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AIM-5-05-0010-NT THE POOR AS CUSTOMERS: DEVELOPMENT THROUGH REVOLUTIONARY MARKETING CONCEPTS Revolutionary marketing concepts that revolutionize development management do not require new sets of skills nor competencies; rather they require a change in mindset and heartset: the poor is not just a beneficiary, but also a customer with particular needs that can be addressed by the for-profit companies. THE ENTERPRISE VIEW OF MARKETING In light of traditional marketing pedagogy, manufacturing companies and serviceproviders segment the market geographically and demographically, target the mostprofitable segment, and then position themselves to cater to that particular segment inorder to make good business. The most profitable segment is generally defined as “thatwhich has large and/or growing members, with the desire to buy and the purchasingpower to do so.” New products and services with no existing competitors usually capture a single,large, homogenous segment. The trailblazing companies aim to sustain steady growth inthis market to be able to remain in the business. Consequently, companies tend to pursue the same profitable market (see Figure1) so that over time, competition penetrates the league of profitable businesses andfurther segments it, and creates various niches. What used to be a single, large,homogenous segment served by a single product is thereafter transformed intofragmented, specialized markets with varying buying patterns. Further, once the varyingneeds of the market niches have been served and as soon as all who could buy a productProf. Tomas B. Lopez, Jr. wrote this note with funding support from the Microfinance Management Institute (MMI), a jointventure of the Open Society Institute (OSI) and the Consultative Group to Assist the Poor (CGAP). All case materials areprepared solely for the purposes of class discussion. They are neither designed nor intended to illustrate the correct orincorrect management of problems or issues contained in the case.Copyright 2005, Asian Institute of Management, Makati City, Philippines. All rights reserved. Not for resale. Translation,reproduction, and/or transmission of this material for teaching and non-profit purposes are allowed without writtenpermission from AIM. Please address requests for permission to use materials for purposes other than those cited aboveto: Knowledge Resource Center – Library Casebank, Asian Institute of Management, 123 Paseo de Roxas, Makati City1260, Philippines. Tel. No. (632) 892-4011 local 164/214/398; Telefax: (632) 817-2663; Website: http://www.aim.edu;Email: krc@aim.edu. Copies of translated material must be sent to the same address.

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AIM-5-05-0010-NTThe Poor as Customers: Development Through Revolutionary Marketing Concepts 2are already buying as much as they could, then the market stops growing. When thishappens, the market is said to have matured or is dying, if it is not already dead—aclassic marketing nightmare. But in fact, there are no dead or dying markets, onlydeceased business strategies. You might ask, so when the market has reached its plateau, where else couldgrowth come from? One source of growth is product innovation, following which thecycle proceeds once more, just like before. However, several companies worldwide, intheir search for ways to grow their markets, have started doing business with the oft-ignored, oft-untapped low-income group. Their experience in doing business with thepoor – who are often assumed not to have the desire nor the capacity to buy – haveproven one thing: the poor can be a profitable market. Figure 2 shows that the poor comprise a large and growing market base andpossess the desire to buy and the capacity to pay; but they lack resources and access tofinancial services. Several divides keep the poor from the economic mainstream, namely,those that are economic, political, and digital in nature. Because the poor have no accessto resources, they do not appear attractive as customers. Figure 1 Product Growth Cycle Ideal growth pattern Sales Growth patterns of various niches TimeAsian Institute of Management Copyright 2005

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AIM-5-05-0010-NTThe Poor as Customers: Development Through Revolutionary Marketing Concepts 3 Figure 2 World Population MARKETS EVERYBODY FIGHTS OVER 100,000,000 > $20,000 2,000,000,000 > $2,000 - $20,000 4,000,000,000 < $2,000 THE DEVELOPMENT VIEW OF MARKETING The poor are hardly considered customers to sell to. From the developmentperspective, they are always treated as beneficiaries or victims to be helped. Thismindset, coupled with an unfriendly policy environment, limited resources, and the lackof understanding of the behavior of the marginalized, results in unsuccessful developmentinitiatives. Changing the mindset on the poor—that is, treating them as customers to beserved and sold to—is no easy to task, but it is one that must be done. After all, initiatinga change in mindset could transform not only the way development is pursued, but alsothe way business is conducted. The following cases illustrate how. THE REVOLUTIONARY HOT SPOTSCase 1: Banking without Branches As an offshore bank prohibited from engaging in branch banking in manycountries, Citibank must limit its operations to corporate transactions. It thus makesmoney by maximizing its spread that is, paying low interest rates on its various sourcesAsian Institute of Management Copyright 2005

