marketing channel strategy in rural emerging markets ben neuwirth

5/24/2018 Marketing Channel Strategy in Rural Emerging Markets Ben Neuwirth

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Marketing Channel Strategies in

Rural Emerging Markets

Unlocking Business Potential

By Benjamin Neuwirth

Benjamin Neuwirth, Kellogg School of Management,[email protected]
mailto:[email protected]:[email protected]:[email protected]:[email protected]



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EXECUTIVE SUMMARY

In his landmark book The Fortune at the Bottom of the Pyramid, C.K. Prahalad describes theprofits that can be earned by selling products to Bottom of the Pyramid customers. While thereis truth to this, companies face unique challenges when operating in the rural regions ofemerging markets where many of these customers live. For example, the consumer population isdispersed over a wide geographic area, transportation infrastructure is often poorly developed,and many consumers have sporadic and extremely low incomes.

This paper examines these challenges from a marketing channel perspective. The fundamentalquestion is: How can companies entering into rural emerging markets design a marketingchannel strategy that meets the needs of customers and allows for the long-term profitable

success of the business? I begin answering this question by examining common challenges thatcompanies operating in this environment face. Each challenge is accompanied by examples ofcompanies that have solved the problem in a unique way. Then, I develop a generalizedframework for designing marketing channels in rural emerging markets. Finally, I apply theframework to d.light Design, a company that manufactures and sells solar lanterns in India andAfrica and that I worked at in the summer of 2011.



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TABLE OF CONTENTS

Introduction 5

Challenge: Distribution Network Design 6

Fast Moving Consumer Goods: Hub-and-Spoke 7Consumer Durables: Aggregate Demand in Population Centers 9

Challenge: Distribution Network Logistics 10Corporate Partnerships 13Local Non-Profit Organizations 13Business-to-Business Sales 14

Challenge: Affordability 15

Small and Cheap 16Small-Payment Financing 16

Self Help Groups 17Layaway 18Dont Target the BoP 19

Challenge: Lack of Brand Trust 19Commercial Brands 21Local Non-Profit and Individual Brands 22

Challenge: Lack of Education 23

Challenge: After Sales Service 25

A Framework for Marketing Channel Strategy 26

in Rural Emerging Markets

Activating Customers 27Delivering Products 28Maintaining Customers 29

Note on the Social Function of Companies 29

Operating in Rural Emerging Markets

d.light Design in India 30d.light Design Background 30d.light Enters the Indian Market 31d.light Tries Again in Uttar Pradesh 32

d.light Design India and the Framework for Marketing 34

Channel Strategy in Rural Emerging Markets

Delivering Products: Distribution Network Design 34Delivering Products: Distribution Network Logistics 35



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Activating Customers: Brand Trust 35Activating Customers: Affordability 36Activating Customers: Education 36Maintaining Customers: After-Sales Service 36

Conclusion 37

Appendices 38



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INTRODUCTIONThe majority of emerging market nationscontinue to have largely rural, agrarian-based economies.

1In India alone, of the one

billion residents counted in the 2001 census,

roughly 720 million people lived in ruralareas.2Delivering products and services intothis market presents both unique challengesand enormous opportunities for companies.

In his book Fortune at the BoP, authorC.K. Prahalad challenges corporations andentrepreneurs to realize the enormous profitpotential that lies in emerging markets.Prahalad writes:

If we take nine countriesChina,India, Brazil, Mexico, Russia,Indonesia, Turkey, South Africa, andThailandcollectively they arehome to about 3 billion people,representing 70 percent of thedeveloping world population. In PPPterms, this groups GDP is $12.5trillion, which represents 90 percentof the developing worldThis is nota market to be ignored.3

While there may be profit potential, thequestion remains as to how companies cansuccessfully tap into it. This paper examinesone particular part of this question: How cana company attempting to enter a rural regionin an emerging market with a new productor service and an unknown brand make aprofit? This paper will examine the abovequestion from a marketing channelperspective.

1Vital Wave Consulting, 10 Facts About Emerging

Markets,

http://www.vitalwaveconsulting.com/pdf/10%20Fac

ts%20about%20Emerging%20Markets.pdf(2008).22001 Indian Census,

http://censusindia.gov.in/Census_Data_2001/India_

at_glance/rural.aspx,(2001).3C.K. Prahalad, Fortune at the Bottom of the

Pyramid(New Jersey: Pearson Publishing, 2005).

In their book Marketing Channels (7thedition), authors Anne Coughlan and ErinAnderson give the following definition for amarketing channel:

A marketing channel is a set ofinterdependent organizationsinvolved in the process of making aproduct or service available for useor consumption.4

The nature of rural emerging markets makesbuilding a successful marketing channelchallenging. The population is widelydispersed, transportation infrastructure is

poor or non-existent, household incomes arelow and sporadic, and traditional methods ofcreating brand trust and awareness will notwork.

