Sol DeLeonThe Market at the

Bottom of the Pyramid

Is There a Market at the Bottom of the Pyramid?

Author, Distinguished University of Michigan Business Professor, C.K. Prahalad (1941 – 2010)

Wharton School Publishing, 2004

Economics 100

More goods = increased utility (benefit) Capitalism is the best system we have found for

delivering goods to consumers

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What is the Bottom of the Pyramid?

> $20,000

$1,500 - $20,000

$1,500

< $1,500

4 Billion People

75-100 Million People

1.5 – 1.8 Billion People

Do the poor have money? / The Poverty Penalty

Comparison of prices in Mumbai shanty town (Dharavi) vs. wealthier neighborhood (Warden Rd.)

Item Dharavi Warden Rd.

Poverty Premium

Credit per annum 600-1000% 12-18% 53.0

Diarrhea meds $20.00 $2.00 10.0

Phone call per min.

$0.04 - $0.05 $0.025 1.8

Changing Nature of BoP

Increasingly urban

Increased connectivity

Increased acceptance to use advance technology

Global Distribution of Poverty

© Copyright SASI Group (University of Sheffield) and Mark Newman (University of Michigan).

Capacity to Consume

Three As to Capacity to Consume

• Affordability – a change in size or method of payment to reach BoP customers without loss of quality

• Access

• Availability

Three As to Capacity to Consume

• Affordability

• Access – a distribution pattern that reaches the poor where they work and live, at convenient times

This requires Geographic Intensity of Distribution

• Availability

Three As to Capacity to Consume

• Affordability

• Access

• Availability - “Often the decision to buy is based on the cash [the poor] have on hand at a given point … They cannot defer buying decisions.”

This requires Distribution Efficiency

Twelve Principles of Innovation for the BoP Market

• Innovation: Hybrids

• Identifying Functionality

• Process Innovation

• Interfaces

• Education of Customers

Twelve Principles of Innovation for the BoP Market

• Scale of Operation

• Deskilling of Work

• Price performance

• Sustainable (Environment-conscious) Development

Twelve Principles of Innovation for the BoP Market

• Designing for Hostile Infrastructure

• Distribution: Accessing the Customer

• Challenging Conventional Wisdom in Delivering Products and Services

Conclusions of “The Fortune at the Bottom of the Pyramid”

• Greater consumer choice = greater dignity

• The presences of multinational corporations and e-governance will oppose corruption and encourage better systems

• The above two conclusions will lead toward an elimination of poverty

Effect of BoP

Criticism 1: The Size of the BoP

Size of BoP

Daily Consumption

Annual Economy

Prahalad's Estimate

4 – 5 Billion

$2 per day $13 Trillion in PPP

Critic's Estimate

2.5 – 3 Billion

$1.25 per day $1.2 Trillion in Global FX

PPP = Purchasing Power Parity FX = Foreign Exchange

Criticism 1: The Size of the BoP

http://www.oxfamblogs.org/fp2p/?tag=growth

Criticism 2: The Issue of Quality

There are only three principle ways to lower real prices for the BoP (or anyone):

• Reduce profits

• Lower the cost of production through innovation/technology

• Lower the quality of the good

Criticism 3: Should we even sell to the BoP?

- “Getting the poor to consume more will not solve their problems, contrary to the BoP argument. Their problem is that they cannot afford to consume more.” -UMBS professor, Annel Kanari

- “... in their in depth study [they] find that 'over 10% of male respondents report spending as much as (or more than!) their regular income on alcohol.' … The rich also often make choices not in their self-interest, but the consequences are not as severe in their case.” - ibid

Criticism 3: Should we even sell to the BoP?

Nobel-prize Economist Amartya Sen:

“The deprived people tend to come to terms with their deprivation because of sheer necessity of survival … The mental metric of pleasure or desire is just too malleable to be a firm guide to deprivation and disadvantage. Social and economic factors such as education, elementary health care, and secure employment are not only important in their own right, but also for the role they can play in giving people opportunity to approach the world with courage and freedom.”

My Thoughts / Are you still awake? / Questions

Thank you for listening!

Sol DeLeon

Thank You!