bottom of the pyramid

7/21/2019 BOTTOM OF THE PYRAMID

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BOTTOM OF THE PYRAMID

most companies trying to do business wit te ! bi""ion peop"e wo ma#e upte wor"d$s poor %o""ow a %ormu"a "ong touted by bottom&o%&te&pyramid

e'perts( O)er products at e'treme"y "ow prices and margins* and ope togenerate decent pro+ts by se""ing enormous ,uantities o% tem- Tis ."owprice* "ow margin* ig /o"ume0 mode" as e"d sway %or more tan adecade* "arge"y on te basis o% Hindustan 1ni"e/er$s success in se""ing 2ee"brand detergent to "ow&income consumers in India-

Howe/er* as an abundance o% recent e'perience sows* te mode" as a %ata"3aw( It ine/itab"y re,uires an impractica" penetration rate o% te targetmar#et4o%ten 567 or more o% a"" consumers in an area-

8tories o% we""&meaning commercia" /entures tat cou"dn$t ma#e sustainab"e

pro+ts are a"" too common in "ow&income mar#ets- Despite acie/ing ea"typenetration rates o% 97 to :67 in %our test mar#ets* %or instance* Procter ;<amb"e cou"dn$t generate a competiti/e return on its Pur water&puri+cationpowder a%ter "auncing te product on a "arge sca"e in =66:- A"toug teprice4e,ui/a"ent to :6 1-8- cents a sacet4pro/ided a margin o% about967* on par wit tat o% te company$s products wor"dwide* P;< ga/e up onPur as a business in =669 and announced tat te sacets wou"d be so"d on"yto umanitarian organi>ations at cost-

DuPont ran into simi"ar prob"ems wit a /enture pi"oted %rom =66? to =66@ inAndra Prades* India* by its subsidiary 8o"ae* a g"oba" manu%acturer o% soy

protein disc"osure( I was te /enture$s initia" +e"d "ead and a%terward stayedon as a consu"tant- Intended to a""e/iate ma"nutrition and open a newmar#et %or te company* te /enture aimed to get moters in rura" areas andurban s"ums to coo# wit soy protein as part o% teir dai"y routine- Teproduct mi' consisted o% sma"" pac#ets o% protein iso"ate* wic pro/idedabout a"% o% woman$s a/erage dai"y protein needs* and a range o% pac#aged*soy&%orti+ed snac# %oods a"" priced be"ow 56 1-8- cents- Te iso"ate$s marginswere on a "e/e" wit tose o% 8o"ae$s core business&to&business products* butsa"es pro/ed to be inconsistent- 8a"es were stronger %or te snac# %oods* butte margins were signi+cant"y "ower4so "ow* in %act* tat te company wou"da/e ad to se"" ,uantities muc iger tan cou"d a/e been absorbed by

te communities witin reac o% te business- 1nab"e to see a pat topro+tabi"ity* 8o"ae c"osed te pi"ot-

As tese and oter /entures suggest* cost structures in "ow&income mar#etsare daunting( Operationa" e'penses* suc as distribution* are %re,uent"ymuc iger tan tose tat companies %ace in de/e"oped mar#ets- Inaddition* customer ac,uisition and retention %or new products o%ten demand



unusua""y intense4and cost"y4"e/e"s o% ig&touc engagement- To co/ertose ig costs* muc greater /o"umes are needed %or brea#&e/en-

Howe/er* se""ing to customers in rura" /i""ages and in s"ums scattered acrossurban centers is diCcu"t and ineCcient- Eac "oca" business unit is %orced to

generate its sa"es /o"umes %rom te consumer base "i/ing in a narrowgeograpica" range4o%ten ust a sma"" c"uster o% /i""ages in rura" areas* orse/era" neigboroods in te case o% "arger s"ums-

Any business tat starts o) needing a 567 or iger penetration rate is bui"ton a sa#y %oundation- At te bottom o% te pyramid* it$s a "osing proposition-Instead* companies see#ing to impro/e te "i/es o% te wor"d$s poor sou"d%ocus on a more rea"istic route to pro+tabi"ity( Tey need to e"e/ate grossmargins %ar abo/e te company a/erage by pusing down /ariab"e costs andboosting te price consumers are wi""ing to pay %or a unit o% product- Teya"so need to raise te price point %or a sing"e transaction- Tis combination o%

iger margins and iger price points increases te contribution4teamount o% money tat goes to co/ering +'ed and operating costs4generated %rom e/ery transaction-

