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Fortune at the bottom of pyramid


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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.

Published in: Business

Fortune at the bottom of pyramid

  2. 2. TABLE OF CONTENTSCONTENT PAGEIntroduction 1 Exhibit 1: The world economic pyramid 2 Exhibit 2: The process of making profits and alleviating poverty 3Challenges 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 7Implications for consumers 7Implications for national economy 9Implications for companies targeting BOP consumers 9Conclusion 10AppendicesAppendix 1: Share of global poor by country 12Appendix 2: Key purchase influencers and their components 13Appendix 3: Purchase decision influencers 14Appendix 4: BOP producer constraints framework 15Appendix 5: Marketing Mix implications for companies targeting BOP consumers 16References 17
  3. 3. 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)INTRODUCTIONIn today’s globalized world, companies are striving hard to come up with innovativestrategies encapsulating new business models to capture market share in already tappedmarkets 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; Subrahmanyanand 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 theactual size of BOP – with cumulative purchasing power of $5 trillion (Subrahmanyan andGomez-Arias 2008). Due to their extremely low income – less than $2 dollars a day – thesepoorest people of the world are placed in Tier 4, and are referred as being ‘economically atthe Bottom of the Pyramid’ (Exhibit 1). 1
  4. 4. subsistence marketplaces in developing countries – mostly neglected (Martinez andCarbonell 2007) – which even now have impressively high potential, “will have an additionalone billion new consumers entering the global market for discretionary spending before2020”; the potential will increase markedly (Viswanathan and Rosa 2010). These figuressuggest a market which merits attention by for-profits companies but a lot of criticismappears on the basis of constraints regarding income of these poor people. There exists amarketing myopia which restricts companies from seeing the reality, identifying theopportunities and entering into the unexplored markets (Martinez and Carbonell 2007). InPrahalad’s (2004) view, BOP consumers will lead to breakthrough innovations in products aswell as management practices; “the bottom of the economic pyramid is a sandbox forinnovation”. Prahalad’s BOP proposition (Exhibit 2) if implemented successfully will not onlyprovide benefits to MNCs, but it will also eradicate poverty in the long-run. 2
  5. 5. OF LAUNCHING PRODUCTS TARGETING BOP MARKETSCompanies targeting BOP consumers need to take a bottom-up approach – an approachemployed to gain a clear understanding of various influential factors which determine theconsumer behaviour (Viswanathan and Rosa 2010). A bottom-up approach is necessary inunderstanding and explaining subsistence markets (Karnani 2007b). Managers of thosecompanies need to get as close to the ground as possible. Secondly, these companies needto appreciate BOP markets as more than markets and sell different products with differentstrategies as compared to those in developed markets. The rules of the game can beastonishingly dissimilar from what the companies are used to. The typical distinctionbetween production and consumption found in developed countries is not prevalent in BOPsegments as BOP participants are consumers and producers of specific goods (Wood et al2008).India, located in South Asia, has 1.2 billion population, making it the world’s second mostpopulous country; more than 70 percent resided in rural areas in 2010; 25 percent of 1.2billion population is below poverty line (CIA World Factbook); and 41 percent of world’sglobal poor lives in India (Appendix 1) with over $1.2 trillion market in PPP (Katz 2007). 3
  6. 6. targeting BOP consumers in India would face certain challenges which includechanging 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 ofcommunication and distribution in BOP markets. In India, the unique characteristics of BOPmarkets pose distinct challenges which managers and researchers need to address in orderto understand the consumer behaviour and purchase decisions (Chikweche and Fletcher2010). Moreover, the 4As – availability of products in BOP markets, affordability byconsumers, acceptability and willingness to consume, and awareness about the presenceand 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. 4
  7. 7. heterogeneous nature of the markets and weak infrastructure (communication,media, legal and transportation) in India undermines the ability of MNCs to carry outtheir operations cost-effectively. Furthermore, as each transaction in BOP markets isgenerally of small size, it increases the cost of doing business in those markets (Pitta etal 2008). Perhaps, the BOP segment is may be identifiable and substantial, but it isdifficult to be measured and accessed, though Hindustan Lever has reached certainmarkets in India and have strong communications in those markets where it seemsimpossible to target consumers.P&G’s three channel distribution system for brand PuR in Asia and Africa is an exampleof innovative and efficient model which is based on ‘commercial channel’, ‘NGO channel’and ‘disaster relief model’.3. Understanding consumers behaviour and purchase decisionsFactors that influence consumers at BOP in making purchases or developing perceptionsabout products differ from those factors that influence consumers in other tiers of thepyramid. Understanding these factors is no less than a challenge for marketers andmanagers as it has not been extensively covered in existing literature. For example, astudy by Chikweche and Fletcher (2010) in Zimbabwe found out that price which isconsidered the only and most important factor in BOP consumers’ purchase decisions,was not the only most important factor in purchase decisions of food or personalhygiene products of BOP consumers (Appendix 2). Similar results were found in anotherstudy by Viswanathan et al (2010) (Appendix 3).Consumers in subsistence marketplaces rely more on their social networks and to besuccessful in these markets businesses need to develop different kind of trust than theusual buyer-seller relationships found in conventional business practices (Viswanathanet 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 theirproducts should first resolve the issue of non-consumption by BOP, which are due to 5
