Fortune at the bottom of pyramid

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THE FORTUNE AT THE BOTTOM OF THE PYRAMID

DIFFUSION OF NEW PRODUCTS AND TECHNOLOGIES




TABLE OF CONTENTS

CONTENT PAGE

Introduction 1

Exhibit 1: The world economic pyramid 2

Exhibit 2: The process of making profits and alleviating poverty 3

Challenges of launching products targeting the BOP 3

Poor ‘situation analysis’ data 4

Fragmented markets 4

Understanding consumer behaviour and purchase decisions 5

Meeting latent needs of BOP consumers 6

Recreating the business and pricing models 6

Understanding political and local actors 7

Educating the consumers 7

Implications for consumers 7

Implications for national economy 9

Implications for companies targeting BOP consumers 9

Conclusion 10

Appendices

Appendix 1: Share of global poor by country 12

Appendix 2: Key purchase influencers and their components 13

Appendix 3: Purchase decision influencers 14

Appendix 4: BOP producer constraints framework 15

Appendix 5: Marketing Mix implications for companies targeting BOP consumers 16

References 17


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Abstract: The notion that the Bottom of the Pyramid (BOP) consumers is a

segment that is not important for the long-term viability of most of the businesses

is no more classified as ‘accepted wisdom’. There is a shift in thinking of MNCs

which now are considering BOP consumers as a potential source of revenues as

well as drivers of innovation. Targeting the subsistence marketplaces poses

various challenges for MNCs, but has favourable outcomes for BOP participants,

economy and business organizations. This paper identifies the challenges of

launching products targeting BOP markets in India and discusses the implications

for consumers, national economy, and companies targeting BOP consumers.

“Doing business with the world’s four billion poorest people – two thirds of the

world’s population – will require radical innovations in technology and business

models.”

Prahalad and Hart (2002)

INTRODUCTION

In today’s globalized world, companies are striving hard to come up with innovative

strategies encapsulating new business models to capture market share in already tapped

markets and sustain a growth pattern. But there is an ‘invisible market’ (Prahalad 2004),

which comprises of 3 billion people or 750 million households (Akula 2008; Subrahmanyan

and Gomez-Arias 2008; Karnani 2007a; Aiyar 2006); 4 billion according to Pitta et al (2008)

and 5 billion people according to Prahalad (2004) – still there is uncertainty concerning the

actual size of BOP – with cumulative purchasing power of $5 trillion (Subrahmanyan and

Gomez-Arias 2008). Due to their extremely low income – less than $2 dollars a day – these

poorest people of the world are placed in Tier 4, and are referred as being ‘economically at

the Bottom of the Pyramid’ (Exhibit 1).


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The subsistence marketplaces in developing countries – mostly neglected (Martinez and

Carbonell 2007) – which even now have impressively high potential, “will have an additional

one billion new consumers entering the global market for discretionary spending before

2020”; the potential will increase markedly (Viswanathan and Rosa 2010). These figures

suggest a market which merits attention by for-profits companies but a lot of criticism

appears on the basis of constraints regarding income of these poor people. There exists a

marketing myopia which restricts companies from seeing the reality, identifying the

opportunities and entering into the unexplored markets (Martinez and Carbonell 2007). In

Prahalad’s (2004) view, BOP consumers will lead to breakthrough innovations in products as

well as management practices; “the bottom of the economic pyramid is a sandbox for

innovation”. Prahalad’s BOP proposition (Exhibit 2) if implemented successfully will not only

provide benefits to MNCs, but it will also eradicate poverty in the long-run.


