Bottom of the Pyramid Marketing:

Dr. M S Balaji Assistant Professor IBS Hyderabad

Overview
Defining the Bottom of the Pyramid The Great Debate Opportunities Risks & Challenges Guidelines and Leading Practices Conclusion Appendix

Defining the Bottom of the Pyramid: A Visual Representation

Source: Prahalad, C.K. and Stuart L. Hart, The Fortune at the Bottom of the Pyramid, strategy+business, Issue 26, first quarter 2002

The BoP is the largest, but poorest socio-economic group. In global terms, there are 3.7 billion people who are largely excluded from formal markets, the group earns less than $2 per day and 60% of the 3.7 billion people live in China and India.

The Year 2010 saw many new innovations coming from corporations like Tata, Hindustan Unilever (Indian Subsidiary of Unilever), Godrej & Boyce, Narayana Hrudayalaya, and Vortex among others who have been working on innovative offerings to the BoP.

The most remarkable innovation of Tata Swach range of Water Purifiers from Tata Chemicals-A Tata Group Company satisfying the essential necessity of purified water for the BoP for as low as Rs.499 ($10).

Another landmark innovation was in the area of refrigerator from Godrej & Boyce called ChotuKool. It provides all the functionality of a normal refrigerator but can run on a battery and doesnt need continuous power supply unlike the traditional refrigerator. Priced at Rs.3250 ($69), weighing just 3-4Kgs and works on just 20 parts as compared to over 200 parts in a traditional refrigerator it is the ultimate game changer, not only for the BoP.

Defining the Bottom of the Pyramid: Changing Attitudes

Historic View

Modern View Incorporates Both

The Great Debate: Win-Win or Misguided Strategy?

Win-Win

Misguided

Latent market for goods and services Large growth opportunity, due to size of BOP Catalyst for economic development through providing affordable products and services

Poor lack income and jobs; should produce before consume

Vulnerable to poor purchasing decisions; income should be spent on shelter not ice cream. Sale of MNC products does not clearly improve social indicators MNC profits flow abroad, do not help local economies

Case Study: BOP Strategy Gone Wrong at Nestle

Project: In 1970s, Nestle began marketing infant formula to mothers in the developing world, with the argument that bottled milk is better for infant children. Assumptions: Sterile water and bottles, no dilution. Impact: Babies using Nestles product in developing countries were 25X more likely to die of diarrhea, and mothers developed an addiction to the product after prolonged use stopped lactation.

The Great Debate: Conclusion

Merely selling to the BOP does not solve poverty, it depends what you sell, how you sell it, and where it was produced. BOP strategies have the potential to bring positive benefits to companies and communities, but improper application can have devastating consequences. Understanding the local situation is crucial. The key to resolving the debate is a better understanding of both the risks/challenges and opportunities presented by the BOP market

Risks & Challenges:

Operating Environment

Economics

Exposure to new political and economic risks Resources, capabilities and knowledge of the complexities and subtleties of sustainable development are required. Consumers cant afford differentiated products Competing with local business can threaten the existing power structure.

Market size unclear: estimates range from $0.3 trillion to $13 trillion.

Prahalad uses purchasing power parity and assumes 4 billion BOP spending $4/day to estimate $13 trillion. Aneel uses financial exchange rates (that MNCs would use to expatriate profits) and assumes 2.7 billion BOP spending $1.25/day to estimate $0.3 trillion.

Low margin; high fixed costs Distribution challenges High price sensitivity and per unit transaction costs

World Bank 2005 estimate

Opportunities

BOP consumers suffer a poverty penalty:

At the same time, BOP consumers:

Lack of access to competitively and efficiently-provided goods and services Higher prices for some goods and services (i.e. manufactured goods, credit) Poorer quality goods and services

Are brand-conscious Have well-connected communities (word-ofmouth) Readily accept advanced technology Collectively have purchasing power Are always trying to upgrade from their existing condition

Opportunities

BOP consumers get cheaper products, access to technology, and opportunities to become entrepreneurs, and educate themselves. BOP markets present companies with a new source of: Top-line revenue growth Cost-savings and innovations that can influence existing business models and management practices But selling into BOP markets is difficult and even harder to do responsibly. In order to market to the BOP in a way that brings real benefits to impacted communities, companies should follow some important guidelines and lessons from leaders in the industry.

4 Keys to Unlocking BOP Markets to Corporate Products

Source: Prahalad, C.K. and Stuart L. Hart, The Fortune at the Bottom of the Pyramid, strategy+business, Issue 26, first quarter 2002

Shape Aspirations: Engage the BOP as Joint Problem Solvers

Focus on the poor as producers, not just consumers. Upgrade skills and productivity to improve lives and increase purchasing power. Channel resources back into local communities to improve standards of living.

Case Study: ITC Enables Market Pricing

Geography: Rural India Industry: Agricultural trading Product: E-Choupals; internet-connected computers Background: Farmers sold grain to middlemen at below market prices. Lack of information led to exploitation of farmers.

Case Study: ITC Enables Market Pricing

Innovation: ITC developed E-choupals; network of computers which provided web access in rural farming villages, each manned by a literate host farmer to support illiterate farmers. Farmers check trading price of their produce and sell directly to ITC. Farmers also order raw material at an aggregate level, thereby saving money (economies of scale) Impact: Farmers receive 2.5% higher price ($6/ton).

Tailor Local Solutions: Innovate from the BOP up

Reorient R&D efforts to create appropriate technologies and new products and services that consider the unique needs of the poor, by region and by country. Nurture local markets and cultures and leverage both local solutions and global best practices to meet identified needs. At the BOP, capital not labor is the scarce resource, and focusing on that difference can lead to greater productivity and higher returns.

Improve Access: Identify Innovative Distribution & Communication Strategies

BOP communities are often physically and economically isolated. Create direct distribution and word-ofmouth mechanisms to educate consumers and expand access and availability. Add value by finishing product manufacturing within the community.

Create Buying Power: Identify Innovative Financing Schemes

Provide financial services that focus not only on access but building financial literacy and encouraging a habit of savings. Do not provide credit for luxury purchases (note: definition of luxury items is controversial.) Encourage investment in productive assets (tools, agricultural materials, preventative health). Community credit pooling with a revolving loan fund is one successful strategy proven to reduce default risk.

Build the Commercial Infrastructure: Develop Partnerships

A companys product or service offerings are its core competency, but BOP strategies require a higher level of engagement. Develop partnerships with NGOs, local governments, financial institutions and local entrepreneurs to expand training, development, micro-finance and other expertise. Building a base of local support can also help to establish credibility within local communities, gain insight into a countrys culture, increase local knowledge and overcome opposition when entering a new market.

BOP

MNCs

NGOs & Govts

Conclusion: For those combating poverty

IF corporations can without causing the very poor to divert income from pressing needs, sell products that make people more productive, that are produced in a way that create local jobs and increase local human capital, without driving out local industries, and reinvest locally instead of repatriating profits, THEN, they can be an important part of the solution to poverty, which is excellent CSR.

Conclusion: For corporations interested in BOP

IF corporations can create low price, quality products,

that can be scaled across many BOP markets and achieve high volume, while creating means for the capital constrained poor to buy, and building relationships and infrastructure that allow them to reach poor consumers, and finally, follow the directives on the previous slide (at least enough to avoid becoming a publicized bad example)

THEN, they can serve BOP markets profitably.