Bottom of the Pyramid
The quest for the fortune at the bottom of the pyramid: potential and challenges Dennis A. Pitta The University of Baltimore, Baltimore, Maryland, USA, and Rodrigo Guesalaga and Pablo Marshall ? Ponti? cia Universidad Catolica de Chile, Santiago, Chile Abstract Purpose – The purpose of this article is to examine the bottom of the pyramid (BOP) proposition, where private companies can both be pro? table and help alleviate poverty by attending low-income consumers. Design/methodology/approach – The literature on BOP was reviewed and some key elements of the BOP approach were proposed and examined.
Findings – There is no agreement in the literature about the potential bene? ts of the BOP approach for both private companies and low-income consumers. However, further research on characterizing the BOP segment and ? nding the appropriate business model for attending the BOP can provide some answers to this issue. Practical implications – The article provides some guidelines to managers as to how they need to adapt their marketing strategies to sell to the BOP market, and what type of partnerships they need to build in order to succeed.
Originality/value – The article presents a thorough analysis of the key elements involved in the BOP initiative: companies’ motivations, characterization of the BOP consumers, and the business model to attend the BOP. Keywords Private sector organizations, Emerging markets, Consumers, Poverty, Disadvantaged groups Paper type Research paper underpin the concept, and refutes its basic premises. Instead of a market of untapped potential, this literature stream sees a ? nancial desert that BOP principles may harm more than help. The BOP may be a less a source of signi? cant pro? ts than a source of serious losses.
Karnani’s analysis posits that the poor may want the same products as the rich do but by virtue of being poor, they cannot afford them. The poor spend most of their income on food, clothing, and fuel. For the poor, the mathematics are clear: buying a branded product reduces the funds they must devote to survival. In contrast, Karnani suggests that raising income will alleviate their poverty, provide cost effective products to other consumers, and allow the formerly poor to consume more. Raising their incomes may require that they become producers with stable jobs and wages. Both viewpoints concentrate on the poor but draw different onclusions about how to alleviate their poverty. The two positions also differ in the nature and proper role of industry and government. In light of the differences, the argument would bene? t from empirical data that tests the underlying premises of each viewpoint. Verifying the premises would allow further logical analysis of implications and applications of the concept. In fact, the need for clari? cation is recognized. In the next section, the authors provide some foundations for the most traditional and still dominant approach to market, i. e. the focus on the “top of the pyramid” (TOP).
The rest of the article focuses on the “bottom of the pyramid” (BOP); it explores Prahalad’s proposition and the opposing viewpoint, reviews key aspects of the BOP initiative – companies’ motivation; the BOP business model; the role of micro? nance; and the key participants – and proposes some implications and challenges for marketing theory and practice, and ? nally some implications for marketers. An executive summary for managers and executive readers can be found at the end of this issue. Introduction The bottom of the pyramid (BOP) approach to earning corporate pro? ts has gained considerable attention in the arketing literature. It has awakened managers to the potential of serving an unserved market and alleviating the level of global poverty while still earning a pro? t. However, the BOP proposition, while clear, appealing, and enlightening has not been accepted in an unquali? ed manner. One branch of the BOP literature puts forth the elements of the BOP proposition and supports its ? ndings with numerous case studies (Prahalad, 2004). Those studies portray the poor as motivated by similar desires as the rich. They want quality products and any company that can supply those products at he right price will gain their business. Some of the case studies show the strategies for reducing the effective price of products through packaging and developing lower cost sizes. Prahalad and others describe the untapped potential of the BOP, and list strategies that companies may use to tap that potential. An opposing branch of the literature (Karnani, 2007a; Martinez and Carbonell, 2007) analyzes the nature of the BOP market, the applicability of the case studies that The current issue and full text archive of this journal is available at www. emeraldinsight. com/0736-3761. htm Journal of Consumer Marketing 5/7 (2008) 393– 401 q Emerald Group Publishing Limited [ISSN 0736-3761] [DOI 10. 1108/07363760810915608] 393 The quest for the fortune at the bottom of the pyramid Journal of Consumer Marketing Dennis A. Pitta, Rodrigo Guesalaga and Pablo Marshall Volume 25 · Number 7 · 2008 · 393 –401 The “top of the pyramid” customers, and labeled them as Platinum or Gold. In contrast, those with lower to very low LCV’s earn the value labels, Iron and Lead. They point out that a single Gold or Platinum customer may have a Lifetime Customer Value, many times higher than that of someone in the Iron or Lead tier. Speci? ally, one Platinum customer may be worth more than “tons” of those labeled as Lead. Conceptually, identifying value and potential pro? t deriving from the top of the pyramid is straightforward and represents traditional organization goals. Companies can use standard market segmentation and product differentiation to satisfy these tiers. Dealing with these customers requires professionalism, but the normal market research processes, product development, channels of distribution, promotion, and credit functions should result in success. Thus, Zeithaml and her coauthors showed companies how to use their tried and trusted arketing approaches to maximize effectiveness and pro? tability. The key is to serve those customers most likely to generate pro? ts instead of losses. The justi? cation is clear: companies have limited resources and should concentrate their efforts where the returns will be the highest. They demonstrated the value at the top of the pyramid (TOP) and shared strategies for serving those customers while discouraging or even “? ring” the lower, money-losing tiers. For pro? t seeking companies, the customer pyramid approach is appropriate and allows them the best chances to survive in typically competitive markets.
