OLD WINE IN NEW BOTTLES

As Prahalad articulates how the private sector can exploit profitable opportunities by tapping BOP markets, he gives the impression that this is a revolutionary idea. But companies have been selling to the BOP in one form or another for several decades.

Similarly, as he describes how microfinance is useful for tapping the BOP market, it seems to be a new model for serving the poor. But microfinance has long been recognized as an efficient way to eradicate poverty. The Grameen Bank, Muhammad Yunus’s landmark innovation, attracted worldwide attention many years before the BOP concept came to light. Less famous but larger is Bank Rakyat Indonesia, which has the world’s largest sustainable micro-banking system and has held a dominant position in commercial microfinance in Indonesia for more than 20 years (Robinson, 2002, 2004). Furthermore, organizations such as Amul, the State Bank of India, and Nirma have long realized the importance of serving BOP customers. The State Bank of India (SBI), a public sector bank, has been providing banking services for two centuries, and has more than 8000 branches all over the country. It has been serving rural poor customers by providing bank loans for agriculture and other purposes and offering personal banking products. The sheer size of its network of branches helped it reach out to rural customers. In addition to SBI, other national banks and rural cooperative banks have been serving rural and BOP customers, with services designed specifically for them. At some banks, a villager can open an account with as little as Rs 500 ($12.50), whereas MNC banks may require a minimum balance of Rs 5000 ($125) or more, well beyond the capacity of most BOP customers.

Many other organizations such as the National Bank for Agriculture and Rural Development (NABARD), other nationalized banks, and Nirma have been serving BOP customers for decades. These facts make it difficult to accept Prahalad’s contention that few initiatives have focused on developing BOP markets.

Is Sachet(small packing) Marketing Revolutionary?

BOP proponents mention sachets (small packets) as an innovation that has delivered many products to BOP customers. Prahalad suggests that if BOP customers “don't have lump sums to buy 20 ounces of shampoo at one time,” a company should “do what Unilever did in India: Sell single servings of shampoo so the cost structure matches what they can afford” (Fast Company, 2005, p.25). In fact, sachets were introduced in 1976, not by HUL but by CavinKare, a local South-India based company, with its ‘Velvet’ brand (Ranganathan, 2003).

In 1999, CavinKare came up with another pricing innovation: it launched a 4-ml sachet of Chik shampoo priced at 50 paise (1.25 cents). The launch was a great success: Chik’s market share jumped from 5.61 percent in 1999 to over 23 percent in 2003. It became the largest selling brand in rural markets. As Chik’s volume and market share grew rapidly, HUL saw the potential of the market it had always ignored—as well as its own vulnerability. It responded by launching 50-paise and one-rupee sachets of its Lux, Clinic Plus and Sunsilk brands. HUL had always viewed rural consumers as a low-margin, inaccessible segment. It entered the BOP market for shampoo primarily because of its potential vulnerability, not as part of a planned strategy to serve poor customers. Considering all these cases, then, it is simply incorrect to give HUL the status of a pioneer in tapping BOP markets, as the literature on BOP does.

Small Isn’t Always Beautiful

BOP proponents view sachets and other small packages as an ideal way to tap low-income markets. Prahalad (2005, p.16) argues that because small packages are more affordable, they encourage consumption and provide a choice for the poor. But the empirical evidence does not support his contention. An ACNielsen study on rural markets in India revealed that, for several products, the best-selling package size is the same across rural and urban areas (Dobhal and Das Munshi, 2005).4 For products including biscuits, jam, washing powder, sanitary napkins, and milk powder, the smallest available packages are not the largest contributors to the total volumes of products sold in rural areas. The two exceptions are shampoo and razor blades; for these two products the smallest packages do account for the largest share of the total volumes sold. In the cases of jam and milk powder, larger packages (e.g. 500 g) are better sellers even though smaller packages are available (e.g., 12 g in jam and 3 g in milk powder).
If Prahalad and Hart (2002, p. 10) are correct in their argument that the poor “look for single-serve packaging,” then we would expect small-size packages to be the most popular for most products in rural markets, not just for shampoo and razor blades. The smaller packages of shampoo and razor blades also perform better in urban markets as well as rural ones. For shampoo this is probably true because shampoo sachets offer better value than larger packages. With sachets, consumers pay lower prices per unit volume. For example, Sunsilk Black shampoo in sachets costs approximately 25 paise (.6 cents) per ml. On the other hand, shampoo in a bottle costs approximately 5 paise (1.25cents) per ml (a 200-ml bottle costs about Rs99, or $2.50). This is true for almost all the major shampoo brands in India (Krishnan, 2001). The artificial price differential actually contributes greatly to the popularity of shampoo sachets. Another study in India, by LG Healthcare, questions whether sachets are valuable for marketers: although they have helped increase penetration, they have also led to a decrease in overall consumption (Economic Times, 2004).