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AIM-5-05-0010-NTThe Poor as Customers: Development Through Revolutionary Marketing Concepts 4of funds—deposits, equity, or loans—and charging high interest rates on loans to itscorporate clients. Corporate clients are generally more sensitive to interest rates compared toindividual clients or depositors because they take out loans on in large amounts so thatinterest on these loans have a major impact on their financials. As well, they can and dotake out the money they have deposited in banks as soon as they are able to find a venturethat can generate returns higher than the interest paid them for their funds placement ordeposits by their current banks. This scenario and the stiff competition in the market giveCitibank pressure on its spread while it maintains its large clientele base. But sinceoperating expenses are minimal as each of the account managers handles severaltransactions and there is no fixed overhead associated with branch operations, corporatebanking becomes profitable. During economic downturns, however, companies refrain from borrowing fundsto keep their financials from being strained by interest expenses on loans. Consequently,Citibank experiences over-liquidity, as none of its corporate clients are willing to take outloans. On the other hand, it is also during hard times when individual clients need loansor credit lines. With information technology available for facilitating bankingtransactions, Citibank is thus able to grab this particular market opportunity: it caters toindividual clients’ need for financial services without resorting to branch banking. In India, for example, Citibank has a banking package, the Suvidha Account,specially designed for all employees of small- and medium-scale enterprises (SMEs). Thepackage requires individual employees to open an account with a minimum deposit of$20, after which all banking transaction are to done over the phone or through automatedteller machines (ATMs). After four years of operations, Citibank now serves 250,000depositors in Bangalore alone. The same scheme has also been launched in Mumbai andDelhi.Case 2: Farming Online Et Al. In India, farmers, usually in groups, rent out Personal Digital Assistants (PDAs)or handheld devices that are operated by using icons shown in a simple touch screen.These farmers use prepaid cards to pay for online services. Programmed to recognize anumber of Indian dialects, the PDAs are used by farmers for a number of tasks: tocompare commodity prices in the market, inquire about transport schedules and booking,apply for government programs, perform banking transactions, or consult their doctors.Case 3: The Cellular Phone Working as a Cow The Grameen Bank of Bangladesh extends credit to the poor villagers to enablefamilies to raise cows to supplement family incomes through the sale of milk to theirAsian Institute of Management Copyright 2005

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AIM-5-05-0010-NTThe Poor as Customers: Development Through Revolutionary Marketing Concepts 5neighbors, as well as meat when possible. Following the same principle, Grameen Telecom launched Village Phone (VP)which extends credit to the villagers to enable them to buy and operate cellular phones,through which they could receive and make calls to their relatives working in theBangladeshi cities and abroad. Launched in 1997 when the cellular phone market wasalmost exclusively urban, the Village Phone already had 39,000 operators serving morethan 50 million people in 2003. The average monthly phone bill of a VP operator wasUS$125, or twice the amount of the bill of urban users. Income thus obtained earned theoperator a net profit of around US$41 a month. The program does not only provide extra income to families but also facilitatesthe flow of funds to the rural areas. It has also elevated the status of women because thenew communication facilities made their homes the center of social activities in thevillages thus increasing their community involvement. On the other hand, the program earns for Grameen Telecom some US$5.7 milliona month, making Village Phone the company’s most profitable product in its portfolio.Case 4: The Digital Filipino As of 2004, there were 33 million cellular phone owners in the Philippines,sending around 300 million text messages everyday, reflecting a 50-percent increase overlast year’s numbers. Of the said users, 95 percent belonged to the low-income class who availed ofprepaid services. Given the cost of text messages—Php0.50 (US$ 1 cent)—these prepaidusers easily gave cellular phone companies a daily revenue of Php88 million(US$157,000) from text messages alone. The use of cellular phones has become a hit among the low-income class for threereasons. First, the very short product life of cellular phones (averaging 12 to 24 months)has brought down the cost of old units, making them affordable to the masses. A second-hand unit, for instance, may sell for as low as Php800 (US$14.50). Second, the cost of atext message suits the lower class’s daily budget of Php110 (US$2.00). Finally, loweringthe minimum prepaid load from Php250 (US$ 4.46) to Php25 (US$0.45), which isroughly the average daily load of subscribers, and allowing increments of Php1 loadsthereafter have made cellular services affordable to the lower class; even more so afterthe cellular companies enabled practically any subscriber to send loads via SMS (Globe’sShare-A-Load and Smart’s Pasa-Load) at Php1-increments. The telecommunications technology now accessible to the poor has also producednew small techno-prenuers: subscribers registered as authorized loading centers earnextra income by selling over-the-air load to the public. Further, the same technology hasintroduced a breakthrough in the financial market where remittances and other bankingAsian Institute of Management Copyright 2005