Not surprisingly, the “top of the pyramid” (TOP) approach is at the heart of Western business practice. Traditionally, businesses require a set of four conditions to operate successfully in a market segment. The segment must be identi? able, measurable, substantial, and accessible. In Western economies, business and communication infrastructures are developed suf? ciently to meet all of the criteria for most segments. Arguably, while all four conditions are important, the substantial and accessible elements are the more important. For a pro? t-making ? rm, the segment must be large enough to generate pro? s. If that condition is satis? ed, it is critical that consumers in the segment be reachable by communications media to receive promotional messages. In addition, they must be physically accessible to distribution alternatives. From a pro? t perspective, companies concentrate on those areas in which they can be effective, namely segments that meet all four requirements. Serving the TOP inevitably means a focus on pro? ts instead of revenues, and pro? ts are central to Western business. In practice, over time, numerous Western companies have ceded market share or entire markets to others when the pro? ts eclined. One prime example is the computer memory chip market. Memory chips were once produced exclusively in the US and Europe. As Asian competitors entered the market, they cut prices at the expense of pro? ts. Their goal was to make chips; the US ? rms wanted to make pro? ts. Consequently, US ? rms abandoned the marketplace and searched for targets that were more pro? table. European and US companies still make chips. Their dominance of the microprocessor markets is the result of the strategic quest for pro? tability. However, European or US players do not dominate the huge market for memory chips.
To be accurate, the US companies’ actions are not driven solely by the desire to earn pro? ts. Their organization, corporate culture, and internal processes require economies of scale, which demand exploiting the richest target markets. In many cases, successful companies have evolved into ef? cient machines whose foundation is high structural cost. Thus targeting the most lucrative segments is vital for continued success. Pro? t, in its simplest form, is the surplus of revenue over costs. If companies can drive costs low enough, it is conceivable that prices might be low enough for the poor to fford and high enough to generate a pro? t. However, earning a pro? t with such customers today takes enormous effort. More important, companies that exist today may be unable to drive costs low enough to succeed. In fact, costs are only one part of the equation. The underlying problem is that companies are ill equipped to serve the poorest customers. They don’t really know what the poor want and don’t know what bene? ts they seek in products and services. In addition, companies may not know what mix of product bene? ts, price, quality, promotion, and distribution works best for this segment.
However, the focus on pro? ts has led to success. Recognizing the importance of pro? ts, Zeithaml and her colleagues have worked on the customer pyramid concept (Zeithaml et al. , 2001). Without using the term, they focused explicitly on the “top of the pyramid,” those consumers with the highest lifetime customer value (LCV). By dividing the customer pyramid into four sections called customer pro? tability tiers, they identi? ed the “best,” most pro? table The “bottom of the pyramid” approach Prahalad’s proposition In the book The Fortune at the Bottom of the Pyramid: Eradicating Poverty through Pro? ts, C.
K. Prahalad (2004), provided that initial conceptualization that had been missing in marketing thought. His book succeeded in planting the perception that consumers with low levels of income could be pro? table customers. He painted a picture of the double bottom line: social goals combined with the business objective, pro? t (Harjula, 2005). Coincidently, he appealed to the best motives among those at the top of the pyramid. By citing examples of successful attempts to empower the poor and share in global wealth, he kindled the imagination of those who want the world to be a better place. This is an ppealing proposition: “low-income markets present a prodigious opportunity for the world’s wealthiest companies – to seek their fortunes and bring prosperity to the aspiring poor” (Prahalad and Hart, 2002). Prahalad’s proposition is an invitation to company executives, politicians, managers of non-pro? t organizations, and ordinary citizens, to view poverty as something that might be alleviated rather than inevitable. He presents a wellreasoned conceptual view – supported with case study data – of how companies might mine pro? ts from the lowest economic strata (Hart, 2005; Prahalad, 2004). Much of the reatment centers on the nature and scope of pro? ts and the collective wealth of consumers at the bottom of the pyramid (BOP). The main thesis of Prahalad’s work rests on the idea that the potential growth for many multinational (MNC) and medium sized companies does not rest on the small highincome market in the developing world. Instead, its source is the mass low-income people that are joining the market for the ? rst time. This idea goes against the following 394 The quest for the fortune at the bottom of the pyramid Journal of Consumer Marketing Dennis A. Pitta, Rodrigo Guesalaga and Pablo Marshall
Volume 25 · Number 7 · 2008 · 393 –401 assumptions, which, according to Prahalad, most MNC’s make: it is not pro? table for them to attend the BOP due to their high cost structure; the low-income segment cannot afford the products and services they sell; and only developed markets value innovation and will pay for new technology. These arguments imply that governments and nongovernmental organizations (NGO’s) should take care of the low-income segment. According to Prahalad, marketers who believe that the BOP is a valuable unserved market also believe that even the poor can be good customers.