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CHALLENGES OF LAUNCHING PRODUCTS TARGETING BOP MARKETS

Companies targeting BOP consumers need to take a bottom-up approach – an approach

employed to gain a clear understanding of various influential factors which determine the

consumer behaviour (Viswanathan and Rosa 2010). A bottom-up approach is necessary in

understanding and explaining subsistence markets (Karnani 2007b). Managers of those

companies need to get as close to the ground as possible. Secondly, these companies need

to appreciate BOP markets as more than markets and sell different products with different

strategies as compared to those in developed markets. The rules of the game can be

astonishingly dissimilar from what the companies are used to. The typical distinction

between production and consumption found in developed countries is not prevalent in BOP

segments as BOP participants are consumers and producers of specific goods (Wood et al

2008).

India, located in South Asia, has 1.2 billion population, making it the world’s second most

populous country; more than 70 percent resided in rural areas in 2010; 25 percent of 1.2

billion population is below poverty line (CIA World Factbook); and 41 percent of world’s

global poor lives in India (Appendix 1) with over $1.2 trillion market in PPP (Katz 2007).


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Companies targeting BOP consumers in India would face certain challenges which include

changing products and business models altogether, apart from modifying 4Ps of marketing.

Prahald and Hart (2002) suggested that companies need to make BOP consumers self-reliant;

educate and inspire them to buy their products; and develop efficient channels of

communication and distribution in BOP markets. In India, the unique characteristics of BOP

markets pose distinct challenges which managers and researchers need to address in order

to understand the consumer behaviour and purchase decisions (Chikweche and Fletcher

2010). Moreover, the 4As – availability of products in BOP markets, affordability by

consumers, acceptability and willingness to consume, and awareness about the presence

and usage of those products – can be major challenges for MNCs.

1. Poor ‘Situation Analysis’ Data

To target the BOP consumers successfully, strategies and actions need to be devised

based on the situation analysis of the target groups, which is critical but not available.

The existing data would not be able to provide an accurate picture of the micro as well

as macro-environment. The traditional approaches for segmentation or existing market

surveys of developed markets would not be appropriate to develop an understanding of

BOP markets.

2. Fragmented markets – identifiable and substantial, but immeasurable and

inaccessible

BOP markets in general and Indian BOP markets in particular, are geographically and

culturally fragmented markets implying that it is difficult for MNCs targeting BOP in India

while attaining economies of scale. As noted by Karnani (2007a), BOP markets usually do

not offer significant economies of scale to MNCs because of markets being fragmented.

Consumers live in culturally diverse areas and that too in shantytowns or villages located

far from each other.


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The heterogeneous nature of the markets and weak infrastructure (communication,

media, legal and transportation) in India undermines the ability of MNCs to carry out

their operations cost-effectively. Furthermore, as each transaction in BOP markets is

generally of small size, it increases the cost of doing business in those markets (Pitta et

al 2008). Perhaps, the BOP segment is may be identifiable and substantial, but it is

difficult to be measured and accessed, though Hindustan Lever has reached certain

markets in India and have strong communications in those markets where it seems

impossible to target consumers.

P&G’s three channel distribution system for brand PuR in Asia and Africa is an example

of innovative and efficient model which is based on ‘commercial channel’, ‘NGO channel’

and ‘disaster relief model’.

3. Understanding consumers behaviour and purchase decisions

Factors that influence consumers at BOP in making purchases or developing perceptions

about products differ from those factors that influence consumers in other tiers of the

pyramid. Understanding these factors is no less than a challenge for marketers and

managers as it has not been extensively covered in existing literature. For example, a

study by Chikweche and Fletcher (2010) in Zimbabwe found out that price which is

considered the only and most important factor in BOP consumers’ purchase decisions,

was not the only most important factor in purchase decisions of food or personal

hygiene products of BOP consumers (Appendix 2). Similar results were found in another

study by Viswanathan et al (2010) (Appendix 3).

Consumers in subsistence marketplaces rely more on their social networks and to be

successful in these markets businesses need to develop different kind of trust than the

usual buyer-seller relationships found in conventional business practices (Viswanathan

et al 2008), the absence of which may lead to non-consumption of the products.

