were trained in less than a week to use a PC to interpret real-time satellite images of the concentration of schools of fish in the Arabian Sea, and could successfully direct their husbands to the right spots to catch fish."

Prahalad and Hammond explain that: " These examples underscore the readiness of poor communities to adopt new technologies, if they in fact improve economic opportunities or quality of life. The lesson for multinationals approaching this market is not to be concerned about deploying advanced technology solutions at the bottom of the pyramid simultaneously with, or even ahead of, deployment in advanced countries." [emphasis added]

Understanding the market economy

Marketing concepts must be adapted to suit the reality of the particular market. What may work in one market tier, may not work in another. For example, Prahalad and Hammond say: "priorities for spending in poor communities may be quite different from those at the top tiers of the economic pyramid. With dysfunctional distribution channels, the choices available to poor communities are quite limited. Saving to build a home in the future versus buying a television set now is a choice that suggests sophisticated economic reasoning. Buying a house in Mumbai, for most people in the bottom of the pyramid, is not a realistic option. Neither is getting access to running water. They accept that reality and spend their income on things that they can get now. The result is what often seem counter-intuitive economic choices. In the Mumbai shantytown of Dharavi, for example, 85 percent of households own a television set, 75 percent own a pressure cooker and a mixer, 60 percent own a gas stove and 21 percent have telephones. The poor use their limited resources in ways that reflect their reality."

The poor live in very high-cost economies as a direct consequence of the lack of competitive and economical essential services like water, sewage, electricity, garbage disposal, and planned access routes like roads suitable for public transport and trucks. "Consider a BOP household anywhere in the world. Urban slum dwellers without access to municipal water pay 4 to 100 times as much for drinking water as do middle and upper class families. In Lima, Peru, for example, a poor family pays 20 times what the middle class pays. Credit is often unavailable, or available only from local moneylenders who charge 10 to 15 percent interest per day. Interest rates of 1,000–2,000 percent per annum are not uncommon. The lucky small-scale entrepreneurs who get loans from a non-profit microfinance institution still pay 40–70 percent interest per year—rates that in most developed countries would be considered illegal."

"Food often costs at least 20-30 percent more in poor communities. This is true even in downtown Detroit, Los Angeles or San Diego. The poor do not have access to Walmart or Sam's Club and have to depend on high-cost local grocery stores and inefficient supply chains, in developed and developing countries. Clearly costs to the poor could be dramatically reduced if they could benefit from the scope, scale and supply-chain organization of large enterprises, as do their middle class counterparts."

Exploitation or helping the poor?

According to Prahalad and Hammond: "Given the controversy over globalization, many MNC [Multi-National Corporation] managers are concerned that entering BOP [Bottom Of the economic Pyramid] markets would be perceived as exploiting the poor. But when a microfinance institution such as Grameen Bank charges 50 percent effective annual interest, is it exploiting or helping the poor? The alternatives for many poor borrowers would be 1,000 percent interest or no loan at all."

"We believe firms that build the capability to provide services and compete in poor communities can generate an acceptable return on investment and help the poor dramatically reduce their costs and improve their standard of living. Furthermore, the issue is not just cost, but also quality—the quality of water, the range and fairness of financial services, the variety and quality of food. The informal economy that now serves poor communities is an unorganized system that is full of inefficiencies and intermediaries or middlemen who exploit those inefficiencies. Creating real markets among the poor—with adequate information, competition, and choice—can change the situation. Allowing the benefits of organization, logistics, information technology, and scale to bear upon the problem can lead to a win-win solution. If we can remove the inefficiencies of the unorganized sector, we will find an attractive market—for consumers and for firms."

The last say

I'll let Prahalad and Hart have the last say: "In short, the poorest populations raise a prodigious new managerial challenge for the world's wealthiest companies: selling to the poor and helping them improve their lives by producing and distributing products and services in culturally sensitive, environmentally sustainable, and economically profitable ways."

Resources

The fortune at the bottom of the pyramid (http://www.changemakers.net/library/temp/fortunepyramid.cfm)

Cultural Innovation for entering low income markets (http://www.changemakers.net/journal/02september/culture.cfm)

Leaders in Dubai (http://www.leadersindubai.com/speaker-content.cfm?sccid=3&sid=42)

What works: Serving the poor, profitably (http://www.markle.org/downloadable_assets/servepoorprofitably.pdf)

 

 

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