With growing saturating in developed markets and increased competition, companies across the globe are beginning to explore this hitherto ignored market that presents huge latent demand for goods and services.
The term, ‘Bottom of the Pyramid,’ was first coined by management guru, CK Prahalad, who along with Stuart Hall of Cornell University in his 2002 path-breaking article, “The Fortune at the Bottom of the Pyramid,” provided the first articulation of how companies can profitably serve a huge untapped market of more than 4 billion people living on less than $2 per day, who remain largely unserved. While the idea has since been debated fiercely among companies across the globe on several forums, it has been confined largely to the board room discussions in a majority of firms. That means that the world’s poorest consumers have been ignored by business organizations.
One of the prime goals of the proponents of BOP market is to create awareness among companies about what they call, “BOP penalty,” which, according to the World Resource Institute, occurs when the poor actually have higher priced goods of lower quality relative to more affluent populations, or can’t even gain access to goods and services.
According to Robert Katz, Research Analyst, the Sustainable Enterprise Program, World Resources Institute, “Low-income communities are often served by monopolies – for food, water, transport, finance, and other basic goods and services. In the absence of competition from the private sector, these local, unregulated monopolies charge higher prices. For example, low-income communities often don’t have public water service, leaving BOP consumers to purchase from private water vendors. These vendors charge anywhere from eight to sixteen times as much as the utility.” Organizations like WRI and IFC through insightful research hope to help businesses create practices that stop or at least cut back on the “BOP penalty.”
Now, faced with saturating growth in developed markets and increased competition, companies across the globe are beginning to explore this hitherto ignored market that presents huge latent demand for goods and services. Indeed, the opportunities are huge at the BOP. For instance, China, a $5 tn market in PPP (Purchasing Power Parity) terms is next only to the United States. India, with a population of 1 billion plus people is another trillion dollar market ($3 tn). In fact, if one takes nine countries – China, India, Brazil, Mexico, Russia, Indonesia, Turkey, South Africa, and Thailand – collectively they are home to about 3 billion people and represent 70% of the developing world population, with a GDP of $12.5 tn, which represents 90% of the developing world. This is larger than the GDP of Japan, Germany, France, UK, and Italy combined! The huge population of India and China is a significant factor in the sense that even a small proportion (say, 5-10%) of the population of China or India can represent a new market of 50-100 million each. With an estimated 4 billion BOP members across the globe, which is expected to grow to 6 billion in the next 40 years, the BOP is, according to Prahalad, “the biggest potential market opportunity in the history of commerce.”
Although the purchasing power of the BOP consumers is low (less than $1,500) compared to the topmost strata of the pyramid (greater than $20,000), tailor-made products with a focus on reducing manufacturing costs will do the trick. To the surprise of business organizations, as statistics reveal, the poor are now spending much more on products that were once considered to be luxuries. For instance, in Dharavi – Asia’s largest slum on the outskirts of Mumbai, 85% people own a television set, 75% own a pressure cooker and blender, 56% own a gas stove, and 21% have telephone connections.
A few companies are beginning to notice. For example, Aviva Life Insurance, a joint venture between India’s Dabur and the UK’s Commercial General Union, has entered into an alliance with BASIX, a Hyderabad-based microfinance institution, promoted by the International Finance Corporation, Washington, Shore Bank, and ICICI Bank, among others. Aviva aims to target 1 million microinsurance lives by 2008, and is also working towards a model that makes distribution of products to the rural and poor people a sustainable business. The company’s alliance with BASIX has successfully resulted in the launch of several new products and models like low-cost group insurance. BASIX is the first microfinance institution in India, and, perhaps, also in the world, to attract commercial equity investments. Global corporations like P&G and Unilever too have taken major initiatives to cater to this highly promising market.
For instance, Procter & Gamble (P&G) created NutriStar, a powdered health drink designed to help kids grow better while also boosting their mental alertness and performance, while Hindustan Lever Limited (HLL) has developed more stable iodine for salt that is effective in preventing iodine deficiency disorder among low-income consumers. Besides, P&G has also developed an affordable and simple-to-use in-home water purification product, PUR Water Purifier for low-income households. The company sells single serving sachets that contain the same ingredients that are capable of treating up to 10 liters of water. The sachets are ideal for BOP markets; their small size makes them convenient to transport and store and their low-cost ensures that even the poorest families can use them.
The successes of these companies have begun to inspire several other firms to enter the BoP market. In the meanwhile, marketers have also realized that this market is not all about selling only consumer packaged goods or FMCG products. Rather, companies are now offering a range of different goods and services from financial services like banking and insurance to education, housing to healthcare, and transportation to telecommunications. According to a recent study by the World Resource Institute (WRI) and International Finance Corporation (IFC), the low-income segment holds unexplored opportunities of an incredulous $5 tn a year. Titled, ‘The Next 4 Billion,’ the report promises to help remove the biggest barrier which has prevented companies from exploring this market: empirical research/evidence substantiates the BOP theory and practice.
The study which claims to be the first of its kind to ever put a number on the size and scope of the BOP market identifies 9 major sectors which cater to the BOP markets and present immense growth potential. These sectors are: water ($20 bn), information and communication technologies ($51 bn), health ($158 bn), transportation ($179 bn), housing ($332 bn), energy ($433 bn), and food ($2,895 bn). According to the report, the Bottom of the Pyramid market in India is estimated at about $1.205 trillion, in purchasing power parity terms, and makes up 84.8% of the total $1.42-trillion national household market. Further, as per the report, the country’s BOP segment accounts for 88.1% of the total national household expenditure on food, 87.2% of energy expenditure, 85.3% of health spend, 78.8% of household goods expenditure and 52.6% of the country’s spend on information and communication technology.
Jany, Lead Economist
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