Marketing to the Bottom of the Pyramid Essay

Professor C. K. Prahalad’s seminal publication, The Fortune at the Bottom of the Pyramid, suggests an enormous market at the â€Å"bottom of the pyramid† (BOP)—a group of some 4 billion people who subsist on less than $2 a day. By some estimates, these â€Å"aspirational poor,† who make up three-fourths of the world’s population, represent $14 trillion in purchasing power, more than Germany, the United Kingdom, Italy, France, and Japan put together. Demographically, it is young and growing at 6 percent a year or more. Traditionally, the poor have not been considered an important market segment. â€Å"The poor can’t afford most products†; â€Å"they will not accept new technologies†; and â€Å"except for the most basic products, they have little or no use for most products sold to higher income market segments†Ã¢â‚¬â€these are some of the assumptions that have, until recently, caused most multinational firms to pay little or no attention to those at the bottom of the pyramid. Typical market analysis is limited to urban areas, thereby ignoring rural villages where, in markets like India, the majority of the population lives. However, as major markets become more competitive and in some cases saturated—with the resulting ever-thinning profit margins— marketing to the bottom of the pyramid may have real potential and be worthy of exploration. One researcher suggested that American and European businesses should go back and look at their own roots. Sears, Roebuck was created to serve the lower-income, sparsely settled rural market. Singer sewing machines fashioned a scheme to make consumption possible by allowing customers to pay $5 a month instead of $100 at once. The world’s largest company today, Walmart, was created to serve the lower-income market. Here are a few examples of multinational company efforts to overcome the challenges in marketing to the BOP. Designing products for the BOP is not about making cheap  stuff but about making technologically advanced products affordable. For example, one company was inspired to invent the Freeplay, a windup self-power–generating radio, when it learned that isolated, impoverished people in South Africa were not getting information about AIDS because they  had no electricity for radios and could not afford replacement batteries. BOP MARKETING REQUIRES ADVANCED TECHNOLOGY The BOP market has a need for advanced technology, but to  be usable, infrastructure support must often accompany the  technology. For example, ITC, a $2.6 billion a year Indian conglomerate, decided to create a network of PC kiosks in villages. For years, ITC conducted its business with farmers through a maze of intermediaries, from brokers to traders. The company wanted farmers to be able to connect directly to information sources to check ITC’s offer price for produce, as well as prices in the closest village market, in the state capital, and on the Chicago commodities exchange. With direct access to information, farmers got the best price for their product, hordes of  intermediaries were bypassed, and ITC gained a direct contact with the farmers, thus improving the efficiency of ITC’s soybean acquisition. To achieve this goal, it had to do much more than just distribute PCs. It had to provide equipment for managing power outages, solar panels for extra electricity, and a satellite-based telephone hookup, and it had to train farmers to use the PCs. Without these steps, the PCs would never have worked. The complex solution serves ITC very well. Now more  than 10,000 villages and more than 1 million farmers are covered by its system. ITC is able to pay more to farmers and at the same time cut its costs because it has dramatically reduced the inefficiencies in logistics. The vast market for cell phones among those at the BOP is  not for phones costing $200 or even $100 but for phones costing less than $50. Such a phone cannot simply be a cut-down version of an existing handset. It must be very reliable and have lots of battery capacity, as it will be used by people who do not have reliable access to electricity. Motorola went thorough four redesigns to develop a low-cost cell phone with  battery life as long as 500 hours for villagers without regular electricity and an extra-loud volume for use in noisy markets. Motorola’s low-cost phone, a no-frills cell phone priced at $40, has a standby time of two weeks and conforms to local languages and customs. The cell-phone manufacturer says it expects to sell 6 million cell phones in six months in markets including China, India, and  Turkey. BOP MARKETING REQUIRES CREATIVE FINANCING There is also demand for personal computers but again, at very low prices. To meet the needs of this market, Advanced Micro Devices markets a $185 Personal Internet communicator—a basic computer for developing countries—and a Taiwan Company offers a similar device costing just $100. For most products, demand is contingent on the customer  having sufficient purchasing power. Companies have to devise creative ways to assist those at the BOP to finance larger purchases. For example, Cemex, the world’s third-largest cement company, recognized an opportunity for profit by enabling  lower-income Mexicans to build their own homes. The company’s Patrimonio Hoy Programme, a combination builder’s â€Å"club† and financing plan that targets homeowners who make less than $5 a day, markets building kits using its premiumgrade cement. It recruited 510 promoters to persuade new customers to commit to building additions to their homes. The customers paid Cemex $11.50 a week and received building  materials every 10 weeks until the room was finished (about  70 weeks—customers were on their own for the actual building). Although poor, 99.6 percent of the 150,000 Patrimonio Hoy participants have paid their bills in full. Patrimonio Hoy at tracted 42,000 new customers and is expected to turn a $1.5 million profit next year. 8/27/10 2:14 PM Cases 3 Assessing Global Market Opportunities One customer, Diega Chavero, thought the scheme was a scam  when she first heard of it, but after eight years of being unable to save enough to expand the one-room home where her family of six lived, she was willing to try anything. Four years later, she has five bedrooms. â€Å"Now I have a palace.