For most products, the logic of serving the poor by simply offering smaller packages may not be as workable as Prahalad argues. To make small packs more affordable, companies must keep their unit cost lower compared to larger packs. This does not make economic sense: it is by selling larger packages that companies can reduce their processing and transaction costs, not the other way around. Companies usually reward consumers who buy larger, or economy-size packages, through low-unit pricing, because of their associated cost savings. Low-price shampoo sachets are an atypical case or an unusual distortion of the market. In fact, companies are trying to persuade consumers to move up from sachets to bottles; though sales volume has risen because of sachets, the profits and revenues have dropped (Soaps, Detergents & Toiletries Review, 2003).

Fortune at the Bottom of the Pyramid-2

THE FORTUNE: AT THE BOTTOM OR THE MIDDLE OF THE PYRAMID?

Before looking at the larger questions, it’s important to estimate the true size of the BOP market. Prahalad and Hart (2002, p. 2) refer to the 4 billion people in Tier 4 as the bottom of the pyramid. But certainly income inequality is widespread across the developing countries where the BOP population lives. Many developing countries, especially the least developed countries (LDCs), are characterized by extreme poverty. Many factors make it unrealistic for the private sector to participate in economic development in most LDCs. Among them are inefficient regulation, widespread corruption, lack of basic infrastructure, extreme poverty, and the underdeveloped financial and banking structure. In these countries, people’s most basic needs must be fulfilled before anyone can look at them as profitable BOP markets. The success stories of MNCs serving poor customers cited in the BOP literature are predominantly in fast-growing economies such as India, where the GDP per capita remains low, as well as in countries like Brazil and Mexico with higher per-capita income. Not surprisingly, BOP advocates fail to provide cases of MNCs serving the BOP population in LDCs.

                                        World Bank data can be used to estimate the size of the BOP market. In 2005, 2.4 billion people lived in low-income countries (Table 1), and 751.8 million people of those lived in LDCs where the per capita gross national incomes averaged US $378.2. Realistically, these very low income earners at the extreme bottom of the pyramid are not likely to be profitable customers for MNCs. (See Table 2 for comparative figures for selected countries among the LDCs and Newly Industrializing Economies). In 2001, 1.1 billion people were living on less than $1 a day which the World Bank considers to indicate extreme poverty. If we enlarge the base, a total of 2.7 billion people live on less than $2 a day (World Bank, n.d.). The 1.1 billion people living in acute poverty, and struggling to meet even their basic needs, cannot possibly be viewed as a profitable market for large corporations. Whatever fortune does exist is only at the lower middle and middle of the pyramid, definitely not at the bottom. When Prahalad and Hart (2002, p. 2) talk about “doing business with the world’s 4 billion poorest,” they count the entire population of both developing countries and least-developed countries. Depending on the products and services and economic conditions prevailing in poor countries, a significant portion of this population will be totally out of the direct reach of MNCs. MNC involvement in LDCs can be viable and fruitful only after these countries reach a certain threshold of economic development.

                         Karnani (2007) provides an interesting contradiction to Prahalad’s estimate that the BOP market size is $13 trillion at purchasing power parity (PPP)2. He construes that as a gross overestimation. Using the World Bank estimate of $1.25 a day as the average consumption of the 2.7 billion poor and total poor, he calculates the BOP market size as $1.2 trillion. He also points out that MNCs would repatriate profits at actual currency exchange rates, not at PPP. Taking this factor into account, he estimates the BOP market size as less than $0.3 trillion, which is just 2.3 percent of Prahalad’s estimate of $13 trillion.