Despite their low level of income, they are discerning consumers who want value and are well aware of the value brands favored by more af? uent consumers. This school of thought recognizes the obstacle that low income creates. It postulates that if companies take the correct steps and devote suf? cient resources to satisfying the needs of the BOP, they can overcome barriers to consumption. This view rests on Prahalad’s calculations of the immense size of the global BOP, in his view, a $1. 3 trillion dollar market. Prahalad recognizes that serving the low-income sector requires a commercial strategy in response to the needs of hose people; to succeed, other players have to get involved – mainly local and central government, ? nancial institutions, and NGOs. He proposes four key elements to thrive in the low-income market: 1 creating buying power; 2 shaping aspirations through product innovation and consumer education; 3 improving access through better distribution and communication systems; and 4 tailoring local solutions. opportunities and poverty eradication through pro? ts may set unrealistic expectations for business executives (McFalls, 2007). Second, the traditional timelines for achieving social goods versus pro? s differ (Harjula, 2005). Businesses may use a ? ve-year horizon as their benchmark for returns. In contrast, social goals like reducing smoking and other unhealthy lifestyle behaviors may take generations. Thus, rather than viewing the poor primarily as consumers, this group suggest a focus on this segment as producers, i. e. potential entrepreneurs that can improve their economic situation by increasing their income level. Companies must be willing to invest time, resources and training to insure that the producers create products with some barriers to entry and a reasonable level of productivity.
They need to do so to avoid the trap of producing commodities that are easy to duplicate and, thereby, keep the poor, poor. Otherwise, alleviating poverty becomes very unlikely. Reconciling the two opposing viewpoints It is clear from the previous discussion that ? ndings in the literature about the nature, scope, and value of the BOP proposition are mixed. More research is needed on this topic to gain an accurate view of the presence and extent of opportunities at the bottom of the pyramid. The following sections examine some key elements of the BOP initiative that have been, acknowledged in the literature; speci? ally, the ? rms’ motivations to attend the BOP market, the characterization of the BOP consumers, and the BOP business model. The latter element focuses on three major issues: the role of micro? nance, the importance of establishing alliances among different actors (e. g. for-pro? t ? rms, NGOs, governments), and how for-pro? t companies need to adapt their marketing mix to attend the BOP pro? tably. The opposing viewpoint The second literature thread emerged years later in the discussion and represents a thoughtful attempt to verify the bottom of the pyramid (BOP) concept.
It questions the ease with which companies may tap the BOP and whether pro? ts exist there at all (Karnani, 2007a). First, this group dismisses the published calculations about the size of the BOP and its wealth. They describe the economic size of the BOP as considerably smaller than Prahalad’s estimate and cite the inherent subsistence problem: the poor spend 80 percent of their income on food, clothing, and fuel. There is hardly anything left to spend after that (Karnani, 2007b). Second, they argue that it is very unlikely that companies will be able to attend the BOP market pro? tably.
In fact, the costs of serving this segment can be very high. BOP customers are usually much dispersed geographically; they are very heterogeneous, which reduces the opportunities for obtaining signi? cant economies of scale; and their individual transactions usually represent a low amount of money. In addition, consumers at the BOP are very price sensitive, which, again, makes pro? tability a dif? cult goal to achieve. Those factors show that the ideal that both pro? ts and social good can result from serving the BOP is questionable. First, each goal has different motivations, demands, and echanisms to satisfy and they can be contradictory. The differences between business realities and development imperatives are not easy to reconcile. Some recent case study work suggests that the early language around the inclusive capitalism idea that emphasizes unlimited business Firms’ motivation to attend the BOP market A comprehensive examination of the BOP approach requires ?rst an understanding of why for-pro? t companies engage in such an initiative. The literature suggests two main motivations that companies have to attend the BOP market: 1 they can convert this segment’s purchasing power into ro? ts; and 2 they can bring prosperity to the poor, and thus alleviate poverty. ? For example, in the 1970s, Nestle was able to contribute to social progress while developing a competitive advantage and making pro? ts in Moga, a district in India. With the purpose ? of establishing local and diverse sources of milk, Nestle built many refrigerated diaries and then sent its trucks to collect product while providing ? nancing, nutritional supplements, and assistance and training to the farmers. With this action, ? Nestle increased its milk production and the suppliers’ roductivity, improved the quality of the product and ? processes, and increased the penetration of other Nestle products in the region. In turn, farmers raised their standard ? of living; Nestle was able to pay higher prices, and farmers were then able to obtain credit. A second case illustrates how a focus on the BOP can be an important strategic goal, with two dimensions: pro? tability and corporate social responsibility. Masisa is a leading company in the production and trade of wood boards for furniture and interior architecture in Latin America. It has 395
The quest for the fortune at the bottom of the pyramid Journal of Consumer Marketing Dennis A. Pitta, Rodrigo Guesalaga and Pablo Marshall Volume 25 · Number 7 · 2008 · 393 –401 established the goal of generating 15 percent of the revenues from inclusive businesses, i. e. the bottom of the pyramid, before 2012. Under their de? nition, inclusive businesses must be pro? table, and socially/environmentally responsible. They expect to help improve the standard of living for low-income people by facilitating their participation in the value chain as suppliers, distributors, or other element of the hannel, and by providing them with access to products and services that can help them improve their socio-economic condition. cooperatively owned items like a television, a telephone, an electric generator, medical services, or even something to help make products for sale. Managing that sum for the common good presents a major dilemma: community welfare versus individual choice. People in the BOP would need a high sense of community involvement and consumer education to make responsible choices. A non-pro? t community action organization or a socially conscious business would be very helpful in marshalling cooperation.
