Selling to Consumers at the Bottom of the Pyramid

Stephen DeAngelis

September 22, 2014

“A decade ago,” writes Stephanie Strom (@ssstrom), “C. K. Prahalad, a University of Michigan business professor, in his book ‘The Fortune at the Bottom of the Pyramid,’ detailed the potential [of low-income consumers], contending that such households were every bit as discriminating and aspirational as their counterparts at the other end of the income spectrum.” [“Multinational Companies Court Lower-Income Consumers,” The New York Times, 17 September 2014] Unfortunately, Professor Prahalad passed away in April 2010 and his vision for and concern about people living at the bottom of the pyramid are sorely missed. I first wrote about the so-called “bottom billion” seven years ago in an article entitled “Helping the Bottom Billion.” In that article, I was arguing that the best way to help the bottom billion was to encourage economic growth. I wrote, “A country is either advancing or it is falling behind. In this accelerated information age, countries that are advancing are outpacing the bottom billion so badly that those at the bottom are being left in the dust and, as a result, are choking on poverty.” The focus of that article and a follow-on article entitled “Helping the Bottom Billion Revisited” was a profoundly insightful op-ed piece by Paul Collier, an economics professor at Oxford University. [“Will the Bottom Billion Ever Catch Up?” The Washington Post, 21 October 2007]. Collier wrote:

“Most of the bottom billion live in Africa, but the countries at the bottom are scattered across the continents: places such as Haiti and Bolivia in Latin America, Yemen in the Middle East, many of the ‘stans’ in Central Asia, and Laos and East Timor in East Asia. They are nearly all small, which is part of the problem. Countries with small and poor populations tend to lack the critical mass of educated and talented people to diagnose failure and do something about it. Globalization has compounded this shortage by making exits both feasible and attractive: The bottom billion are hemorrhaging their limited talent. Chinese students go back to China, Indian students now go back to India, but students from the countries of the bottom billion don’t go back. Many of these small countries are also plagued by civil war.”

In 2008 Collier penned an op-ed piece for the New York Times entitled “A Measure of Hope.” In that article, he argued, “The big difference between a poor Asian household and an equally poor African one is hope, not necessarily for the present generation of adults but for their children. Hope makes a difference in people’s ability to tolerate poverty; parents are willing to sacrifice as long as their children have a future. Our top priority should be to provide credible hope where it has been lacking.” The fact that multinational companies are proactively thinking about and offering low-income consumers goods and services previously unavailable should provide a measure of hope. Strom reports, “For years, multinational companies had little interest in lower-end consumers, figuring no money was to be made. Now, they are increasingly attractive to all types of industries, from consumer product makers to technology businesses. Google just announced plans to sell a stripped-down, cheaper version of its Android phone in India.”

 

As I’ve noted in past articles about innovation, many of these multinational companies have learned how create products for low-income households from the very consumers they are targeting. The process is called “jugaad” (pronounced jewgard), which is an Indian term. Literally, “jugaad” means “somehow get it done.” In the U.S., we might use the term “jury-rigged” in much the same way. Unlike “jury-rigged,” however, “jugaad” is overcoming its pejorative past and is a process now being taught around the world. It has come to represent a movement that develops no-nonsense products without the bells and whistles often found in more developed countries. Strom asserts, “That is Lesson No. 1 in developing products for consumers who live on pennies a day in places like India.” Vikram Damodaran, director of health care innovations at Wipro GE Healthcare, told Strom, “You can’t take a product and simply strip it down and replace expensive parts with cheaper ones. It has to come from the ground up, with a lot of input from the people who might actually use it.” Strom reports that the late Professor Prahalad “estimated there were four billion such consumers in a market worth $13 trillion.” Thirteen trillion dollars is a substantial amount of money; but, most of it, by necessity, is spent on essentials. And those essentials have to be made available in affordable quantities.

 

Mark B. Milstein, director of the Center for Sustainable Global Enterprise at Cornell University, told Strom that early efforts to tap the bottom-of-the-pyramid market failed. “There was not much thinking about what those consumers needed or wanted or how they might be different from consumers with more disposable income.” Strom explains some of the challenges that face CPG manufacturers desiring to sell products in struggling communities:

“Distributing goods to the many tiny shops that serve poor Indian consumers, for instance, is vastly different from getting products into Walmart or convenience stores that use technology and warehouses to manage inventory. The average Indian shopkeeper has no storage space and is lucky if he has a working calculator. Companies often forget to consider whether consumers want or need a product with too many bells or whistles. A phone with a built-in camera, for example, makes little sense if a family does not have access to the Internet and cannot share photos. Pricing, too, can be complicated. ‘Where we might use eight grams of tea to make four cups, a poor person will use it to make seven or eight cups,’ said D. Shivakumar, chief executive of PepsiCo’s India business. ‘If you don’t understand that, your projections for profits and losses will be way off.’ Mr. Shivakumar, who is known as Shiv, said companies often focused too much on how little poor consumers had to spend and then developed products to fit that budget. Instead, he said, it is important to determine how to give them the sizzle at a price they can afford.”

If getting the design of a product correct is the first lesson that companies need learn when addressing the needs of low-income families, the second lesson has to do with economics. Muhammad Yunus is credited with developing the microfinance sector. He established a bank that started offering micro-loans to impoverished Bangladeshi women. As a trained economist, he came to the realization that without a source of credit those women would never break poverty’s stranglehold. His efforts resulted in his sharing the 2006 Nobel Peace Prize. Unilever has taken notice of such efforts. The company recognized that low-end consumers have a great need for a good water purification system. Strom reports, “It took five years to get the product right. The device had to produce water that could meet the United States’ Environmental Protection Agency standards. It had to work without electricity or water pressure. And it had to be as simple to use as possible.” The result was the Pureit water filtering system that Hindustan Unilever sells for around $25. Strom notes that amount is equals “a month’s income for a person living below the poverty line in India.” Rather than abandon the product and the consumers for which it was intended, Hindustan Unilever teamed with “with nonprofit groups and microfinance institutions interested in water and sanitation to develop installment plans that would enable families to pay off their Pureit purchase over six months or so.” Yuri Jain, vice president for Hindustan Unilever’s water business, told Strom, “It gives consumers the ability to pay for something they want and need at a price that is not high, but is yet aspirational.” And, in another case of reverse innovation, “Unilever developed a more expensive version of Pureit to sell to well-heeled consumers in nine countries. The top of the line sells for roughly $340.”

Strom goes on to discuss a few other products that been developed in lower income markets and have been exported to richer markets. One of the first companies to recognize the potential of reverse innovation was General Electric. Strom reports, “G.E. realized more than a decade ago that products devised for the Indian market might appeal to more developed markets, and planted the company’s largest and first international research and development center here. The lab has 4,500 engineers, 1,600 of whom work on health care innovations.” Shyam Rajan, chief technology officer at Wipro GE Healthcare, takes pride in the fact that General Electric is providing products for the poor while at the same time is creating a brand new market where none previously existed. It’s a win-win situation for both low-income consumers and manufacturers.

Both as a businessman and as someone interested in poverty reduction, I find the subject of how the 4 billion people living at the bottom of the economic pyramid can be helped to live a better quality of life engaging. As a result, I will continue to address strategies that economically benefit them and how those strategies could impact the global economy. I believe that companies that help low-income consumers overcome the challenges of everyday life will discover new opportunities and new markets. The challenges are many, encompassing everything from healthcare to food security to education, but that means that opportunities are also plentiful.