I propose that an entering companyneeds to design marketing channels that bothsuccessfully deliver products to customers ina capital-efficient way, and that unlock thelatent desire that customers have to purchaseand receive those products. In this manner,

not only are transporters and warehousespart of a successful marketing channel, butso are entities that educate customers aboutproducts and services they may not knowthey need, as are the financial programs thathelp customers finance their purchases. Thismeans that, in the rural emerging marketcontext, Coughlan and Andersonsdefinition of marketing channels should beextended to include the interdependentorganizations and programs that enable

customers to use and consume in the firstplace.

This paper begins by examining theunique challenges that a company will face

4Anne Coughlan and Erin Anderson, Marketing

Channels (7th

edition)(New Jersey: Prentice Hall,

2001), 4.
http://www.vitalwaveconsulting.com/pdf/10%20Facts%20about%20Emerging%20Markets.pdfhttp://www.vitalwaveconsulting.com/pdf/10%20Facts%20about%20Emerging%20Markets.pdfhttp://www.vitalwaveconsulting.com/pdf/10%20Facts%20about%20Emerging%20Markets.pdfhttp://censusindia.gov.in/Census_Data_2001/India_at_glance/rural.aspxhttp://censusindia.gov.in/Census_Data_2001/India_at_glance/rural.aspxhttp://censusindia.gov.in/Census_Data_2001/India_at_glance/rural.aspxhttp://censusindia.gov.in/Census_Data_2001/India_at_glance/rural.aspxhttp://censusindia.gov.in/Census_Data_2001/India_at_glance/rural.aspxhttp://www.vitalwaveconsulting.com/pdf/10%20Facts%20about%20Emerging%20Markets.pdfhttp://www.vitalwaveconsulting.com/pdf/10%20Facts%20about%20Emerging%20Markets.pdf



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when building a marketing channel in ruralemerging markets. Each challenge isdiscussed and examples are given ofcompanies that have solved the challenge increative ways. Then, I present a framework

that new companies can use when they arein the process of building their ownmarketing channels in rural emergingmarkets. Finally, I apply the framework tothe case of d.light Design, a company thatmanufactures and sells solar lanterns in ruralemerging markets. I worked at d.lightDesign in the summer of 2011, and theissues I witnessed while working there werethe inspiration for this paper.

It should be noted that while I includeexamples and data from rural emergingmarkets located all over the world in thispaper, the majority of the examples comefrom India, the market with which I have themost familiarity.

CHALLENGE: DISTRIBUTION

NETWORK DESIGN

When a company decides to sell its products

and services in a rural emerging market, oneof the most important decisions it will makeis the design of its distribution network. AsChopra and Meindl write in their bookSupply Chain Management, Aninappropriate network can have significantnegative effects on the profitability of thefirm.5While a company operating in adeveloped market needs to carefullyconsider its distribution network design inorder to achieve profitability, companies

operating in rural emerging market faceparticular challenges because of the lowdensity of the population and poorlydeveloped transportation infrastructure.

5Sunil Chopra and Peter Meindl, Supply Chain

Management (Fourth Edition), (New Jersey: Prentice

Hal, 2010), 78.

The majority of populations in emergingmarkets continue to live in rural areas. InIndia for example, according to the 2001census, 72% of the countrys populationresides in over 600,000 villages. Of those

villages, 85% have less than 5,000 people inthem, meaning that 612 Million people inIndia live in low-density areas.

6As a

consequence of the low population densitycompanies may be faced with continuouslyescalating inventory holding andtransportation costs as they are forced tostock and manage sales points in thousandsof villages to meet customer expectations forproduct availability.

Exacerbating the problems associatedwith product distribution into lowpopulation density areas, rural emergingmarkets also often have poorly maintainedtransportation infrastructure, if indeed theinfrastructure exists at all. The problems oftransportation in rural emerging markets hasto be experienced to be understood, so I willoffer several anecdotes from India in placeof hard statistics:

While in India I traveled by car from

Varanasi to Shahganj in the rural districtof Jaunpur. The road connected severallarge towns and small cities, andalthough the road was officiallydescribed as being paved, the road wasactually in horrible disrepair. It took me5 hours to travel 100 kilometers,which is an average speed of 18kilometers per hour.

While completing market research inanother rural district, I was asked to

travel to a large village severalkilometers away. However, when it wasascertained that I was traveling by carthe invitation was rescinded due to the

6Pradeep Kashyap and Siddhartha Raut, The Rural

Marketing Book, (New Delhi: Dreamtech Press,

2005), 190.