However, too many of the poor make poor choices like spending money on tobacco instead of food for their children. Even if this optimistic level of potential purchasing power exists, harnessing it for pro? t will be extremely dif? cult. One further concern questions this premise. Traditionally, serving the poor was the role of charities, not for pro? t, and other non-governmental organizations. Much of the excitement that the BOP proposition has generated stems from the inclusion of pro? t making companies in the process. The thought is that pro? t will be a powerful goad toward achieving success.
Pro? t is clearly an incentive but beyond the cases cited in Prahalad’s work, there is little proof that companies can make the shift. More empirical data would aid the process of developing purchasing power. Purchasing power and pro? tability Karnani (2007a) notes that BOP concept rests on a fuzzy de? nition of the target market. It is dif? cult to ? nd an article in the BOP literature that does not cite the now popular ?gure: four billion. Four billion originally referred to those people who primarily live in developing countries and whose annual per capital income is under US$1,500 per annum.
Some of the literature takes as an article of faith that the BOP exists and earns that level of income. The perception is that individually the consumers are poor but together they represent massive purchasing power. However, authors de? ne the BOP income level using several standards, which obscures its true nature. For example, Hammond et al. (2007) consider the bottom of the pyramid as composed of people with per capita incomes below $3,000 in local purchasing power. Prahalad (2004) states that there are more than four billion people with per capita income below $2 per day at purchasing power parity (PPP) rates ($750 per year).
This is a signi? cant reduction in previous estimates: four billion people with per capita income below $1,500 per year ($4 per day) (Prahalad and Hart, 2002), or four billion people with per capita income below $2,000 per year ($6 per day) (Prahalad and Hammond, 2002). Other contemporary sources like the World Bank estimated the number at 2. 7 billion, in 2001. However, other researchers characterize the World Bank projection as an overestimation, with some experts estimating the poor at 600 million (The Economist, 2004). The differences range from four billion to 600 million, a large enough gap to cause oncern. The three reported income levels range from $2-6 per day. The $2 per day criterion is consistent with previous literature in development economics. It is important to understand that how to alleviate poverty depends on the de? nition of poverty. Using the $2 per day ? gure presents different challenges than the higher levels: people who earn less than $2 per day have very different needs and priorities than people who earn $4-6 per day. Adopting the higher poverty line obscures these differences (Karnani, 2007b) and overestimates the potential at the BOP.
In principle, it is clear that collectively the mass of poor customers do hold wealth. However, an additional problem is that they do not hold it in the right concentrations. If one considers a hypothetical example, the nature of the wealth at the BOP may become a bit clearer. If a village of 1,000 adults earns an average of US$750 per year (the $2 per day ? gure), the gross earnings of the village are signi? cant. However, the question becomes how much remains after satisfying the necessities. Even if an impressive 10 percent of income remains per household, that translates into $0. 0 per day. It is dif? cult to perceive how such small sums might generate pro? ts. Collectively, the village may have $200 per day in “disposable income. ” That might translate into community- Poverty alleviation and prosperity to the poor From a social responsibility perspective, there are distinct differences between a market-based approach to poverty reduction and approaches that are more traditional. Traditional approaches often focus on the very poor, proceeding from the assumption that they are unable to help themselves and thus need charity or public assistance.
In contrast, a market-based approach starts from the recognition that being poor does not eliminate commerce and market processes: virtually all poor households trade cash or labor to meet a signi? cant part of their basic needs. The latter approach is the one for-pro? t companies have embraced to pursue the BOP initiative. The argument regarding poverty is that the poor face undeveloped distribution outlets and must pay monopoly prices for the goods they desire. In addition, they are unable to afford the standard quantities and qualities of products offered to richer consumers. This is consistent with
Hammond et al. (2007), who describe people at the BOP as having signi? cant unmet needs, and being dependent on informal or subsistence livelihoods. They are vulnerable, poorly integrated to the formal economy, and impacted by a BOP penalty under which they pay higher prices for basic goods and services than wealthier consumers. Successful attempts to bring quality products to the poor at affordable prices would overcome the high price of poor distribution (Martinez and Carbonell, 2007). In that sense, it would increase their purchasing power by bringing previously unaffordable goods within their budgets.
However, the $2 per day income limit is a signi? cant obstacle and may make this goal impossible to attain. There is some hope in alleviating poverty but it is more in line with Karnani’s vision of the poor as producers who are able to boost their income suf? ciently to rise above the bottom of the BOP. The very recent example of ITC Limited outlined the distribution based economic problems faced by poor farmers in India. There are many factors that affect the ? ow of goods and services in and out of rural areas, and thus reduce the rural population’s income and quality of life 96 The quest for the fortune at the bottom of the pyramid Journal of Consumer Marketing Dennis A. Pitta, Rodrigo Guesalaga and Pablo Marshall Volume 25 · Number 7 · 2008 · 393 –401 (Vachani and Smith, 2008). While the major source of problems was the poor transportation infrastructure, other factors operate to keep disadvantaged groups like poor Indian farmers in poverty. Buyers bully them into accepting “buyers’ prices. ” Moreover, farmers are ignorant of their rights and the market value of their crops. In addition, they pay monopoly prices for the items they need.
