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


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

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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 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 poor
COMMUNICATION
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)

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