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impassibility of the village road toanything but motorcycles and bicycles.

In his book In Spite of the Gods,author Edward Luce described hisvoyage by car to a village not far outside

of Delhi, the most metropolitan Indiancity: The village is about a three-hourdrive from Delhi along potholed roadsthat are chock-a-block with scooters,bicycles, donkey carts and antiquetractors.7(See Exhibit 1 for an exampleof the traffic conditions in rural Indianvillages)

To further confirm the lack of goodtransportation infrastructure in India,Pradeep Kashyap writes in The Rural

Marketing Book that 68 per cent of therural market [in India] still lies untappedprimarily due to inaccessibility,

8and C.K.

Prahalad offers further insight beyond theborders of India when he writes moregenerally that access to distribution in ruralmarkets continues to be a problem.9

Exhibit 1. Women with donkeys carrying

bricks blocking traffic in a rural Indian

village.

7Edward Luce, In Spite of the Gods, (New York:

Doubleday, 2007)8Kashyap and Raut, p 189

9Prahalad 2006

Based on the above predictions ofcontinuously escalating inventory costs andimpassable transportation infrastructure, itmay seem an insurmountable task to

distribute a product or service in a ruralemerging market. While many companieshave failed at distribution in this context,others have succeeded, and we can learnfrom their distribution network designs. Thekey points companies should focus on whendesigning their rural distribution networks inemerging markets are as follows:1. The company should choose the

distribution network model that isappropriate for the product or service it

is selling.2. While continuing to meet the customersneeds, the company should aggregateconsumer demand into central locationsas much as possible in order to decreaseinventory and transportation costs.

3. The company should consider takingadvantage of rural entrepreneurs (REs)to facilitate last-mile product deliveryand sales.

Let us now examine a few examples ofsuccessful distribution models. In this paperI focus on distribution network design forfast moving consumer durable (FMCG)products like food products and cosmetics,and for consumer durables like consumerelectronics. It is important to note that nomatter what type of product or service acompany is selling, the distribution networkmust be tailored to meet the needs of thebusiness and its customers.

Fast Moving Consumer Goods: Hub-and-

Spoke

Consumers of FMCG products expect fastresponse time; that is, when a consumerdecides to either eat a snickers bar or washtheir laundry with Nirma detergent, the



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consumer expects their desired product to beavailable immediately for purchase. Thismeans that a company entering into a ruralemerging market with an FMCG productneeds to make the product available at the

local village level. While stocking FMCGproducts in widely dispersed villages willdrive up inventory costs, Chopra and Meindlsuggest that this may indeed be the correctstrategy. They write:

Distribution networks that carry localinventories are suitable for productswith high demand, especially iftransportation is a large fraction oftotal cost. These networks incur

higher inventory cost but lowertransportation cost and provide afaster response time.10

Some companies do indeed choose tostock many small village shops with theirproducts. For instance, Hindustan UnileverLimited (HUL) claims that its brandedproducts are available in 6.3 million retailoutlets in India11, and HULs competitorNirma claims that its products are available

in 2 million retail outlets

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(See exhibit 2 foran example of a typical retail store in ruralIndia). HUL and Nirma, however, have verystrong brand names in India and sellproducts (like shampoo sachets) that costone or two rupees and that have high andconstant demand. For a company entering arural emerging market, whose FMCGproducts will likely have less immediatedemand, I recommend using a hub-and-spoke model to supply villages. Colgate

took this approach while determining how tobest reach small villages in rural India with

10Chopra and Meindl, p 101

11Doug Baille, Unilever in India,

http://www.unilever.com/images/ir_Unilever-in-

India_tcm13-113961.pdf(November 2007)12

Information from the Nirma Corporation:

http://www.nirma.co.in/dist_reach.htm

its oral care products. The company hadexperimented with stocking retailers in verysmall villages, but found that its traditionalsales force-driven model was noteconomically feasible in geographically

dispersed villages with low levels ofdemand. Colgate decided to hire localentrepreneurial youth to distribute itsproducts in villages and at weekly marketscalled haats. The youth bought Colgateproducts with cash from a local distributor,and then biked within a 10 kilometer radiusselling the products to villagers. AlthoughColgate payed the youth a small stipend,they received less margin than a professionalsales person would have and they reduced

Colgates inventory costs.

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Exhibit 2. A typical retail store in a rural

Indian village.