These factors act to keep them at a disadvantage and unable to earn the proper income from their efforts. By addressing farmers’ lack of information about the current value of their crops, the best seed to use for high yields, proper farming practice, and alternative outlets for their crops, ITC increased their welfare. To accomplish this, ITC set up a parallel distribution system, which led to increases in farmers’ income and consumption. The effort started at the grassroots with ITC hiring agents already in the ? eld and rewarding them for improvements in farmer welfare and consumption.
The company placed computers with satellite based internet connections in each village and taught farmers to use them to assess current crop pricing. ITC guaranteed to match or exceed the prices offered by others. In addition, ITC provided products farmers needed like seed at a discount from the existing retailers. There was signi? cant “missionary” education aimed at allaying the farmer’s fears of exploitation. After a few farmers tried the system, more of them signed on. The result was increased income, higher satisfaction, more independence, and lower cost to purchase supplies.
The example is encouraging and demonstrates the commitment and stamina organizations need to operate at the BOP. ITC set up a private distribution network that was more closely associated with a cooperative than the typical channel. Farmers and grassroots agents who knew their needs very well cooperated to operate the channel and share in its economic bene? ts. In essence, ITC adopted Karnani’s model of buying from BOP producers to raise their level of income developing them into pro? table customers. Can companies really generate pro? ts and alleviate poverty at the BOP? This example seems to show that they can.
It also shows the extent to which companies will have to re-engineer their approaches and operations to succeed. There is some data on the changes in the size of the BOP that aid in forecasting the future. Chen and Ravallion (2007) report a decline in the proportion of people living under the poverty line in the developing world over the period 19812004. That represents a reduction of about 0. 8 percent points per year over the period. Separate from the numbers, the question remains, “Who are BOP customers? ” Current demographic labels such as “blue-collar’ or working-class,” fail to capture the extreme level of poverty.
As marketers gain more experience with the BOP, it is possible that other useful differentiations may emerge based on speci? c variables, such as behavioral or psychographic. The global distribution of BOP customers adds another factor to consider: culture. The cultures of Latin America, Asia, and Africa differ widely. It is logical that differences in culture will affect future attempts to understand the needs of the BOP segments. In general, D’Andrea et al. (2004) ? nd that consumers at the BOP spend a higher portion of their income on consumer goods (50 to 75 percent), as compared to wealthier segments (around 35 percent).
These authors also ? nd that, due to their limited and unstable cash ? ow, lowincome consumers tend to shop daily and spend small amounts of money each time. Then too, they are reluctant to buy in places that are located far away from their homes. The ? ndings show that “stay at home” mothers make most of the purchases and family spending decisions; by doing this, they ful? ll roles as wife, mother, and household manager. Companies currently devote resources to listening to the voice of the customer and are con? dent in their efforts with currently serviced segments. A change of focus to the BOP ill require new techniques, and freedom from “accepted knowledge. ” The BOP is so radically different that companies will have to ignore what they know as “truths” that may not apply anymore. Faulty new product development eradicates the potential for pro? t and unfamiliar product development (NPD) territory increases the risks of failure. Firms can increase their NPD success rates by integrating consumers into the process as boundary spanning team members instead of mere respondents to surveys. Thus, product development will bene? t from the input of customers at the lowest levels of income (Pitta and Franzak, 1997).
However, that initiative will be supremely different from current successes. A good example of how companies, NGOs, governments, and other institutions can collaborate in this aspect is the formation of BOP learning laboratories (McFalls, 2007). The laboratories were designed to investigate the complex factors that interact at the BOP as well as opportunities for both sustainable and human development. More initiatives like this one are needed, as well as research on the characteristics of the BOP consumers. Characterization of BOP consumers A fundamental requirement to attend the BOP market uccessfully is to know deeply the characteristics of the people in this segment. Some academic studies and reports from NGOs have contributed re? ning the understanding of the BOP: how many they are, where they are located, what their income level is, and what some of their characteristics in terms of needs and habits are. According to Hammond et al. (2007), the BOP is concentrated in four regional areas: Africa, Asia, Eastern Europe and Latin America and the Caribbean. 12. 3 percent of the BOP lives in Africa, 72. 2 percent in Asia, 6. 4 percent in Eastern Europe and the remaining 9. 1 percent lives in Latin
America and the Caribbean. Rural areas dominate most BOP markets in Africa and Asia while urban areas dominate most in Eastern Europe and Latin America and the Caribbean. Estimates of the size of the BOP in US dollars or buying power approximate $1. 3 trillion. The Asia market has a buying power of $742 billion, Latin America market is $229 billion, the Eastern Europe market $135 billion and Africa $120. The BOP business model In spite of the opposing viewpoints in the literature regarding the extent to which there is a business opportunity at the BOP, there is agreement that serving the low-income sector ro? tably requires a different business model (Chesbrough et al. , 2006; Prahalad and Hart, 2002). Prahalad and Hart (2002) state “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”. Moreover, the market at the BOP requires a 397 The quest for the fortune at the bottom of the pyramid Journal of Consumer Marketing Dennis A. Pitta, Rodrigo Guesalaga and Pablo Marshall Volume 25 · Number 7 · 2008 · 393 –401 combination of low cost, good quality, sustainability, and pro? ability (Prahalad and Hart, 2002). As a result, for-pro? t ? rms need to understand how the BOP segment differs from upper tiers, and adapt the marketing approach to meet the characteristics of consumers at the bottom. Prahalad’s concentration on the bottom of the pyramid requires a sea change in a company’s approach to business. Attempts to reap pro? ts from the BOP using current marketing techniques will fail. Failure will result because the products are too expensive or complicated, are not available in small enough quantities or sizes, or are simply not what the poor want. The BOP is not low hanging fruit.