Tat$s a ta"" order- But my e'perience "eading businesses in A%rica* India* andoter emerging economies sows tat it can be done- In tis artic"e* I wi""sow ow to bui"d a margin&boosting p"at%orm tat can e"p companies so"/ete cost prob"ems inerent in bringing needed products and ser/ices to /erypoor mar#ets- A %ew companies are a"ready using aspects o% a p"at%orm toimpro/e teir pro+tabi"ity prospects* and 8-- onson* te ouseo"d&products ma#er* as "aunced an integrated margin&boosting p"at%orm %or

se""ing insecticide in rura" <ana as part o% an e)ort to reduce ma"ariain%ection tere- Initia" resu"ts %or tat /enture sow te +nancia"s mo/ing inte rigt direction-

Why Low Prices and Margins Don’t Work

-G- Praa"ad was a "eader in %ocusing corporate attention on businessopportunities among consumers at te bottom o% te economic pyramid- His/iew tat /ery&"ow&income mar#ets are best reaced troug te "ow&price*"ow&margin* ig&/o"ume mode" as cast a "ong sadow on corporatestrategy in tese mar#ets- And* indeed* te mode" wor#s we"" i% twoconditions are met( One* te company can "e/erage an e'istingin%rastructure tat ser/es wea"tier customers to o)er a product or ser/ice topoor consumers and two* te consumers a"ready #now ow to buy and usete o)ering-

1ni"e/er$s 2ee" detergent bene+ted %rom tose conditions in India- Tecompany$s we""&estab"ised distribution and retai" canne"s* wic ser/ed



midd"e&c"ass consumers in accessib"e cities and surrounding areas* wereused to ser/e "ow&income consumers- Because 2ee" was so"d a"ongside tecompany$s oter products in te sma"" kiranagrocery sops %re,uented bybot midd"e&c"ass and poor consumers* te re/enues %rom te poorestconsumers needed to co/er on"y te incrementa" costs o% te new product-

Furtermore* detergents weren$t new to customers* so 1ni"e/er didn$t a/eto spend money creating demand %rom scratc and educating customersabout ow to use te product- Tan#s to te e'isting distribution networ#and consumers$ %ami"iarity wit te product category* 1ni"e/er cou"d a)ordto se"" 2ee" %or 567 "ess tan its oter detergents-

Bot conditions a"so e"d in te case o% Mani"a 2ater in te Pi"ippines* awe""&#nown e'amp"e o% success in a bottom&o%&te&pyramid mar#et- Tecompany$s pipes and centra" metering points pro/ided water to ? mi""ionmainstream customers in Metro Mani"a$s east ser/ice >one- In te "ate :6s*an additiona" = mi""ion "ow&income peop"e "i/ing in and around te city were

added to te customer base* wit re"ati/e"y sma"" incrementa" in/estments-

Te prob"em wit tis mode" is tat opportunities to "e/erage e'istingin%rastructure are usua""y "imited* and most products so"d by bottom&o%&te&pyramid /entures are new to te target consumers- In %act* a%ter a =66re/iew o% more tan =J6 mar#et&based /entures aimed at a""e/iatingpo/erty* Monitor <roup reported tat it ad %ound on"y a .and%u"0 tat wereab"e to operate on a sca"e "arge enoug to be commercia""y /iab"e- E/en1ni"e/er as been unab"e to reproduce 2ee"$s +nancia" success wit Proect8a#ti* a /enture it "aunced in =666 in rura" India* were te company adno in%rastructure-

Te rea"ity is tat most bottom&o%&te&pyramid /entures stumb"e o/er tedua" obstac"es o% /i""age sca"e and ig&touc sa"es-

Village scale is optimal but capital intensive.