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AIM-5-05-0010-NTThe Poor as Customers: Development Through Revolutionary Marketing Concepts 6transactions are processed through the cellular phone system. In essence, a cellular phonenow serves as a wallet, a financial conduit. It has allowed the masses to perform financialtransactions without going through a bank.Case 5: Patrimonio Hoy Around 60 percent of the population in Mexico is considered poor. InGuadalajara, Mexico, specifically, extended families of six to ten adults live in one ortwo do-it-yourself rooms, which serve as the bedroom and kitchen. They usually spendUS$1,527 and take four years to complete a 100-square-foot room. The members of thesefamilies are usually not part of the formal economy, as they do not have regular jobs. Cemex Corporation, a cement manufacturer, came up with Patrimonio Hoy in1998 a program patterned after the Grameen model. Capitalizing on the traditional savingsystem called “tanda,” which requires its participating members to pool their savingsweekly, the program encourages the poor women to save 120 pesos per week for theirhouse construction. It then extends credit to them by advancing building materials evenbefore they are able to accumulate sufficient savings to fully pay the bill. The programpromotes reciprocal responsibility in the sense that Cemex delivers quality materials andservices so that the customers get better housing within a shorter period (1.5 years) and ata lower price (US$ 1,038) by merely paying their weekly share on time and constructingthe house by themselves. Thus, after four years of operations, Patrimonio Hoy has been able to providedecent housing to 20,000 families (this number has grown to 75,000 families by 2004).On Cemex’s part, it has tripled its sales to low-income customers: whereas 2,300 poundsof cement was formerly consumed by the same market in four years, the same amount ofmaterials is now consumed within 15 months. And since Cemex sells its products atmarket price—it does not provide subsidies to the poor—its bottom line has improved asa result of this program.Case 6: Revenues from Retailing Several manufacturers in the Philippines have registered remarkable increases intheir sales by simply coming up with smaller store keeping units (SKUs) of theirproducts. The shampoo is a classic example. Shampoos used to be sold in bottles, but sincethe low-income class could not afford to include a relatively costly bottle of shampoo intheir daily basket of goods, the shampoo manufacturers came up with shampoos packedin single-use sachets (although some extend the use of a sachet to two washings).Although shampoos come out more expensive per unit when sold in sachets than whenpacked in bottles, the cost per sachet better fits the budget of the low-income users.Asian Institute of Management Copyright 2005

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AIM-5-05-0010-NTThe Poor as Customers: Development Through Revolutionary Marketing Concepts 7 A processed meat manufacturer has also come up with a 100-gram can of cornedbeef, small enough to match the price of a 155-gram can of sardines at Php14 to Php16 orUS$0.25 to US$0.29 per can. The idea was initially received with skepticism as othermanufacturers wondered who would buy such a small serving of meat. However, guidedby the fact that low-income families extend their consumption by adding potatoes, water,and other extenders to corned beef so that a 100-gram of meat could make five to sixservings, the meat manufacturer’s newly-packaged corned beef turned out to be a winnerIt increased the company’s sales by 18 percent and relegated sardines, commonly knownas the poor man’s viand, to the back seat after the latter lost its market to corned beef. The same principle lies behind the success of cigarette vending on the streets andin the sari-sari or corner store for although smokers from the low-income class could notafford to make a one-time purchase of a cigarette pack, they are willing to buy a stick ofcigarette from street vendors, even if this means paying Php1.00 (US$0.017) higher thanif they bought cigarettes one pack at a time from supermarkets Because of the largenumber of small buyers and higher margins per stick of cigarette derived via this mode ofselling, the cigarette manufacturers enjoy more profit from the small buyers’ market thanfrom those who buy by the pack. VALUE CHAIN INNOVATIONS IN THE EMERGING MARKET Several private companies are realizing that, to sustain their businesses, the nextlogical move is to tap the “bottom of the pyramid” or BOP. From their perspective, thismove is more strategic than philanthropic. (see Figure 3) Figure 3 The New Market 100,000,000 > $20,000 2,000,000,000 > $2,000 - $20,000 THE NEW DARLINGS OF 4,000,000,000 ENTERPRISE < $2,000Asian Institute of Management Copyright 2005