  8. 8. being too expensive or complexity of the products. Building transactioncapacity of BOP consumers to enable them to act as customers is a challenge for MNCs.4. Meeting latent needs of BOP consumersBOP consumers in India are not educated; most of them being illiterate, poses challengefor companies to understand their needs. Companies require adopting methods tounderstand and fulfil the known and latent needs of BOP consumers (Viswanathan andRosa 2010). Subrahmanyan and Gomez-Arias (2008) in their study found out that BOPconsumers are sophisticated and creative, despite income and resource constraints; andseek to fulfil higher order needs apart from survival or physiological needs. The poorwould embrace those firms which serve them the best; firms need to win the share ofhearts (Wood et al 2008).CavinKare’s fairness cream was successfully sold in India. Idea was generated afterobserving people in rural areas drinking saffron mixed with milk for fairer complexion(Anderson and Billou 2007).5. Recreating the business and pricing modelsThe challenges in BOP markets lead companies to change their business models astargeting Tier 4 of the pyramid requires different tactics to succeed in the market.Prahalad in an interview commented that “price-performance relationships have to befundamentally different” (Leynse 2004). Companies might need to create products thatare 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 $3000and $70 respectively). To create such businesses, MNCs have to realign their businessmodels as well as internal processes (Kirchgeorg and Winn 2006). The dynamics ofsubsistence marketplaces make it imperative for managers to modify their businessmodels, cost structures, operations and use of capital (Pitta et al 2008; Chesbrough et al2006; Prahalad 2004). Marketing to BOP segments entail different business models 6
  9. 9. (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 CONSUMERSNot only companies targeting the bottom of the pyramid consumers would reap profits ifsuccessful, but consumers and markets would have additional benefits as well. Martinez andCarbonell (2007), suggested that successful attempts by businesses to sell quality products 7
  10. 10. the poor would have lessen currently high prices of products due to poor distributioninfrastructure, eventually increasing the purchasing power of BOP consumers by makingpreviously unaffordable goods affordable for them (Pitta et al 2008). Consumers would betargeted with quality products at affordable prices leading to a competitive market in thelong-term. This would also make it imperative for companies to come up with innovativeproducts and strategies as after a certain point companies would not be able to compete onprices. When organizations such as Casas Bahia, ITC limited, Aravind Hospital would enterBOP markets, BOP consumers would be able to purchase products or services which theycould 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 BOPparticipants boost their income sufficiently to rise above the BOP. ITC Limited employedKarnani’s model of buying from BOP producers and reduced the problems faced by poorfarmers in India due to weak distribution infrastructure, developing them into profitablecustomers (Pitta et al 2008). Overall, agriculture provides income for 1.3 billion farmers, andof the poor living in the developing economies 50 percent are small farmers. Just by linkingthese 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 inmaking this world a more stable, less dangerous place (London et al 2010). Grameen Bank inBangladesh and Hatton National Bank in Sri Lanka provide services to the consumers insubsistence marketplaces and played vital role in transformation and growth of thesemarkets (Elaydi and Harrison 2009). Moreover, when companies start their business insubsistence marketplaces, numerous developments in the markets take place and entry-level jobs are created eventually benefitting the BOP participants (Viswanathan and Rosa2010). 8
  11. 11. FOR NATIONAL ECONOMYFrom a sustainability perspective, there are several other reasons to alleviate poverty, apartfrom moral imperative. Poverty is detrimental not only socially but environmentally as well,which leads to social inequality, violating moral rights and destabilizing societies. Bringing inthe MNCs to sell to BOP will resolve the problem of poverty in India (Kirchgeorg and Winn2006).BOP initiative, apart from benefitting companies and BOP consumers, would also help thenational economy grow. It will not only alleviate poverty but will also affect the economypositively 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 tohigher GDP.But to attain growth, governments need to actively and positively take part in this BOPinitiative by fulfilling its conventional purpose such as basic education, public health andinfrastructure, which would have direct impact on the productivity of MNCs.IMPLICATIONS FOR COMPANIES