Christensen et al (2002) noted that companies in quest of disruptive growth for their

products should first resolve the issue of non-consumption by BOP, which are due to


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products being too expensive or complexity of the products. Building transaction

capacity of BOP consumers to enable them to act as customers is a challenge for MNCs.

4. Meeting latent needs of BOP consumers

BOP consumers in India are not educated; most of them being illiterate, poses challenge

for companies to understand their needs. Companies require adopting methods to

understand and fulfil the known and latent needs of BOP consumers (Viswanathan and

Rosa 2010). Subrahmanyan and Gomez-Arias (2008) in their study found out that BOP

consumers are sophisticated and creative, despite income and resource constraints; and

seek to fulfil higher order needs apart from survival or physiological needs. The poor

would embrace those firms which serve them the best; firms need to win the share of

hearts (Wood et al 2008).

CavinKare’s fairness cream was successfully sold in India. Idea was generated after

observing people in rural areas drinking saffron mixed with milk for fairer complexion

(Anderson and Billou 2007).

5. Recreating the business and pricing models

The challenges in BOP markets lead companies to change their business models as

targeting Tier 4 of the pyramid requires different tactics to succeed in the market.

Prahalad in an interview commented that “price-performance relationships have to be

fundamentally different” (Leynse 2004). Companies might need to create products that

are functionally more advanced – like the Jaipur Foot (cost in U.S. and India is $8000 and

$30 respectively), or Aravind Hospital in India (cost of a surgery in U.S. and India is $3000

and $70 respectively). To create such businesses, MNCs have to realign their business

models as well as internal processes (Kirchgeorg and Winn 2006). The dynamics of

subsistence marketplaces make it imperative for managers to modify their business

models, cost structures, operations and use of capital (Pitta et al 2008; Chesbrough et al

2006; Prahalad 2004). Marketing to BOP segments entail different business models


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(Wood et al 2008), as it is argued that consumers at BOP would not be able to afford

even a reasonable quality product except certain utilitarian products or services, hence

leaving no fortune for MNCs at the BOP.

Moreover, MNCs need to adapt their value chains, acclimatize marketing management

and align their strategies to dynamics of the new markets. Smart Communications in

Philippines using technological innovation developed over-the-air payment system to

make their prices affordable for BOP consumers (Anderson and Billou 2007).

6. Understanding Political and Local Actors

Doing business in developing countries, for instance India, is not akin to doing business

in developed countries. Various issues prevailing in subsistence marketplaces are

loopholes in laws and its enforcement, weak legal infrastructure, corruptible public

officials and poor IP enforcement laws, which weaken MNCs and hinder their innovation

and growth process.

7. Educating the consumers

Creating awareness among the consumers about the brands and products would be a

significant challenge for businesses, especially in regards to technological products as

most of the BOP consumers are illiterate or cannot understand any other language

except their native language.

e-Choupal started by ITS in India is an example of business that educates its customers

to make use of Information Technology.

IMPLICATIONS FOR CONSUMERS

Not only companies targeting the bottom of the pyramid consumers would reap profits if

successful, but consumers and markets would have additional benefits as well. Martinez and

Carbonell (2007), suggested that successful attempts by businesses to sell quality products


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to the poor would have lessen currently high prices of products due to poor distribution

infrastructure, eventually increasing the purchasing power of BOP consumers by making

previously unaffordable goods affordable for them (Pitta et al 2008). Consumers would be

targeted with quality products at affordable prices leading to a competitive market in the

long-term. This would also make it imperative for companies to come up with innovative

products and strategies as after a certain point companies would not be able to compete on

prices. When organizations such as Casas Bahia, ITC limited, Aravind Hospital would enter

BOP markets, BOP consumers would be able to purchase products or services which they

could not afford to have before. Indirect benefits include better health and education,

capacity-building and improved productivity.

