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)
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 WORLD ECONOMIC PYRAMID |
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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| THE PROCESS OF MAKING PROFITS AND ALLEVIATING POVERTY |
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).
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.
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.
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. Similar results were found in another study by Viswanathan et al (2010).
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 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 (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 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).
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 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). 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).
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.
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 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.