In emerging mar#ets$ rura" areas and santytowns* roads are usua""y narrow*un"it* unpa/ed* and ea/i"y poto"ed* and te ig cost o% "oca"transportation traps consumers were tey "i/e- I% a company tries to e'pandbeyond a /i""age or a sma"" c"uster o% /i""ages* margina" costs rise rapid"y andeCciency drops- 8o"ae* %or instance* tried to e'pand %rom its origina" group o%

target /i""ages to more&distant areas* but tra/e" time cut signi+cant"y intose""ing time and pused up costs- Te incrementa" sa"es cou"dn$t be usti+ed-

Te Ko"ume <ame( A Losing Proposition

E'perience in most bottom&o%&te&pyramid mar#ets contradicts tecon/entiona" wisdom tat /ery&"ow&priced consumer products can bepro+tab"e at ig /o"umes-



Find tis and oter HBR grapics in ourVI!"L LI#$"$%

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umerous /entures in "ow&income areas operate at a /i""age sca"e- Ta#e IT$se&oupa" initiati/e* wic pro/ides rura" Indian %armers wit on"ine mar#etand agricu"tura" data- Eac internet #ios# ser/es %armers "i/ing witin ust a+/e&#i"ometer range- Or consider Danis mu"tinationa" <rund%os$s c"ean&water&dispensing system- Eac Li%eLin# ser/es ust a sing"e /i""age-

apita" e'penditures associated wit a distributed business mode" arein/ariab"y iger per unit o% output- Eac "oca" operation needs wareousespace* production and oCce e,uipment* a security guard* uti"ities* and so on-Moreo/er* e/ery rep"ication o% te business re,uires a %u"" organi>ationa"team* and recruitment and de/e"opment o% tese emp"oyees is e'pensi/eand time&consuming-

&igh'touch sales and marketing are costly.

https://hbr.org/visual-library/2012/06/the-volume-game-a-losing-proposition

https://hbr.org/visual-library/2012/06/the-volume-game-a-losing-proposition



onsumers at te bottom o% te pyramid "ac# wat antropo"ogists ca"" a.cu"tura" competence0 %or product consumption4tey aren$t accustomed tousing and e'perimenting wit products- Te adoption o% new products entai"sa steep "earning cur/e %or tem- onse,uent"y* sa"es and mar#eting e)ortsin/o"/e dep"oying a substantia" number o% peop"e wit sa"es s#i""s and deep

product #now"edge4an e'pensi/e proposition- Finding ta"ent is an e/enbigger ca""enge in "ow&income areas* were i""iteracy and innumeracy arerampant-

During te mid&=666s* %or e'amp"e* 8ri Lan#an te"ecom pro/ider Dia"og adto create a ig&touc business mode" bui"t around /i""age&based women.in%omediaries04entrepreneurs wo %unctioned as coaces4becausewitout tem* adoption was /ery "ow-

Operating at a /i""age sca"e and using a ig&touc sa"es process a"so means"ower growt- De"ayed cas 3ows can ta#e a big bite out o% te net present

/a"ue o% an in/estment- Tat$s a prob"em %or bottom&o%&te&pyramidin/estments* because discount rates %or ris#y proects in emerging mar#etscan top 567-

Margin'#oosting olutions

To co/er te iger costs o% operating in "ow&income mar#ets and to wor#around te restrictions o% s"ower growt and "imited /o"umes* companiesneed to generate a ig contribution %rom e/ery sa"es transaction- Tatre,uires a tree&pronged margin&boosting approac( "oca"i>ed base productsso"d as a bund"e* an enab"ing ser/ice* and customer peer groups-

Locali(e and bundle base products.

A "oca"i>ed base product is an o)ering wose +na" processing prior to sa"e4suc as di"ution or combination wit oter components or ingredients4isdone as c"ose to te target mar#et as possib"e- Te company sa/es on "aborcosts because "oca" wage rates are "ow- 8o"ae was ab"e to doub"e grossmargins by getting repeat customers to use teir own re+""ab"e containerswen tey bougt bu"# protein but it wasn$t enoug to sa/e te /enture-

Bund"es sa/e consumers time and money in gaining access to neededproducts and create a ricer consumer e'perience wose tota" /a"ue isgreater tan te sum o% te parts- At te same time* bund"es a""owcompanies to se"" more per transaction- For instance* a "ow&income consumercan more easi"y "ay out te money %or a .body care #it0 tat contains se/era"needed products suc as sampoo* tootpaste* and oter products tan payte same amount %or a sing"e product* "i#e a "arge&si>e sampoo-



Ma#ers o% so"ar&powered "igts4%or e'amp"e* D-Ligt and Duron4pro/idebot "igt and oter needed %unctiona"ity* suc as a capacity %or recargingce"" pones* in teir products- osmos Ignite$s MigtyLigt integrates aportab"e radio* and te company is considering adding more %unctiona"ity*suc as te abi"ity to run battery&operated de/ices and water puri+ers-

)*er an enabling service.