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AIM-5-05-0010-NTThe Poor as Customers: Development Through Revolutionary Marketing Concepts 8 Experience of various companies cited earlier proves that the emerging marketcould indeed be lucrative; however, penetrating the new market requires changing theway they do business in various areas. For while selling to the poor uses the samemarketing principles as selling to the rich, selling to the poor involves a differentplatform. • Marketing – knowing customers’ behavior, their psycho-social patterns or cultural practices, spending patterns, cash flow or paying capacity, among other things, and developing products and services that suit their needs. 1 A person earning Php 250 a day (roughly US$ 5), for instance, would not spend, say Php150, on a single purchase, even if his total monthly salary amounted to Php7500 (US$134). This person’s wage being budgeted to fit his daily living expenses determines his real purchasing power and disposable income. • Operations – driving down costs (both production and operating costs) to make products and services affordable while maintaining high quality; replicating successful business models. Companies can make their products and services affordable to the poor by managing their servicing costs in the same manner that information technology has done the banking and mobile phone industries. • Distribution – making products and services accessible and available to the market which is normally done by partnering with local individuals or groups (e.g. NGOs, micro-businesses). • Making the products and services affordable (or financing, for lack of a better term) - enabling the customers to pay for the products and services either by lowering the price or by designing an appropriate financing scheme (without necessarily lowering the price, as in the case of CEMEX). In some cases, companies have designed socialized pricing schemes, which effectively mean that the rich subsidize the price of products or services provided to the poor. Innovation also has to be introduced in the organizational culture – that is, thenew mindset and heartset about the poor as customers have to be espoused by each unit inthe organization to ensure the success and lasting impact of the marketing revolution. Finally, to make the business sustainable in the BOP market, the model has to bescalable, as the small absolute value of per unit profit becomes significant whenmultiplied by the big customer base at the bottom. On the customers’ part, their capacity 1 In the case of social entrepreneurship, the model remains the same except that relatively moreinvestment is necessary in product development than if a product has already been developed for the top ofthe pyramid and is altered to fit the BOP.Asian Institute of Management Copyright 2005

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AIM-5-05-0010-NTThe Poor as Customers: Development Through Revolutionary Marketing Concepts 9to consume 2 likewise has to be increased, either by increasing their access or theircapacity to pay or both. One way of increasing the customers’ capacity to pay is to allow them to take partin wealth-creation by making them partners or co-producers in the value chain. Takingthe revolution one step further, the poor people can be elevated from being mereconsumers to being producers in the mainstream economy. Multi-level marketing hasgained popularity because participants in the network are not just customers buyinggoods, but have also become business people earning additional income by sellingproducts to others (normally to their social circles). This way, the resulting snowballingof income would sustain the growth of the middle class and, from the social developmentperspective, alleviate poverty. Figure 4 summarizes these points. The microfinance institutions (MFIs) are one of the first groups to get into the“poor” market and have strengthened their distribution network (or clientele reach) overthe years. The MFIs, however, need to intensify product development to meet the variousgrowing needs of their customers while tapping their existing channels to scale upoperations and strengthening their financial services to enable the customers to consume. The private companies and MFIs can therefore benefit from each other’sexperience: while the corporations can learn from the vast network and financingschemes of the MFIs, the latter can learn from the former’s experience in productdevelopment and service delivery. Combining MFIs’ heartset and the corporations’mindset would expand the both entities’ understanding of the value chain innovationsrequired by the emerging market.2 Defined as the access and the capacity to pay of customers (Prahalad, 2005).Asian Institute of Management Copyright 2005

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AIM-5-05-0010-NTThe Poor as Customers: Development Through Revolutionary Marketing Concepts 10 Figure 4 Value Chain Innovations in the Emerging Market Market Profile • How they buy • How they use • How big really is their purchasing power Customer Insight Innovations in Operations Marketing Distribution Financing Value Company’s Value Networking capacity to scale Networking Common Mindset and Heartset The poor customers’ capacity to consume The poor customers’ capacity to produce The poor as distributors and/or suppliers The poor as entrepreneurs(Lopez, Chua, and Sebastian, 2005)ReferencesAsian Institute of Management Copyright 2005

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AIM-5-05-0010-NTThe Poor as Customers: Development Through Revolutionary Marketing Concepts 11Richardson, Don, Ricardo Ramirez, and Moinul Haq, Grameen Telecom’s Village PhoneProgramme in Rural Bangladesh: a Multi-Media Case Study, 2000.www.changemakers.netAsian Institute of Management Copyright 2005