Other FMCG companies have hadsuccess with the hub-and-spoke (with the

spokes being local entrepreneurs) model aswell. Coca-Cola has successfully employedthe hub-and-spoke model in multiple ruralemerging markets. In Africa, for instance,

13Benjamin Mathew and Amit Mookerjee, Evolution

of a Sustainable PPP Model in the BOP Market,

(Internal MART document: August 2008)
http://www.unilever.com/images/ir_Unilever-in-India_tcm13-113961.pdfhttp://www.unilever.com/images/ir_Unilever-in-India_tcm13-113961.pdfhttp://www.unilever.com/images/ir_Unilever-in-India_tcm13-113961.pdfhttp://www.nirma.co.in/dist_reach.htmhttp://www.nirma.co.in/dist_reach.htmhttp://www.nirma.co.in/dist_reach.htmhttp://www.unilever.com/images/ir_Unilever-in-India_tcm13-113961.pdfhttp://www.unilever.com/images/ir_Unilever-in-India_tcm13-113961.pdf



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Coca-Cola set up Manual DistributionCenters in which an independent personwas given the rights to distribute Coca-Colaproducts within a defined radius

14.

Similarly, in India local entrepreneurs sell

Coca-Cola using all possible means oftransport, ranging from trucks, auto-rickshaws, cycle rickshaws and hand carts,to even camel carts in Rajasthan and mulesin hilly areas, to transport its product fromthe nearest hub.15(See exhibit 3) AsColgate and Coca-Cola have shown, thehub-and-spoke model for FMCG productsworks well because it addresses theinventory cost and transportationinfrastructure issues that are associated with

distributing products in rural emergingmarkets while also providing for goodproduct availability at the small-villagelevel.

Exhibit 3. An auto-rickshaw delivers

Coca-Cola in a rural Indian village.

Consumer Durables: Aggregate Demand in

Population Centers

Some companies mistakenly believe that therules for FMCG products apply to consumerdurables as well. These companies distribute

14Business Call to Action, Coca-Cola in the

developing world,

http://www.youtube.com/watch?v=CW4-QUBZ_gQ15

Kashyap and Raut, p 221

TVs and fans to retailers in villages in orderto get the product close to the customer andfacilitate a sale. Despite their best efforts,companies selling durables in villages havegenerally failed. As Xavier and

Swaminathan write in Business Line aboutthe Indian consumer durables market:

For example, for fans, for which 53per cent of the residential segmentssales are from rural areas, only 4.7per cent came from the 7,208 ruraloutlets. For colour television sets,rural areas account for 26 per cent ofthe total sales but only 4.4 per centhappened through the 2,244 outlets

in rural areas.

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Xavier and Swaminathan go on toidentify that rural consumers prefer to buyconsumer durables in large towns and citiesbecause of the better prices they receive, andbecause of the better product variety that isavailable. I saw this phenomenon in my owntravels in India as well. While walkingthrough the rural Kerala backwaters, I askeda local resident if he bought his TV on the

island he calls home. He said no, that hetakes a 1.5 hour boat ride to buy electronicswhen he needs them. According to C.K.Prahalad, the rural poor possess the samesentiment in Brazil, where BoP customersdesire the same merchandise as top of thepyramid customers.17

In addition to meeting the consumersneeds for variety and value, companiesshould sell consumer durables in large towns

and cities for distribution network designreasons as well. Consumer durables havelower and more varied demand than FMCGproducts. In order to handle the highervariation in consumer durable sales, but also

16Francis Xavier and V. Swaminathan, Durables to

Doorsteps, Business Line: Praxis(July 2003): 52-5617

Prahalad 2006
http://www.youtube.com/watch?v=CW4-QUBZ_gQhttp://www.youtube.com/watch?v=CW4-QUBZ_gQhttp://www.youtube.com/watch?v=CW4-QUBZ_gQ



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meet the customers expectation of beingable to see and trial the product, demandfrom a larger population of customersshould be aggregated into a centralpurchasing location. In addition to towns

and cities, companies in India can considerselling their products in weekly haatswhichattract up to 4,000 consumers at a time frommultiple nearby villages.

One problem with the demandaggregation model is that while manyconsumer durables can be easily picked upby customers in a central location, someproducts require technical installation onsite.In this case it may make sense to have some

selling locations more geographicallydispersed to facilitate the response time thatcustomers expect when they buy theproduct. SELCO, a startup company thatmanufactures and sells solar light systemsfor houses, has 25 Energy Service Centersdistributed throughout different districts inrural India. Despite the increased cost ofinventory caused by warehousing product insuch a dispersed manner, SELCO is close tobreakeven.18

The last insight for companies enteringrural emerging markets with consumerdurable products is the recent rise of ruralhypermarts in some countries(see exhibit4). While these large-format stores arelocated in rural areas, they provide manyproducts and services and cater to a largenumber of consumers in the surroundingtowns and villages. One example of such astore is ITCs Choupal Saagarin India. The

Choupal Saagars can often be found onmajor roads in rural areas, and they selleverything from clothing to fertilizer to

18Yale School of Management Case Research and

Development Team, SELCO 2009: Determining a

Path Forward,http://nexus.som.yale.edu/design-

selco/?q=node/94(2009)

motorcycles.19These stores are effective ataggregating rural consumer demand andcompanies should consider selling theirconsumer durable products in them.