If Karnani’s vision of BOP participants as producers and not just consumers (Karnani 2007a)

is put into reality, it would have significant effect on poverty alleviation making BOP

participants boost their income sufficiently to rise above the BOP. ITC Limited employed

Karnani’s model of buying from BOP producers and reduced the problems faced by poor

farmers in India due to weak distribution infrastructure, developing them into profitable

customers (Pitta et al 2008). Overall, agriculture provides income for 1.3 billion farmers, and

of the poor living in the developing economies 50 percent are small farmers. Just by linking

these farmers to non-local consumers would allow these farmers to access new markets,

making BOP producers prosperous (London et al 2010).

MNCs by developing BOP marketplaces can bring fortune to billions of people and help in

making this world a more stable, less dangerous place (London et al 2010). Grameen Bank in

Bangladesh and Hatton National Bank in Sri Lanka provide services to the consumers in

subsistence marketplaces and played vital role in transformation and growth of these

markets (Elaydi and Harrison 2009). Moreover, when companies start their business in

subsistence marketplaces, numerous developments in the markets take place and entry-

level jobs are created eventually benefitting the BOP participants (Viswanathan and Rosa

2010).


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IMPLICATIONS FOR NATIONAL ECONOMY

From a sustainability perspective, there are several other reasons to alleviate poverty, apart

from moral imperative. Poverty is detrimental not only socially but environmentally as well,

which leads to social inequality, violating moral rights and destabilizing societies. Bringing in

the MNCs to sell to BOP will resolve the problem of poverty in India (Kirchgeorg and Winn

2006).

BOP initiative, apart from benefitting companies and BOP consumers, would also help the

national economy grow. It will not only alleviate poverty but will also affect the economy

positively by curing economic stagnation, and eliminating reasons of civil wars and terrorism

(Karnani 2007a). BOP initiative in India would also attract FDI into the country leading to

higher GDP.

But to attain growth, governments need to actively and positively take part in this BOP

initiative by fulfilling its conventional purpose such as basic education, public health and

infrastructure, which would have direct impact on the productivity of MNCs.

IMPLICATIONS FOR COMPANIES TARGETING BOP CONSUMERS

Prahalad in an interview mentioned that to follow the BOP initiative, firstly businesses need

to create the capacity to consume and to create the market for the poor, whereas

multinationals has always focused on creating more efficiency in existing markets (Leynse

2004). Companies need to put in their resources in Blue Oceans adapting Blue Ocean

Strategy and creating and capturing ‘new’ demand, instead of competing in already

saturated markets. For this, companies need to employ innovation strategies which can help

them to enter new markets; Hewlett-Packard successfully entered vast India BOP market by

launching solar-powered portable charging system for its digital cameras and printers

(Varadarajan, 2008). Technological innovations such as Tata Nano, a small car made by Tata

Motors for India’s BOP consumers (Strategic Direction 2009); and Haier’s modified washing

machines to wash vegetables (Anderson and Billou 2007) prove that it is possible to develop

products for BOP consumers without compromising on the essential features and quality of


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the products. In BOP markets, diffusion of innovation takes place by early adopters

influencing the decisions of potential customers.

BOP markets offer favourable conditions for business organizations. Companies which

target BOP consumers wishing to achieve dual objectives of making profits and alleviating

poverty should focus on reducing the constraints for ‘value creation’ and ’value capture’

(London et al 2010) (Appendix 4). Because of these constraints, BOP consumers and

producers reap almost no profit which lowers their income.

MNCs can also tap into tacit knowledge about the marketplaces by hiring local people.

Furthermore, companies can build transaction capacity of the poor by increasing their

income through the provision of microcredit or participation in value chain activities

(Kirchgeorg and Winn 2006).

MNCs can target BOP consumers with the products specifically developed for them making

use of technological competencies. MNCs’ production capacities permit them to employ

their mass-production methods and sell products at little margins (Kirchgeorg and Winn

2006).

In terms of marketing mix, the adaptations that can be made for BOP segments by MNCs are

summarized in Appendix 5.