† Another deterrent to the development of small enterprises at the BOP is available sources of adequate financing for microdistributors and budding entrepreneurs. For years, those at the bottom of the pyramid needing loans in India had to depend on local moneylenders, at interest rates up to 500 percent a year. ICICI Bank, the second-largest banking institution in India, saw these people as a potential market and critical to its future. To convert them into customers in a cost-effective way, ICICI turned to village self-help groups. ICICI Bank met with microfinance-aid groups working with  the poor and decided to give them capital to start making small loans to the poor—at rates that run from 10 percent to 30 percent. This sounds usurious, but it is lower than the 10 percent daily rate that some Indian loan sharks charge. Each group was composed of 20 women who were taught about saving, borrowing, investing, and so on. Each woman contributes to a joint savings account with the other members, and based on the self-help group’s track record of savings, the bank then lends money to the group, which in turn lends money to its individual members. ICICI has developed 10,000 of these groups reaching 200,000 women. ICICI’s money has helped 1 million households get loans that average $120 to $140. The bank’s executive directory says the venture has been â€Å"very profitable.† ICICI is working with local communities and NGOs to enlarge its reach. BOP MARKETING REQUIRES EFFECTIVE DISTRIBUTION When Unilever saw that dozens of agencies were lending microcredit loans  funds to poor women all over India, it thought that these would-be microentrepreneurs needed businesses to run. Unilever realized it could not sell to the bottom of the pyramid unless it found low-cost ways to distribute its product, so it created a network of hundreds of thousands of Shakti Amma (â€Å"empowered mothers†) who sell Lever’s products in their villages through an Indian version of Tupperware parties. Start-up loans enabled the women to buy stocks of goods to sell to local villagers. In one case, a woman who received a small loan was able to repay her start-up loan and has not needed to take another one. She now sells regularly to about 50 homes and even serves as a miniwholesaler, stocking tiny shops in outlying villages a short bus ride from her own. She sells about 10,000 rupees ($230) of goods each month, keeps about $26 profit, and ploughs the rest back into new stock. While the $26 a month she earns is less than the average $40 monthly income in the area, she now has income, whereas before she had nothing. Today about 1,300 poor women are selling Unilever’s products in 50,000 villages in 12 states in India and account for about 15 percent of the company’s rural sales in those states. Overall, rural markets account for about 30 percent of the company’s revenue. In another example, Nguyen Van Hon operates a floating sundries distributorship along the Ke Sat River in Vietnam’s Mekong Delta—a maze of rivers and canals dotted with villages. His boat is filled with boxes containing small bars of Lifebuoy soap and  single-use sachets of Sunsilk shampoo and Omo laundry detergent, which he sells to riverside shopkeepers for as little as 2.5 cents each. At his first stop he makes deliveries to a half dozen small shops. He sells hundred of thousands of soap and shampoo packets a month, enough to earn about $125—five times his previous monthly salary as a junior Communist party official. â€Å"It’s a hard life, but its getting better.† Now, he â€Å"has enough to pay his daughter’s schools fees and soon . . . will have saved enough to buy  a bigger boat, so I can sell to more villages.† Because of aggressive efforts to reach remote parts of the country through an extensive network of more than 100,000 independent sales  representatives such as Hon, the Vietnam subsidiary of Unilever realized a 23 percent increase in sales last year to more than $300 million. BOP MARKETING REQUIRES AFFORDABLE PACKAGING As one observer noted, â€Å"the poor cannot be Walmartized.† Consumers in rich nations use money to stockpile convenience. We go to Sam’s Club, Costco, Kmart, and so on, to get bargain prices and the convenience of buying shampoos and paper towels by the case. Selling to the poor requires just the opposite approach. They do not have the cash to stockpile convenience, and they do not mind frequent trips to the village store. Products have to be made available locally and in affordable units; fully 60 percent of the value of all shampoo sold in India is in single-serve packets. Nestlà © is targeting China with a blitz of 29 new ice cream  brands, many selling for as little as 12 cents with take-home and multipack products ranging from 72 cents to $2.30. It also features products specially designed for local tastes and preferences of Chinese consumers, such as Nestlà © Snow Moji, a rice pastry filled with vanilla ice cream that resembles dim sum, and other ice cream flavors like red bean and green tea. The ice cream products are distributed through a group of small independent saleswomen, which the company aims to expand to 4,000 women  by next year. The project is expected to account for as much as 24 percent of the company’s total rural sales within the next few years. BOP MARKETING CREATES  HEALTH BENEFITS Albeit a promotion to sell products, marketing to BOP does help improve personal hygiene. The World Health Organization (WHO) estimates that diarrhea-related diseases kill 1.8 million people a year and noted that  better hand-washing habits—using soap—is one way to prevent their spread. In response to WHO urging, Hindustan Lever Company introduced a campaign called â€Å"Swasthya Chetna† or â€Å"Glowing Health,† which argues that even cleanlooking hands may carry dangerous germs, so use more soap. It began a concentrated effort to take this message into the tens of thousands of villages where the rural poor reside, often with little access to media. â€Å"Lifebuoy teams visit each village several times,† using a â€Å"Glo Germ† kit to show schoolchildren that soap-washed hands are cleaner. This program has reached â€Å"around 80 million rural folk,† and sales of Lifebuoy in small affordable sizes have risen sharply. The small bar has become the brand’s top seller.