It is a market with potential, and achieving that potential will require costly effort and innovative strategies (Seelos and Mair, 2007). Even with a completely new management approach, evidence suggests that pro? ts at the bottom of the pyramid may be elusive (Karnani, 2007a). The literature suggest that the three most critical aspects in developing a new business model to serve the BOP are the access to credit, the establishment of alliances, and the adaptation of the marketing mix. The following subsections address these issues. still in its early stage in countries like Brazil, Mexico, and Argentina.
Most of the banks that have participated in micro? nance are large commercial banks in search of new and attractive markets. The main reasons for commercial banks to attend the BOP have been: . the strong competition among large banks; . the evidence by NGOs supporting the BOP initiative; . the social responsibility dimension; . the opportunity to diversify their business operation; and . the possibility of working together with other institutions, like NGOs and governments. According to Westley (2007), by the end of 2005, there were 30 commercial banks in Latin America oriented to the microentrepreneurs.
The establishment of alliances There is recognition that serving the BOP requires the involvement of multiple players, including private companies, governments, nongovernmental organizations (NGOs), ?nancial institutions, and other organizations – e. g. communities – (Prahalad and Hart, 2002). By infusing the pro? t motive into value creation, the hope is that private companies will take the leading role in serving the BOP and, thus, the purpose of alleviating poverty will more likely succeed. Prahalad and Hart (2002) suggest that, among private companies, multinational corporations (MNC) with extensive ? ancial resources are in the best position to lead the process of selling to the poor. However, MNC’s have built-in weaknesses that limit their potential for success with these consumers. They are simply too large, too rigid and too far from the customer to be effective. Instead of the top down approach that MNC’s represent (McFalls, 2007; Harjula, 2005), a bottom up process is necessary (Karnani, 2007a). Changing perspectives from top down to bottom up is so complicated that if MNC’s are to be involved, they may have to create ? exible subsidiaries free from the corporate structure, processes, culture, and assumptions.
ITC has succeeded using that model and has done so at the grassroots level. Therefore, more research is needed to ? nd out under which circumstances MNC’s or other types of private company should lead the BOP initiative. This line of reasoning is consistent with D’Andrea et al. (2004) who, in the context of retailing in Latin America, suggest that smallscale independent supermarkets and traditional stores are more likely to reach emerging consumers than MNC’s. Likewise, NGOs have been critical in the development of the business model infrastructure in several successful cases of for-pro? t ? rms serving the BOP.
For-pro? ts have created sustainability for the technology used (Chesbrough et al. , 2006); NGO’s, understand people’s needs. In addition, NGO’s are closer to people at the BOP, and are better prepared to educate them. For example, in Uganda, Africa, the NGO Infectious Disease Institute in Kampala collaborated with P? zer by educating people about the causes of AIDS, and how to prevent and combat it. This facilitated P? zer’s initiative to provide these people access to drugs that combat HIV/AIDS (Chesbrough et al. , 2006). Lastly, the public sector has an important role in developing the BOP proposition.
The focus is changing from traditional governmental assistance delivery, to different ways of creating a sustainable environment for aiding the BOP. For example, Micro? nance Microloans are well known and originally seemed like the answer to self-suf? ciency. The concept that a poor consumer could gain a small loan and become a producer contributing to family income and independence is tantalizing. There is evidence that microloans have succeeded in aiding the bottom of the pyramid. There is also evidence that many of the would-be entrepreneurs failed to capitalize on such credit. They got deeper into debt (Karnani, 2007a).
Some authors point out that the entrepreneurial skill that can lead to success is rare. Most individuals would rather have a guaranteed income rather than assume the risk that entrepreneurship entails. This adds to the argument that if businesses can create jobs and boost the poor’s income, then consumption will follow. Those businesses may not be able to obtain outside ? nancing. The BOP segments are not able to generate suf? cient pro? ts to justify a high cost of capital. To reduce the cost of capital, perhaps collaboration with funding sources like the World Bank or other NGO will be necessary.
With ?nancial aid, companies trying for the BOP market may be able to succeed. The creation of buying power is one of the key elements that allow low-income segments to reach product and services. Formal commercial credit has been unavailable to this market and the cost of accessing and getting ? nancial services in the informal ? nancial market is enormous. Since the pioneering initiative of Grameen Bank, in the mid of the 1970’s, several ? nancial institutions have been very successful in offering ? nancial services to low-income people who were not traditionally served by the formal bank system.
Programs for microcredit have characteristics that are speci? c and different from those of the traditional banking sectors. These differences include property and corporate governance of the institutions, characteristics of the consumers, the technology used to manage credit, and the characteristics of the product and service. The growth of the microcredit market has been heterogeneous across countries. For example, in Latin America, the micro? nance industry has had a signi? cant ? growth in countries like Peru, Bolivia and El Salvador but it is 398 The quest for the fortune at the bottom of the pyramid
Journal of Consumer Marketing Dennis A. Pitta, Rodrigo Guesalaga and Pablo Marshall Volume 25 · Number 7 · 2008 · 393 –401 the provision of funding and training to entrepreneurs is a way governments can support consumers and producers at the BOP. Another example is engineering supportive tax structures that promote private sector investment in BOP initiatives. distribution makes the poor poorer. Today, with escalating global fuel costs adding to the cost of transportation, the poor face an increasingly rigorous future. The lack of infrastructure serving rural areas also increases prices.