To sustain ig margins* it is a"so necessary to o)er a ser/ice tat engagescustomers and gi/es tem te #now"edge and s#i""s needed to ma'imi>eproducts$ %unctiona"ity- A c"ose re"ationsip between consumers and ser/icepro/iders a"so adds intangib"e /a"ue to te consumer e'perience* a""owingcompanies to carge a premium-

Enab"ing ser/ices engage customers and gi/e tem te #now"edge and s#i""sneeded to get te most out o% products-

For e'amp"e* %or about N:! a wee#* Me'ico&based cement manu%acturerEME se""s "ow&income %ami"ies a ser/ice tat e"ps tem bui"d teir ownomes more e)ecti/e"y and at "ower cost by pro/iding access to inspections*wareousing o% materia"s* and te ad/ice o% an arcitect- Te price inc"udeste company$s cement products-

+ultivate customer peer groups.

Li#e a sewing circ"e or an in/estment c"ub* a customer peer group is a c"ose&#nit association o% peop"e wo sare an identity4but in tis case* it$s bui"t

around a product- 8uc groups e'tend te ig&touc bene+ts o% an enab"ingser/ice* as members e"p one anoter adopt new bea/iors and mind&setstat ma#e te product more bene+cia"-

Margin&Boosting P"at%orms

Acie/ing sustainab"e margins in "ow&income mar#ets re,uires integratingtree common approaces4"oca"i>ing and bund"ing products* o)ering anenab"ing ser/ice* and cu"ti/ating customer peer groups4into a coerentstrategy-

#undled Products

Pac#aging se/era" product %unctions togeter pro/ides a ricer e'perience%or customers and impro/es teir access to needed products4and at tesame time a""ows companies to se"" more per transaction- For instance*MigtyLigts$ so"ar&powered "igts o%ten pro/ide oter %unctions suc aspone recarging-



,nabling ervices

8er/ices can increase te /a"ue o% a product set %or consumers- By pro/idingarcitectura" and oter ser/ices wit te sa"e o% cement* EME e"psMe'ican consumers bui"d better omes wit its products wi"e boosting te

gross margin per transaction-

+ustomer Peer -roups

Associations o% customers pro/ide additiona" /a"ue and e"p aggregate sa"es*tereby reducing costs- <rameen Ban#$s peer groups in Bang"ades e"pmembers "earn about +nancing and encourage time"y repayment o%micro"oans-

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Peer groups a"so dri/e up te si>e o% sa"es transactions( A sing"e sa"eaggregates te demand o% many customers- <rameen Ban#* temicro+nance ban# in Bang"ades* is we"" #nown %or its use o% peer groups(8e"%&%ormed c"ubs o% +/e to :6 peop"e* usua""y women* sare responsibi"ity %ormicro"oans- A group wi"" typica""y gi/e itse"% a name and meet regu"ar"y tocec# on members$ businesses- <rameen boosts te "oan amounts gi/en outper transaction by interacting wit te "ending circ"e* not indi/idua"borrowers- It attributes its 7 repayment rate in "arge part to te se"%&imposed discip"ine and mutua" "earning induced by te peer&group approac-

"iming to $educe Malaria in $ural -hana

2i"e 8o"ae* EME* and <rameen a/e seen te /a"ue o% using indi/idua"aspects o% te margin&boosting p"at%orm* a new proect in <ana by teg"oba" consumer products company 8-- onson4a "eader in ouseo"dc"eaning* pest contro"* and air care products4as imp"emented a p"at%ormwit a"" its parts- At te time o% tis writing* te proect* wic I am wor#ingon in partnersip wit orne"" 1ni/ersity* 8-- onson* and te Bi"" ; Me"inda<ates Foundation* was tree monts into a :9&mont pi"ot- Te ear"y resu"tsare promising- Here$s a snapsot o% te business-

he goal/

To reduce rates o% ma"aria in%ection by getting "ow&income consumers to use8-- onson$s mos,uito contro" products as part o% teir dai"y routines- Teproect is part o% te company$s broader socia" mission to de/e"op consumer&"e/e"* mar#et&based so"utions to endemic ea"t prob"ems among at&ris#



popu"ations- Tese so"utions are meant to comp"ement traditiona"pi"antropic and aid&based e)orts-

