Business for the poor is not poor business

Imagine not having a bank account, telephone, clean water, toilet, electricity, and health care. Imagine spending up to 80 percent of your income for food, not being able to buy a uniform required for your child to go to school. Imagine depending on middlemen to sell your produce and loan sharks for credit. Imagine that the land where your home is built does not have a title. It may be hard for you to imagine living your life like this but, for a billion people, this is reality.

These are people living on less than $3 a day in Brazil, less than $1.50 a day in India, and less than $1 a day in Chad. They are at the base of the economic pyramid. Helping them has been the objective of every right-thinking government and international organization for decades, sometimes with success, but too frequently only with marginal progress.

Many people think of the poor as the responsibility of the state or mere recipients of aid. They are not. They are not too different from you and me: We have the same hopes, creativity, and needs. Therefore, we must do more to include them in the growing world economy. They, too, are creative entrepreneurs and value-conscious consumers who contribute to prosperity by doing their share. In fact, if you are in business, you would be foolish to ignore this market of 4 billion people with an estimated $5 trillion in purchasing power.

An increasing number of companies are realizing the potential of this market and are finding creative ways of producing and marketing goods and services to the poorest, while offering them livelihood as producers, distributors, and retailers. For companies, “inclusive business” models are opportunities for growth and competitive advantage. Firms in emerging markets are learning that focusing on the “base of the pyramid,” or BOP, is smart business that creates the relationships, brand loyalty, and innovations that will drive their long-term profitability.

So how is this done? How can doing business with consumers of minimal disposable income and no credit history be profitable? Mostly by focusing on business basics such as a) cost-effective production and distribution, b) market knowledge, c) customer service, and d) access to finance.

At the BOP where operating margins are low, profitability requires high volumes and efficient distribution networks. As customers are in hard-to-reach areas such as urban peripheries or rural villages, companies must seek creative solutions. Some have networks they can use but others must find new channels. Technology has been a great enabler. For example, mobile phone networks are being leveraged to provide not only voice and text but also services that facilitate banking, provide market information, and improve health and education.

However, truly reaching customers requires more than just access. Companies must develop relationships and loyalty, which means providing relevant, easy to use products and services. Often a small adjustment to a local market can make a big difference. For example, CEMAR, a power distribution company in one of Brazil’s poorest states, lengthened its billing cycle from one month to four months to facilitate payments and limit the travel times of customers living in distant rural areas.

Those at the BOP have limited or irregular cash flow and frequently need financing. As suppliers or retailers, they need credit to make purchases during the business cycle such as agricultural inputs, mobile phones, or inventory. As consumers, they need financing to pay for big-ticket items such as home improvements, health care, or education. Successful BOP companies consider supplier, retailer and customer financing as an extension of their core business, a part of the end-to-end solution they offer. They recognize that to prosper they must help their customers grow so that they continue to demand their products and services.

Companies can also offer capacity-building to improve their borrowers’ ability to pay — such as agricultural productivity and financial literacy training. For example, ECOM, a commodity trader working with coffee farmers in Central America, visits farmers regularly and issues credit within the limits of their production capacity.

The Indian firm Jain Irrigation, a leader in drip irrigation, explains:

“In order to do business with small farmers, we need to give them a complete solution which includes not only our product, but other agri-inputs, financing and knowledge. We are there every step of the way to ensure they know how to use our equipment and that it translates into higher yields. When their crop productivity increases, they become comfortable with our product, and that becomes the driving force behind our business.”

Companies with inclusive business models may also have to change mindsets and behaviors to convince potential customers, distributors, and suppliers. Customers may be unfamiliar with a product’s benefits; distributors may lack the skills to take on new lines; and producers may be cautious about converting to new crops or production practices. For small, cash-strapped companies and individuals such decisions involve substantial trade-offs and risks. Mi Tienda, a rural distribution company in Mexico that serves family stores, has had to work to convince owners that, with a little investment, their traditional enterprises can actually grow and improve their living standards.

New technologies can also be challenging for developing countries’ consumers. In Sri Lanka, the leading mobile phone provider, Dialog Telekom, has found it useful to work with local community groups and individual “infomediaries” to build the confidence and capacity users need to get the most out of their phones.

Successful companies in emerging markets recognize that they must grow together with their consumers, suppliers, distributors, or retailers. For instance, Manila Water Co., which has lowered water bills twenty-fold for its customers, has both increased efficiency and leveraged subsidies to reduce cost, and increased its customers’ ability to pay through creating microbusiness opportunities such as supplying water meter protectors and other hardware for company projects.

I could go on and on about this and mention surprising success stories about private companies reaching the BOP even in traditionally public domains such as education and health care. It is not a new concept to seek customers and markets where others have not tread, but it is accelerating as more countries, companies and individuals join the formal world economy. Let’s ensure that this happens in an inclusive way that benefits all, especially those most in need.

How can we ensure inclusive growth? Weigh in via Debating Europe, an official partner of the European Development Days.