CHALLENGE: DISTRIBUTIONNETWORK LOGISTICS

Once a company entering a rural emergingmarket has determined what type ofdistribution network it should use, asdescribed above, its next challenges lies increating an effective distribution network onthe ground. The problem the company willface, however, is that the logisticscapabilities it needs may not currently exist

in the market, or, if they do, that thecompanies providing logistics capabilitiesmay be highly disorganized and ineffective.To add to the problem, the company willalso be under pressure to keep its costs lowin order to facilitate the low prices that ruralcustomers need. As C.K. Prahalad writes,Because BOP forcesan extraordinaryemphasis on price performance, firms mustfocus on all elements of cost.20

If the company already had ensuredproduct demand in the market, it would beable to build out a custom distributionnetwork with relatively low risk. Eveready,maker of batteries and flashlights, did this inIndia. To reach deep into rural markets,Eveready procured 1,000 vans and 44warehouses and began distributing to600,000 retail outlets.21Because Evereadyhas 80 percent market share in flashlights inIndia, the large expenditures needed to buildthe distribution network could be made withrelative assurance that there would be buyerswhen an Eveready van pulled up to a small

19Ali Farhoomand, ITC E-Choupal: Corporate Social

Responsibility in Rural India, (Hong Kong: Asia Case

Research Center: 2008)20

Prahalad 200621

http://nexus.som.yale.edu/design-selco/?q=node/94http://nexus.som.yale.edu/design-selco/?q=node/94http://nexus.som.yale.edu/design-selco/?q=node/94http://nexus.som.yale.edu/design-selco/?q=node/94http://nexus.som.yale.edu/design-selco/?q=node/94http://nexus.som.yale.edu/design-selco/?q=node/94



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village in rural India (and in fact I sawEveready flashlights being sold in many

small Indian villages).

Exhibit 4. A hypermart in rural India.

However, if a company does not have aproduct and brand that already enjoysimmense pull from the market, it is risky tobuild out an expensive custom distributionsystem before the first product has beensold. As Kashyap at MART, a leading ruralmarketing consulting firm in India, says,large companies are incurring huge coststo distribute their products into rural areas ofIndia and they are finding it challenging todesign a distribution model that is costeffective.22

Another option the entering companycould consider is building a distributionsystem by hiring existing distributors andlogistics companies. In rural areas ofemerging markets, however, this strategycomes with its own set of perils as theexisting distribution and logistics companies

22Kashyap and Raut, p 192

will likely be highly unorganized andinefficient, not to mention that the enteringcompany may have little opportunity forrecourse should the distributors it hiresrenege on their contracted promises.23

A good example of the problem ofbuilding out a distribution system fromexisting distributors and logistics companiescomes from the pharmaceutical industry inIndia. While there is growing demand formedical drugs in rural India, the industry hasstruggled to supply this demand because ofthe inefficiency of their distribution networkmade up of private clearing and forwardingagents and small retailers. Eric Langer and

23According to the IFC and World Bank, India is

ranked 182nd

in the world (2nd

to last) in contract

enforcement. The World Bank, Economy Rankings,

http://www.doingbusiness.org/rankings(June 2010)
http://www.doingbusiness.org/rankingshttp://www.doingbusiness.org/rankingshttp://www.doingbusiness.org/rankings



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Abhijeet Kelkar give three reasons for thepharmaceutical industrysproblems in India:

The main hurdles include the highlyfragmented nature of the distribution

network, limited advancement inregulatory reforms, and presence ofstrong resistance from lobbies oftraders involved in the supply chainof pharmaceutical products.24

When pharmaceutical company Ciplaattempted to break out of the existingdistribution network and deliver its asthmamedicine directly to customers homes, thetraders lobby boycotted Cipla and stopped

stocking its drugs in retailers. Cipla wasforced to stop its distribution networkinnovation and give in to the traders lobby.