For example, in Chile, consumer goods prices in the remote North and South of the country are 20-25 percent higher than the more highly populated central zone of Santiago and Valparaiso (Ferreira and Litch? eld, 1999). The idea of closeness in distribution channels for consumers at the BOP is very important. This means, for example, having stores that are both geographically close and affectively close. In other words, emotional proximity is also very important. A good example is Banco Estado, a stateowned commercial bank, which consumers consider the “closest” to the BOP segment.
The reasons are its extensive distribution, its perception of being adaptive to people’s needs, its ? exibility, and its position as affectively close. In the context of retailing, D’Andrea et al. (2004) show that the development of personal relationships with the stores’ personnel has a positive effect on consumers’ self-esteem and well-being. Pricing for the bottom of the pyramid is, of course, also very critical. The challenge here is twofold. On the one hand, there is the issue of affordability: prices need to be affordable to BOP consumers. Ramaswamy and Schiphorst (2000) emonstrate the challenges in companies trying to serve the poor. In order to achieve affordability, they must reduce the costs of production and simplify the products. On the other hand, ? exibility in payments is also very important. Providing options of how and when low-income consumers can pay for their products and services constitutes both a challenge and a source of competitive advantage to private companies. To do this, private companies may need the assistance of commercial banks and NGOs as key partners. Some marketing theorists (Karnani, 2007b) view the BOP as a collection of producers rather than consumers.
Therefore, innovative payment models, which allow BOP consumers to pay using a marketing exchange model would increase their ability to pay for the things they consume. The ? Nestle milk agricultural exchange model cited above comes to ? mind. In that model, Nestle actually paid farmers for their milk at attractive prices. They could use the money to buy seed at equally attractive prices. It is a small step to consider a more traditional barter system. As long as the barter system offered fair pricing it would present a win-win situation that would help sustain the arrangement. The marketing mix
It is no surprise that serving different market segments may require different marketing mixes. Therefore, for-pro? t ? rms need to understand how the BOP segment differs from upper tiers, and adapt the marketing approach to meet the characteristics of these consumers. Since affordability is at the heart of serving the BOP, product modi? cation will help lower the price and improve affordability. The parallel strategy, reducing product size works in higher customer tiers but has limited usefulness at the lowest levels. In India, unit-use reduced size cachets of shampoo do promote consumption but are not the answer.
The higher cost of packaging erodes pro? ts, and the resulting discarded packaging adds to pollution. The problem remains that the customer still has to allocate scarce income to the shampoo. One answer is to create a bare-bones product with fewer product features that the poor can afford. One example, Nirma detergent made in India, highlights a “poorer” product that is affordable. A single entrepreneur created Nirma to compete with Hindustan Lever’s market leading detergent, Surf. Surf gained market share because it is an excellent product. It has numerous additives that make it effective yet gentle to humans.
Its cost was signi? cant. In fact, Nirma does not contain many of the ingredients and safeguards of its rival. It works but can cause blisters on the skin (Ahmad and Mead, 2004). Despite its harshness, the poor embraced it because they could afford it. The implication is that “research must also seek to adapt foreign solutions to local needs” (Prahalad and Hart, 2002). Evidence shows that consumers at the BOP care about branded products, because leading brands are a guarantee of product quality, which is particularly important to this segment because “the ? ancial loss from an underperforming product is greater for people with limited incomes” (D’Andrea et al. , 2004, p. 6). However, emerging consumers are not very loyal to speci? c brand names, although they do not experiment with unknown brands. In practice, they switch among a few known brands (D’Andrea et al. , 2004). D’Andrea and colleagues also argue that low-income consumers prefer products in small sizes, even if the perunit cost is higher, because of their income and space constraints. Moreover, too many varieties of products can harm emerging consumers’ purchasing experience. They may eel tempted to buy things they don’t need or can’t afford, which can produce a feeling of inferiority or frustration (D’Andrea et al. , 2004). Marketers also need to revisit distribution channels also to attend the BOP market effectively. Vachani and Smith’s (2008) recent work dealing with inclusive distribution has merit as a model for success. In essence, their examples infused a social action philosophy into a business model. One of their focal companies, ITC, demonstrated the vision necessary to discern pro? ts in the future and the determination to invest in a new distribution channel as a in-win proposition. Undoubtedly, the high cost of Conclusions and challenges for marketing theory and practice While the picture is not completely clear, the bottom of the pyramid may offer opportunities to create value for both the poor and companies. Early promises of a fortune seem to have been overstated. The degree of wealth present among the poor is much lower than ? rst reported. In addition, that wealth is too fragmented to be tapped under the current business models. It now appears that the basic concept overestimates the role that BOP consumers can play in contributing to company pro? ts.
