Management guru C.K. Prahalad, has a favourite anecdote with which he begins to captivate his audience. He tells of how a multinational company introduced shampoos and detergents in small sachets, as opposed to pricey and cumbersome bottles, and managed to create an entirely new market for itself in rural India. It is the basis on which the professor rests his theory: About 80% of the people in the world, whom he calls the bottom of the pyramid (BoP), are underserved or unserved by the organized sector; this market, he argues, can be tapped if companies bring in products that this population segment could afford. The underlying claim is that by pricing consumer products lower,companies would be able to expand their markets so much that overall revenues will not suffer: The lower per unit price will be more than made up by scaling of total sales.
Now, the World Resources Institute, together with the International Finance Corporation, the private lending arm of the World Bank, has provided the empirical basis for the professor’s theory. The study, titled The Next 4 Billion: Market Size and Business Strategy at the Base of the Pyramid, using data from national household surveys in 110 countries, estimates the size of the global BoP market at $5 trillion (Rs205 lakh crore, at the current exchange rate). For India, the report estimates that companies can tap a market of Rs54.25 lakh crore by catering to the needs of people who earn less than $3,000 (around Rs1,23,000) a year. This number has been adjusted for purchasing power parity—which compensates for exchange-rate differentials by comparing the real purchasing power of different local currencies in terms of a fixed basket of goods—on the basis of data for 2005.
These are startling numbers, to say the least. In the case of India, the report is positing that by innovative pricing, companies could tap into a potential market size, which is substantially more than its current national income of around a trillion dollars (though this is at market rates, rather than purchasing power parity). But barring a few commodities such as shampoos, detergents and cell phones, companies, already nearing saturation levels in the urban segments, haven’t gone rushing in.
This should trigger a note of caution. Because, if there was indeed money to be made, then companies would have been there in a flash. Alternatively, the answer may be slightly more complex. The BoP argument, while right, may be addressing the solution only from one perspective. While it may be true that through innovative pricing, companies could seek out markets and thereby push overall earnings, it is also equally important that members of the potential market pack purchasing power—because only then will desire translate into demand.
Hence, while the BoP argument is both refreshing and innovative, it needs much more to become practice. Its beauty lies in its essence: that only market-based solutions can ensure sustainability of poverty alleviation efforts. It has to be win-win for all the stakeholders. There is only so much that social spending by the government can achieve. For a more broad-based, faster and, most importantly, sustainable approach to poverty alleviation, affordability has to go hand-in-hand with developing capacity—not just in income, but also in political power and education.
The additional risk of going down the BoP path is that its empirical basis will be, and is already, challenged. While the critics may be proved right eventually, they would have done a singular disservice by missing the woods for the trees.
Instead, the BoP report should be the starting point for ushering in a seemingly provocative, but radical approach to poverty alleviation in India and the rest of the world.
Is there really a fortune waiting for companies at the bottom of the pyramid? Write to us at firstname.lastname@example.org