I propose that a company entering forthe first time into rural areas of emergingmarkets should if possible notattempt tobuild custom distribution networks or piecetogether a complete distribution networkfrom existing private logistics firms. Instead,in order to keep costs low and increase the

probability of success, the entering companyshould as much as possiblepiggybackon topof successful distribution networks thateither have already been built by companiesor that already exist in the local society.Piggybacking has been identified in theacademic literature as a good alternative tobuilding a new distribution network. VernTerpstra and Chwo-Ming J. Yu write:

Piggybacking is a non-equity

arrangement wherein one producermarkets the products of anotherproducer. The first producerthecarrier in this caseperforms as adistributor in marketing the products

24Eric Langer and Abhijeet Kelkar, Pharmaceutical

Distribution in India, BioPharm International

(September 2008), 2-5

of the second producerthe rider.The fact that the riders products arebeing distributed by anotherproducer may bring importantbenefits to the rider as compared

with using a regular distributor.

25

Terpstra and Yu go on to explain that therider chooses to piggyback to take advantageof the carriers distribution network andlocal knowledge, while the carrier joins inthe relationship to add the riders product orservice to its portfolio. The authors give theexample of Whirlpool piggybacking on topof Sonys distribution network in Japan inthe 1970s, a partnership that increased

Whirlpools sales and allowed Sony to offerbetter product selection to its customers.26More recently, in India the Energy andResource Institute (TERI) found thatpiggybacking their solar light distribution onexisting infrastructure and entrepreneurialnetworks lowered the cost of their supplychain.27

The key attributes a rider companyentering into a piggybacking relationship

should look for are:1. The carrier has a proven distributionnetwork that reaches deep into ruralareas

2. The carrier has a long-term interest inallowing the rider to piggyback on itsdistribution network.

3. The carrier uses a distribution model thatwill be effective for the type of productthe rider is providing (as discussed in theprevious section)

25Vern Terpstra and Chwo-Ming J. Yu, Piggybacking:

A Quick Road to Internationalization, International

Marketing ReviewVolume 7 Issue 4 (2001): 52-6326

Terpstra and Yu p 5927

Rehman, Kar, Raven, Singh, Tiwari, Jha, Sinha,

Mirza, Rural Energy transitions in developing

countries: a case of the Uttam Urja initiative in

India, Enviromental Science and PolicyVolume 13

(2010)



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The second point is important if thepiggybacking relationship is going to lastbeyond an initial trial phase. The interestcan be either profit-motivated (for acompany) or social welfare-motivated (for a

NGO or local trade organization).

It should be noted that the rider companywill likely not be able to use a purepiggybacking model for their distribution. Amajority of product movement logistics maybe handled by a large corporate partner,however the rider may still have to set uplocal warehouses to supply the carrier withproducts in a timely manner. Or, in anotherexample, the rider may not be able to find

carriers in some markets that it feels arenecessary for business success, and so therider will have to organize its owndistribution in those markets.

Below are three types of piggybackingrelationships a new company seeking todistribute its products in rural emergingmarkets can form. The company shouldchoose the type of relationship that bestmeets its needs.

Corporate Partnerships

Just as Whirlpool did with Sony in Japan, anentering company can partner with acorporation that has an existing distributionnetwork in the target geography. Oneexample of this in an emerging market is thepartnership between Sara Lee and Godrej inIndia. Seeking to enter the India market, in1995 Sara Lee partnered with local

conglomerate Godrej to market anddistribute its products. Another example of asuccessful corporate piggybackingrelationship is Proctor & Gamble and Indianconsumer goods company MaricoIndustries. Seeking to distribute deodorant,detergent, and diapers into rural India,Proctor & Gamble formed a distribution

alliance28in 1999 with Marico in order tocapitalize on the Indian companysdistribution network.

While the above two examples involve

large companies, new and/or smallcompanies can also piggyback on thedistribution networks of establishedcompanies in emerging markets. Myanalysis of d.light Design later in the paperprovides a good example of this.

Local Non-Profit OrganizationsIn addition to corporate distribution

networks, rural emerging markets often playhost to numerous formal and informal local

non-profit organizations that reach activenetworks of rural consumers. Manycompanies are finding that engaging theselocal networks provides excellent access torural consumers at very low costs. The mostfamous example of this is Hindustan LeverLimiteds (HUL) Project Shakti. Under thisinitiative HUL has partnered with womensSelf Help Groups (SHGs) in rural villagesin India. The SHGs have been set up by thegovernment and NGOs to empower women

through collective savings andentrepreneurship. HUL wanted to reach deepinto rural India where villages have less than2,000 residents, but HULs standarddistribution network could not do so in acost-effective manner. On the other hand,local SHGs were looking for newentrepreneurship opportunities. HULdelivers products to individual women(called Shakti Ammas) in the SHGs,receiving cash on delivery. The women

entrepreneurs then sell direct to consumersand small retailers in their local area.29The