BOP markets offer significant opportunities for MNCs (Karamchandani et al 2011), as well as

SMEs but opportunities in BOP marketplaces are best not to be viewed with short-term

business approach of market share or profits, instead, companies need to have long-term

orientation to be a market leader in this segment.

CONCLUSION

BOP markets offer valuable opportunities, as there is a lot of potential and opportunities for

innovation that are still to be exploited, which can be made use of if firms plan to make

products specifically for the poor that the poor can afford. MNCs need to develop relevant-

to-BOP consumers products specifically tailored to suit the needs of BOP consumers in order

to make fortune; Tier 4 markets offer profitable opportunities for technological innovations


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as well. Doing business at the BOP is not akin to charity; hence it must be regarded by MNCs

as carrying out operations in a new market; “reconceptualising the poor as customers”

(Kirchgeorg and Winn 2006).

Karnani’s analysis posits that currently BOP consumers are not able to afford certain

products as they spend most of their money on food, clothing and shelter, but by helping

them in alleviating poverty would eventually result in more consumption which means more

profits for the firm. Consequently, for MNCs, there lies both, fortune and glory at the

Bottom of the Pyramid.


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APPENDIX 1: SHARE OF GLOBAL POOR BY COUNTRY

Source: http://www.nationmaster.com/graph/eco_pov_sha_of_all_poo_peo-poverty-share-all-poor-people

http://www.nationmaster.com/graph/eco_pov_sha_of_all_poo_peo-poverty-share-all-poor-people


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APPENDIX 2: KEY PURCHASE INFLUENCERS AND THEIR COMPONENTS

Source: Chikweche and Fletcher 2010


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APPENDIX 3: PURCHASE DECISION INFLUENCERS

Source: Viswanathan et al 2010


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APPENDIX 4: BOP PRODUCER CONSTRAINTS FRAMEWORK

Source: London et al 2010


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APPENDIX 5: MARKETING MIX IMPLICATIONS FOR COMPANIES TARGETING BOP CONSUMERS

PRODUCT

Low –cost Environmental friendly Simple-to-use Standard Foreign solutions for local needs Educational deficits must be kept in

mind Redesign products in terms of

features, shape and usage (e.g. Haier washing machines were redesigned for washing vegetables or making cheese in China)

Smaller quantities and packaging (e.g. Hindustan Lever in India – iodized salt or personal care sachets)

Low-cost production concepts Bare-bones product with fewer

product features that the poor can afford (e.g. Nirma in India)

Multinational product development teams with emerging market experience

COMMUNICATION

Diverse markets in terms of culture and language

Billboards, local methods of entertainment, and word-of-mouth are effective forms of promotion (e.g. HLL incorporate street performances to promote soap brand)

Community meetings and municipal facilities provide platform for communication

Develop innovative way to make use of informal communication

Take into account low literacy level and limited reading ability

PRICE

Low-margin e.g. P&G and Unilever Mixed pricing models (Profits from

high-priced products in industrialized segments supports low-price offers in emerging markets)

Sharing models can distribute high initial investments (e.g. internet or telephone shared across multiple users)

Flexibility and innovative methods for collecting payments as many customers will not have postal address or banking facilities (e.g. micro loans, prepaid phone cards, cashless payment, payment in instalments)

DISTRIBUTION

Localize supply chain activities Involve local actors New approaches to open up poor

segments (e.g. three channel distribution system used by P&G for brand PuR in Asia and Africa using ‘commercial channel’, ‘NGO channel’ and ‘Disaster relief model’)

Identify promising partners, institutions and entrepreneurs

Appropriate distribution systems (e.g. ITS which started e-Choupal enables farmers to get information from their electronic meeting places; and AMUL’s cooperative stores)

Geographically and affectively close distribution channels (e.g. Banco Estado, a state owned commercial bank which is positioned as affectively close)

Source: Kirchgeorg and Winn (2006) and Subrahmanyan and Gomez-Arias (2008)


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