he market/

Te pi"ot$s target mar#et consists o% rura" /i""agers* most"y subsistence%armers- Dai"y spending by tese %ami"ies ranges %rom N:-96 to N9- one o%8-- onson$s product "ines* inc"uding pest contro"* are part o% teseconsumers$ dai"y routines-

he numbers challenge/

Te costs o% te /i""age&sca"e* ig&touc mode" were e'pected to be ig-Gey /ariab"es inc"uded te number o% sa"espeop"e needed to ser/ice te areae)ecti/e"y* depreciation costs %or motorbi#es used by sa"espeop"e on ruggedroads* and mar#eting e'penses re,uired to educate and support rura"

consumers- Mar#et&penetration rates were e'pected to be re"ati/e"y "owbecause o% te no/e" nature o% te o)ering and te "imited customer "oadtat eac sa"esperson cou"d support- Initia" proections re/ea"ed te need %ora price point tat was we"" abo/e te discretionary income o% te targetgroup* at a gross margin %ar iger tan wat te company re,uired %romtraditiona" mar#ets-

he solution/

Te team wor#ed bac#ward %rom te numbers to cra%t a business concepttat wou"d yie"d a contribution per transaction necessary %or pro+tabi"ity4a

critica" component %or any sustainab"e business so"ution- Te resu"tingo)ering4a membersip c"ub %or omema#ers ca""ed 2ow4integrates tetree #ey e"ements essentia" to boosting gross margins and price points atte bottom o% te pyramid-

&omemaker gi0t basket/

"ub members recei/e a ome care .gi%t bas#et0 containing %our 8-- onsonproducts* inc"uding mos,uito contro" products* in bu"# %ormat- Te companypro/ides eac c"ub capter wit branded* reusab"e containers %or periodicre+""ing-

" homemakers’ club/

Membersip is o)ered as a ser/ice tat enab"es customers to care %or teiromes and %ami"ies more e)ecti/e"y- It turns te ob o% ome care into asocia" e'perience by connecting omema#ers in a /ariety o% ways- Membersta#e part in coacing sessions tat are designed to be %un and interacti/e*



co/ering topics ranging %rom ma"aria pre/ention to ome&c"eaning bestpractices- "ub members ta"# about teir own e'periences and sareso"utions to e/eryday prob"ems- A omema#er&o%&te&year contest and mini&%esti/a"s bring togeter member groups %rom neigboring /i""ages to eat*dance* socia"i>e* bui"d connections* and ce"ebrate one anoter$s e'periences-

Tese connections a/e "ong been a /a"ued part o% <anaian cu"ture- Fore/ery tree consecuti/e monts o% membersip* participants earn "oya"tyrewards made up o% common products /a"ued by %arming %ami"ies-

Local chapters/

Membersips are so"d not to indi/idua"s but to sma"" groups o% omema#erstat come togeter to %orm a capter- Eac capter pays a mont"y %ee onbea"% o% a"" its members-

$esults/

To date* resu"ts are trending in te rigt direction- In eac o% te +rst treemonts o% te pi"ot* sa"es a/e outpaced proections* and costs a/e beenconsistent wit initia" estimates- Te sa"es numbers indicate success%u"consumer adoption o% 2ow products tat e"p pre/ent ma"aria-

1e2t steps/

I% resu"ts remain strong* te ne't step wou"d be to rep"icate te businessmode" rapid"y enoug to pay bac# te initia" in/estment and to %urter teproect$s socia" mission- <i/en te importance o% so%t s#i""s to te sa"es

team$s e)ecti/eness* ma#ing te recruitment and training process morestandardi>ed and tere%ore rep"icab"e wi"" be a %oca" point-

I% companies wis to "aunc 3ourising /entures capab"e o% trans%orming te"i/es o% mi""ions o% "ow&income peop"e across te de/e"oping wor"d* tey mustget bac# to basic business tenets- Howe/er "audab"e its mission* a businessbui"t on unrea"istic e'pectations wi"" %ai" ust as sure"y at te bottom o% tepyramid as in a de/e"oped mar#et-

Because te ig costs o% doing business among te /ery poor demand aig contribution per transaction* companies must embrace te rea"ity tatig margins and price points aren$t ust a top&o%&te&pyramid penomenontey$re a"so a necessity %or ensuring sustainab"e businesses at te bottom o%te pyramid-

bottom of the pyramid

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