Fortune at the Bottom of the Pyramid:-1

                                                                   Abstract

The Bottom of the Pyramid (BOP) has emerged as one of the dominant ideas in business. Cognizant of the overwhelming attention BOP has attracted and its potential impact on the billions of the poor and on managerial practices, the author analyzes the different aspects of BOP approach on how large corporations can serve low income customers profitably. An attempt is made to provide an alternate perspective on the BOP concept. I argue for the facilitation of selective consumption by the poor by avoiding their undesirable inclusion (marketing products that are not likely to enhance their wellbeing or products that are likely to be abused by them) and exclusion (not offering products that are likely to enhances their wellbeing) in target market selection decisions by the private sector organizations. A framework is presented for assessing the appropriateness of large corporations’ participation in BOP markets. I also emphasize the need to strengthen the role of the poor as a producer for rapid poverty alleviation.

The Bottom of the Pyramid (BOP) has emerged as a dominant concept in business, propelled by C.K Prahalad’s (2005) The Fortune at the Bottom of the Pyramid. Given the enormous attention the concept has attracted, it has the potential to impact the world’s billions of poor people—as well as the managerial practices of multinational corporations. This double potential makes it important to analyze how large corporations can serve low-income customers profitably.

Prahalad and Stuart Hart argued in 2002 that multinational corporations (MNCs) have only targeted customers at the upper end of the economic pyramid and have ignored BOP customers, assuming them to be inaccessible and unprofitable. Prahalad and Hart argued further that MNCs should view BOP markets as an unexploited opportunity and be proactive in fulfilling the needs and wants of low-income consumers. To tap the vast markets at the BOP, MNCs must specially design and develop quality products and services, or they must select some to alter and make available at lower cost. Serving BOP customers is a profitable opportunity for corporations. It is also a social imperative, given that two-thirds of the human population (about four billion people) are at the bottom of the economic pyramid. By addressing the BOP, they say, MNCs can curtail poverty and improve the living conditions of the world’s poorest.

In these arguments, however, BOP proponents do not take a holistic perspective. Several weaknesses in the BOP theory often go unacknowledged. Considering the far-reaching implications of these proposals, the underlying premises demand carefulscrutiny. Several questions need to be answered: Is there really a ‘fortune’ at the bottom of the pyramid? If so, can MNCs tap it as easily as BOP proponents suggest? And—is there also a fortune for the bottom of the pyramid?

In answering these questions, I offer an alternative perspective on the BOP concept: I believe that we must help the poor to become selective consumers. That is, we must avoid both undesirable inclusion, and exclusion. Undesirable inclusion means marketing products to the BOP that are not likely to enhance their wellbeing or that they are likely to abuse. Exclusion means failing to offer them products or services that are likely to enhance their wellbeing. I also suggest a framework to assess when it is appropriate for large corporations to participate in BOP markets, and I emphasize the need to strengthen poor people’s roles as producers, rather than merely consumers

What is Bottom of the pyramid?

In economics, the bottom of the pyramid is the largest, but poorest socio-economic group. In global terms, this is the four billion people who live on less than $2 per day, typically in developing countries. The phrase “bottom of the pyramid” is used in particular by people developing new models of doing business that deliberately target that demographic, often using new technology. This field is also often referred to as the "Base of the Pyramid" or just the "BoP".

The more current usage refers to the 4 billion people living on less than $2 per day, as first defined in 1998 by Professors C.K. Prahalad and Stuart L. Hart. It was subsequently expanded upon by both Prahalad in 2004 in The Fortune at the Bottom of the Pyramid and by Hart in 2005 in Capitalism at the Crossroads.
Prahalad proposes that businesses, governments, and donor agencies stop thinking of the poor as victims and instead start seeing them as resilient and creative entrepreneurs as well as value-demanding consumers. He proposes that there are tremendous benefits to multi-national companies who choose to serve these markets in ways responsive to their needs. After all the poor of today are the middle-class of tomorrow. There are also poverty reducing benefits if multi-nationals work with civil society organizations and local governments to create new local business models.

Micro-credit
As The Economist reported on August 11th, 2005, one example of “bottom of the pyramid” is the growing microcredit market in South Asia, particularly in India. With technology being steadily cheaper and more ubiquitous, it is becoming economically efficient to “lend tiny amounts of money to people with even tinier assets”. The firm discussed in the article, Sa-Dhan, argues that the availability of credit to the poor “helps the poor but allows banks to increase their business”.