In the past decade, the idea of reaching the bottom of the pyramid, the world’s lowest socio-economic levels, has become an increasingly important organizing principle for professionals working in international development. The promise of strategically harnessing the market potential of the world’s poorest 4 billion people has proved motivational, as large companies, social entrepreneurs and even nonprofits seek financial returns while bringing new market access to those formerly excluded. Yet as more organizations put theory into practice, important critiques of the “BoP” model have emerged.
Does your company work internationally and have interest in engaging new customers who live in poverty? Is your organization discovering unexpected challenges as you seek to serve the poor in emerging markets?
As part of our on-going ‘5 must-reads’ series, Devex Impact reviews and summarizes five essential books and articles on the topic to help you master the basics, stay up to date on the latest insights and learn what works (and what doesn’t) in bringing your business to the world’s poorest.
The Fortune at the Bottom of the Pyramid: Eradicating Poverty Through ProfitsC.K. Prahalad, Wharton School Publishing 2004, Hardcover 432 pages
When it was released in 2004, this book revolutionized the way that firms and international development professionals thought about the world’s poor, proposing that they be seen not as charity cases, but as valuable consumers and an engine for economic growth. Unlocking the potential of this latent market not only rewards companies with hefty profits, but also help millions escape poverty, espouses Prahalad, who served as a professor of corporate strategy at the University of Michigan’s Ross School of Business before he passed away in 2010.
The key bottom of the pyramid business strategy is to approach the market with “small unit packages, low margin per unit, high volume, and high return on capital employed.” In part one of the book Prahalad describes the bottom of the pyramid’s distinctive characteristics, and how the private sector should adapt its practices and products to most effectively engage it. Today, this book still serves as the root of discussion and debate on reaching the bottom of the pyramid.
Reality Check at the Bottom of the PyramidErik Simanis, Harvard Business Review June 2012, 5 pages. (Free registration required to download the report)
In this article, Simanis, who serves as managing director of market creation strategies at Cornell University’s Sustainable Global Enterprise, takes a critical look at Prahalad’s bottom of the pyramid model. He argues that this approach requires an impractically high market penetration rate – usually above 30 percent – and being successful, depends on two variables which are invariably absent: decent infrastructure for product distribution (also known as the “last-mile” problem) and consumers who are already familiar with their products. The result can be that bottom-of-the-pyramid product lines are too costly to maintain.
To reach the bottom of the pyramid in a sustainable way, Simanis argues, businesses need to improve their margins by reducing variable costs and raising price points for single transactions. He outlined a three-pronged strategy for boosting margins: localizing base products sold as a bundle, creating an enabling service, and marketing through customer peer groups. These three tactics allow companies to save on labor costs and sell more per transaction; giving customers the skills necessary to maximize products’ functionality; and extending the benefits of the enabling service through a close-knit association built around a product.
“Companies must embrace the reality that high margins and price points aren’t just a top of the pyramid phenomenon; they’re also a necessity for ensuring sustainable businesses at the bottom of the pyramid.,” wrote Simanis
Segmenting the Base of the PyramidV. Kasturi Rangan, Michael Chu, and Djordija Petkoski, Harvard Business Review June 2011, 6 pages
The market at the bottom of the pyramid is strewn with pitfalls, wrote this team, comprised of two Harvard Business School faculty and a World Bank specialist. If your business is just in it for profit, government and civil society will resist. If you focus on primarily on doing social good, you’ve only created another short-lived corporate social responsibility project. The key to success, the authors wrote, is to scale up from the beginning in order to create a virtuous cycle of economic development, which drives demand for products and services. In other words, “companies [must] link their own financial success with that of their constituencies.”
In order to create both public and private value, businesses need to better understand their target market, and that means breaking the four billion-strong bottom of the pyramid into smaller, more manageable segments. The authors propose segmenting populations into three categories according to living standard: those who are low income (the 1.4 billion people living on $3-5/day), those who live at a subsistence level (the 1.6 billion living on $1-3/day); and those in extreme poverty (the one billion people living on $1/day or less.) Dividing that same population by value-creation roles, businesses will discover consumers, co-producers and clients. The authors then offer guidance on how to map bottom-of-the-pyramid strategies onto these segments: for example, subsistence-level populations given the right training and inputs can become co-producers in a company’s supply chain.
However, the authors remind companies to avoid the trap of thinking their job is over once the product or service has been rolled out. Successful bottom of the pyramid businesses in the low-income and subsistence segments, such as Vodaphone’s MPesa, have involved local retailers and other community networks in their distribution and marketing models. When reaching those in extreme poverty, public-private partnerships with government and NGOs are often required in order to guarantee cost recovery.
By understanding how to tailor products and services to the needs and capabilities of these sub-groups and focusing on community-based economic growth, companies have the best chance of succeeding in the “risky place” that is the market at the bottom of the pyramid.
Marketing Innovative Devices for the Base of the PyramidHystra, March 2013, 56 pages
‘Marketing Innovative Devices for the Base of the Pyramid’ shared 10 best practices for marketing affordable, life-changing devices and equipment to the bottom of the pyramid. Although these lessons emerged from 15 independent organizations offering various products in different regions of Africa, Asia and Latin America, they all represent solutions to top-level marketing challenges.
Hystra aggregated these lessons into an easily navigable framework, citing specific examples from participating firms as supporting-evidence. Amongst the recommnedations were that: organizations marketing to the bottom of the pyramid should reduce turnover among sales agents to a “manageable 30%” by improving both recruitment and compensation, and that products should yield relatively high profit margins in order to support the deployment of field-level personnel for demonstrations, training and after-sales support.
This level of insight from those actually serving the bottom of the pyramid can help businesses and international development organizations solve marketing problems thus increasing willingness to invest in innovative products and distribution models.
Is the Bottom of the Pyramid Really for You?Ashish Karamchandani, Mike Kubzansky, and Nishant Lalwani, Harvard Business Review March 2011, 6 pages
The authors leading Inclusive Markets practice at consulting firm Monitor, assert that aside from a few oft cited examples, “global corporations have been largely unable to reduce costs and prices enough to serve poor consumers.” The relevant question for business then becomes: Should we or should we not aim for the bottom of the pyramid?
The article reviews the most prevalent problems precluding corporations from reaping profits at the bottom of the pyramid, and spells out which corporations should be targeting this demographic and why. Drawing on Monitor’s extensive research involving 700 market-based initiatives for social change in India and Africa, the article details the complex business challenges companies have discovered at the bottom of the pyramid, including uncertain cash flows, misgauged demand, supply chain and distribution problems, and undeveloped business ecosystems.
The overarching thrust of this article is that companies should think carefully before leaping into bottom of the pyramid activities and proposes five key questions to help companies think through the risks and rewards of adapting business models to meet the needs of the poor.
Are there other books or articles that have shaped your understanding of bottom-of-the-pyramid business models? Are there other topics we should cover in our ‘5 Must-Reads’ series? We welcome your feedback. Add your suggestions in the comment box below or message us on twitter @deveximpact
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