28P&G Snaps Pact With Marico, Business Standard,

30 November 2002http://www.business-

standard.com/india/news/pg-snaps-

pactmarico/119441/29

MART consulting and Hindustan Unilever, Project

Shakti: Womens Empowerment(2005)
http://www.business-standard.com/india/news/pg-snaps-pactmarico/119441/http://www.business-standard.com/india/news/pg-snaps-pactmarico/119441/http://www.business-standard.com/india/news/pg-snaps-pactmarico/119441/http://www.business-standard.com/india/news/pg-snaps-pactmarico/119441/http://www.business-standard.com/india/news/pg-snaps-pactmarico/119441/http://www.business-standard.com/india/news/pg-snaps-pactmarico/119441/http://www.business-standard.com/india/news/pg-snaps-pactmarico/119441/http://www.business-standard.com/india/news/pg-snaps-pactmarico/119441/



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Project Shakti initiative currently employees45,000 women entrepreneurs and servicesthree million consumers in 100,000villages.

30C.K. Prahalad wrote about this

initiative:

The SHGs and the direct distributionsystem we have described, such asShakti Amma, represents anextraordinary innovation that bothcuts costs and risks for the firm andat the same time creates andempowered group of newentrepreneurs with sustainable, risingincome opportunities.31

Another great example of using localnon-profit organizations to distributeproducts and services is from Ekagon, astartup company based in New Delhi, India.Ekagon delivers customized agricultureadvice to farmers in rural India via their cellphones. In order to sign-up the farmers,Ekagon piggybacks on local farmersfederations and other farmer organizations.Once a farmers federation has agreed towork with Ekagon, the federation appoints

member farmers in local villages to be thesalespeople for Ekagon. In return for theservice, Ekagon shares revenue with thefarmers federation.32

The above cases show the increasedsales that companies can capture byengaging with local non-profit networks. Itis important to note that both HUL andEkagon partnered with organizations thathad something to gain from the partnership

as well (in both cases it was additional

30Unilever, India: Creating Rural Entrepreneurs,

http://www.unilever.com/sustainability/casestudies

/economic-development/creating-rural-

entrepreneurs.aspx(2005)31

Prahalad 200632

Vijay Aditya, CEO of Ekagon, interview held in New

Delhi, August 2011

revenue). In my interviews I heard aboutpartnerships that were not successfulbecause the local non-profit did not haveenough to gain from the piggybackingrelationship. Before entering into a

piggybacking relationship the rider companyshould determine that the carrier non-profitwill gain enough from the relationship tostick with it for the long-term.

Business-to-Business SalesThe last piggybacking model I will discussis very cost efficient but comes with severalimportant drawbacks. A company seeking todistribute its products in a rural emergingmarket can initiate a large sale of its

products to another company, non-profitorganization, or government. Once thecarrier is in possession of the products, theycan distribute them in the rural areas as theysee fit. KickStart International, maker ofwater pumps for poor farmers in ruralAfrica, operates part of its business usingthis model. Once KickStart hasmanufactured the water pumps, it ships themto the carrier organization and receives cashon delivery. This model is efficient because

KickStart only has to manage the business-to-business relationship, and not thedistribution network.

The downsides to this model is that it ishard to track how the downstream customersare receiving and using the products, and therider company may not gain access tomarket insights in the same way that acompany operating on the ground would.For example, while KickStart recommends

that the non-profit organizations that buy itspumps sell the products to the endconsumers, they have no way to verify if thepumps are sold, or if they are given away forfree. KickStart was founded with thephilosophy that purchasing a product hasmore of a transformational effect on a ruralconsumer then receiving a product for free,
http://www.unilever.com/sustainability/casestudies/economic-development/creating-rural-entrepreneurs.aspxhttp://www.unilever.com/sustainability/casestudies/economic-development/creating-rural-entrepreneurs.aspxhttp://www.unilever.com/sustainability/casestudies/economic-development/creating-rural-entrepreneurs.aspxhttp://www.unilever.com/sustainability/casestudies/economic-development/creating-rural-entrepreneurs.aspxhttp://www.unilever.com/sustainability/casestudies/economic-development/creating-rural-entrepreneurs.aspxhttp://www.unilever.com/sustainability/casestudies/economic-development/creating-rural-entrepreneurs.aspxhttp://www.unilever.com/sustainability/casestudies/economic-development/creating-rural-entrepreneurs.aspx



15

and the company worries that its socialmission could be diminished by productgiveaways.33