TARGETING BOP CONSUMERSPrahalad in an interview mentioned that to follow the BOP initiative, firstly businesses needto create the capacity to consume and to create the market for the poor, whereasmultinationals has always focused on creating more efficiency in existing markets (Leynse2004). Companies need to put in their resources in Blue Oceans adapting Blue OceanStrategy and creating and capturing ‘new’ demand, instead of competing in alreadysaturated markets. For this, companies need to employ innovation strategies which can helpthem to enter new markets; Hewlett-Packard successfully entered vast India BOP market bylaunching solar-powered portable charging system for its digital cameras and printers(Varadarajan, 2008). Technological innovations such as Tata Nano, a small car made by TataMotors for India’s BOP consumers (Strategic Direction 2009); and Haier’s modified washingmachines to wash vegetables (Anderson and Billou 2007) prove that it is possible to developproducts for BOP consumers without compromising on the essential features and quality of 9
  12. 12. products. In BOP markets, diffusion of innovation takes place by early adoptersinfluencing the decisions of potential customers.BOP markets offer favourable conditions for business organizations. Companies whichtarget BOP consumers wishing to achieve dual objectives of making profits and alleviatingpoverty should focus on reducing the constraints for ‘value creation’ and ’value capture’(London et al 2010) (Appendix 4). Because of these constraints, BOP consumers andproducers 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 theirincome 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 makinguse of technological competencies. MNCs’ production capacities permit them to employtheir mass-production methods and sell products at little margins (Kirchgeorg and Winn2006).In terms of marketing mix, the adaptations that can be made for BOP segments by MNCs aresummarized in Appendix 5.BOP markets offer significant opportunities for MNCs (Karamchandani et al 2011), as well asSMEs but opportunities in BOP marketplaces are best not to be viewed with short-termbusiness approach of market share or profits, instead, companies need to have long-termorientation to be a market leader in this segment.CONCLUSIONBOP markets offer valuable opportunities, as there is a lot of potential and opportunities forinnovation that are still to be exploited, which can be made use of if firms plan to makeproducts 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 orderto make fortune; Tier 4 markets offer profitable opportunities for technological innovations 10
  13. 13. well. Doing business at the BOP is not akin to charity; hence it must be regarded by MNCsas 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 certainproducts as they spend most of their money on food, clothing and shelter, but by helpingthem in alleviating poverty would eventually result in more consumption which means moreprofits for the firm. Consequently, for MNCs, there lies both, fortune and glory at theBottom of the Pyramid. 11
  15. 15. 2: KEY PURCHASE INFLUENCERS AND THEIR COMPONENTS Source: Chikweche and Fletcher 2010 13
  16. 16. 3: PURCHASE DECISION INFLUENCERS Source: Viswanathan et al 2010 14
  17. 17. 4: BOP PRODUCER CONSTRAINTS FRAMEWORK Source: London et al 2010 15
  18. 18. APPENDIX 5: MARKETING MIX IMPLICATIONS FOR COMPANIES TARGETING BOP CONSUMERSPRODUCT PRICE  Low –cost  Low-margin e.g. P&G and Unilever  Environmental friendly  Mixed pricing models (Profits from  Simple-to-use high-priced products in industrialized  Standard segments supports low-price offers in  Foreign solutions for local needs emerging markets)  Educational deficits must be kept in  Sharing models can distribute high mind initial investments (e.g. internet or  Redesign products in terms of telephone shared across multiple features, shape and usage (e.g. Haier users) washing machines were redesigned  Flexibility and innovative methods for for washing vegetables or making collecting payments as many cheese in China) customers will not have postal  Smaller quantities and packaging (e.g. address or banking facilities (e.g. Hindustan Lever in India – iodized salt micro loans, prepaid phone cards, or personal care sachets) cashless payment, payment in  Low-cost production concepts instalments)  Bare-bones product with fewer product features that the poor can afford (e.g. Nirma in India)  Multinational product development teams with emerging market DISTRIBUTION experience  Localize supply chain activities  Involve local actors  New approaches to open up poorCOMMUNICATION segments (e.g. three channel  Diverse markets in terms of culture distribution system used by P&G for and language brand PuR in Asia and Africa using  Billboards, local methods of ‘commercial channel’, ‘NGO channel’ entertainment, and word-of-mouth and ‘Disaster relief model’) are effective forms of promotion (e.g.  Identify promising partners, HLL incorporate street performances institutions and entrepreneurs to promote soap brand)  Appropriate distribution systems (e.g.  Community meetings and municipal ITS which started e-Choupal enables facilities provide platform for farmers to get information from their communication electronic meeting places; and  Develop innovative way to make use AMUL’s cooperative stores) of informal communication  Geographically and affectively close  Take into account low literacy level distribution channels (e.g. Banco and limited reading ability Estado, a state owned commercial bank which is positioned as affectively close) Source: Kirchgeorg and Winn (2006) and Subrahmanyan and Gomez-Arias (2008) 16
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