There is still no agreement in the literature about how bene? cial selling to the BOP can be for private companies, or for alleviating poverty. However, there are several elements of the BOP proposition that have been identi? ed as critical to 399 The quest for the fortune at the bottom of the pyramid Journal of Consumer Marketing Dennis A. Pitta, Rodrigo Guesalaga and Pablo Marshall Volume 25 · Number 7 · 2008 · 393 –401 succeed. First, an accurate characterization of the low-income sector – both as consumers and as producers – is required to understand their needs, perceptions, and behavior, which in urn will help companies to design a better business approach. Second, it is important to recognize that serving the BOP market requires a different business model, one incorporating access to microcredit, the establishment of alliances of collaboration among different types of institutions, and the adaptation of the marketing mix. “Until companies better understand the needs of emerging consumers and adapt their business models to serve them more ef? ciently and effectively, their growth will be limited” (D’Andrea et al. , 2004, p. 3). It is well known that BOP markets involve managing ubstantial challenges in technical and economic infrastructure, education, ? nancial resources, and cultural differences. As participants from the economic sectors progress, a number of questions need to be addressed. Gardetti (2005) articulated them clearly. They include: “How can a company turn its strategy at the BOP into a competitive advantage? What kind of business model will work? How can it build trust in the informal economy? What kind of education do business schools need? How does new technology integrate? How can we develop the educational/ social infrastructure? Moreover, from the viewpoint of egulatory and policy formulation, if entering the markets at the base of the pyramid is a sound choice for both development and business, what does it take to turn this into a reality? ” Scholarly research, as well as practitioners’ participation in BOP initiatives, can provide some answers to clarify the true nature and scope of the fortune at the bottom of the pyramid. example in India showed its value in distribution and in customer relationship management. It will be equally valuable in research, product development, pricing, and promotion. Fourth, pricing is of paramount importance in serving the oor. In a for-pro? t enterprise, consumers must pay for the cost of serving them. Microcredit is one potential solution. It may be a limited solution, useful only to consumers with the skills necessary to manage it. However, innovative exchange models may offer even those without ? nancial management skills a chance to improve their condition. Fifth, given the economies of the BOP, it is likely that if pro? ts come, they will come later rather than sooner. Organizations need to choose a long-term involvement in order to avoid disappointment and a ? nancially ruinous midterm decision to exit.
Finally, marketers should understand that some products are simply not suited for the poorest of the poor. Some products of dubious value to this segment, like Armani handbags, or even cheap counterfeits, will have no place at the BOP. More importantly, some products and services related to health care will always be simply too expensive. Altruistic surgeons may care for uniquely disadvantaged patients by donating their time but they are only one part of a surgical team. Even if the hospital and every member of the team donate facilities, their time, and the resources to save a atient, that model is not sustainable as a for-pro? t venture. Similarly, the cost of a ten-day supply of a life-saving antibiotic cannot be reduced realistically using the “smaller package size” option. The implication would be either reduced daily doses or fewer full strength doses. Both are likely to breed drug resistant organisms and thereby threaten the life of the patient and society. To remedy this situation, other players like governments and NGO’s will be important. Many marketers must realize that collaborating with them is important. To be effective, the collaboration must be proactive.
Marketers wishing to serve the BOP, who recognize the importance of alliances with others, should seek out relationships with both government and NGO’s. Early and persistent outreach will be valuable in alerting all of the players to each other’s strengths and in creating an accurate picture of the challenges. Politically, coalitions of organizations with different fundamental objectives are prone to misunderstanding. Often their terminology is similar but the meaning is different. Alternatively, their objectives may be so totally different that they are fundamentally foreign to one another.
If the goal is poverty eradication at a pro? t, all the players must collaborate. The goal may be so dif? cult and achieving effective teamwork is essential. Implications for marketers In general, if pro? t-seeking companies plan to serve the BOP, numerous factors will have to change. First, marketers will have to approach the BOP in a novel manner different from any they used in their prior successes. The BOP is mostly unknown territory. They may have to reinvent themselves or create divisions with substantial independence. If the old segmentation rules that worked at the TOP no longer apply, either will the product development, sales, pricing, distribution policies, and management. In addition, the pro? t objectives and revenue goals will have to be changed. Those who are not prepared to address the sea change in marketing approach should avoid entering this market. Second, simply modifying products and selling them is a path to failure. Success will depend on knowing the BOP intimately. Currently the BOP is terra incognita in terms of segments and their needs. To succeed, marketers must be able to differentiate different income segments and their value. Within the various BOP de? itions, there are three apparent segments, “under $2 per day”, “$4 per day”, and “$6 per day”. The needs and incomes of the segments seem to differ enough to indicate that they be treated differently. Marketers need to know which ones to serve and how to serve those successfully. Third, in order to understand the voice of the BOP consumer, companies need grass roots sources of intelligence. Collaborating effectively with agents “on the ground” who have direct contact with relevant BOP segments is vital. Moreover, companies must train those agents to seek ? information that will help serve those customers.
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Practices and Guidelines for Project Design, Monitoring, and Evaluation, IADB, MSM – 138. Zeithaml, V. A. , Rust, R. T. and Lemon, K. (2001), “The customer pyramid: creating and serving pro? table customers”, California Management Review, Vol. 43 No. 4, Summer, pp. 118-34. Further reading Anderson, S. N. (1994), “Unions/management create collaborative culture”, Communication World, Vol. 4 No. 1. Corresponding author Dennis A. Pitta can be contacted at: [email protected] edu To purchase reprints of this article please e-mail: [email protected] com Or visit our web site for further details: www. emeraldinsight. com/reprints 401