CHALLENGE: AFFORDABILITY

One of the key issues that may preventrural consumers in emerging markets frommaking a purchase is lack of substantial andconsistent household income. By betterunderstanding the size and patterns ofearnings in rural emerging markets,companies can design both products andpurchasing schemes that help unlock theenormous purchasing potential ofpopulations in rural emerging markets. The

most famous example of success in this areais the single-serve sachets of fast movingconsumer goods (FMCG) products such asshampoo and laundry detergent that areavailable in even the deepest rural areas inIndia. While a traditional bottle of shampoomay be too expensive for a rural customer toafford, they can often afford the Rs.1 priceof a single-serve amount of the sameshampoo. Hindustan Unilever (HUL) was aleader in the sachet revolution and now

single-serve sachets of shampoo make up 70percent of HULs shampoo sales in India.34

There are two income patterns that arecharacteristic of the rural poor in emergingmarkets. The first is simply a lack ofsubstantial household income. As C.K.Prahalad points out, much of the ruralpopulation in emerging markets makes upthe BoP; or those people who subsist on lessthan $2 USD per day (I will refer to BoP in

this paper as BoP). According to Prahalad,this level of the income pyramid currentlycontains 4 billion people. The other incomepattern that characterizes the rural poor, and

33Charlene Chen, Program Manager at KickStart

International, interview held in New Delhi, August

201134


perhaps the less well-known one, is thesporadic nature of a persons earnings. Asthe authors of Portfolios of the Poor write,households are coping with incomes thatare not just low, but also irregular and

unpredictable.

35

The book goes on toexplain the reasons for this as follows:

In the villages, farmers earn the bulkof their income during two to threepeak harvest months, earningnothing during troughs. Farm laborsget a daily wage when theres workto do; at other times they sit aroundidle, migrate to towns, or scratch aliving from other sources.36

I gained personal experience with thisphenomenon as well while traveling throughrural India. One farmer I spoke with in theIndian state of Uttar Pradesh said that hegrows 2-3 crops per year, and that he earnsRs. 10,000-15,000 per crop. Assuming anaverage of Rs. 12,500 earned for each of thethree crops, the farmer earns a total of Rs.37,500 per year, or $833 USD per year, andhe earns it intermittently.

Although consumers in rural emergingmarkets clearly have low and sporadicincomes, it would be a mistake to assumethat these consumers necessarily desire topurchase cheap products. Instead, asPrahalad writes, the consumers are verybrand-conscious and are motivated to buyquality goods. However, at the same time,they are by necessity very value-conscious.

37

The challenge for companies entering this

market is to offer consumers high-qualityproducts and brands while also offering

35Daryl Collins, Jonathan Morduch, Stuart

Rutherford, and Orlanda Ruthven, Portfolios of the

Poor(New Jersey: Princeton University Press, 2009)36

Collins, Morduch, Rutherford, and Ruthven 200937

Prahalad 2006



16

prices and payment schemes that fit with theincome levels and patterns of the population.

There are five price and paymentschemes that have been used successfully by

companies in rural emerging markets.Companies should choose the affordabilityscheme that the best meets the financialneeds of both the target consumers and thecompany itself.

Small and Cheap

As was described above in the case ofHindustan Unilevers shampoo sachets,offering quality branded products in smaller

package sizes allows consumers to make apurchase even when they have very minimalfunds available. Another company that hasimplemented a small and cheap scheme isCoca-Cola. In Kenya, when Coca-Cola sawits sales slumping because of inflation, thecompany came out with a smaller andcheaper version of its product to addressaffordability concerns.38Similarly, in 2001when coke introduced a smaller and cheaperproduct in India priced at Rs. 5, per capita

consumption of Coca-Cola doubled in themarket by 2003.39

The small and cheap scheme seems towork best for FMCG products that can beconsumed by customers immediately. Whilethere has been a lot of work done by PaulPolak and others to promote affordableengineering when designing consumerdurable goods for emerging markets, even ifthe durable goods are relatively inexpensive,

they may still cost too much immediate andspontaneous purchase by BoP consumers.

38George Ngigi,Coca-Cola targets low income

consumers with mini-bottles, Business Daily

(Kenya), 25 August 2011, Article can be found here:

http://www.afrika.no/Detailed/20728.html39

Jennifer Kaye, Coca-Cola India (Tuck School of

Business at Dartmouth, 2004)

Small-Payment Financing

A payment scheme that has worked well forsome companies selling consumer durables

is small-payment financing. Casas Bahia inBrazil, seller of electronics and otherconsumer durables, has built a successfulbusiness using this model. The companyallows customers to make small installmentpayments over a period of months, and over90 percent of sales are financed in thisway.40

While it could be assumed that BoPconsumers would be very risky to finance,

with a high propensity for default, CasasBahia has managed to make a successfulbusiness out of it. The key to the companyssuccess lies in the training that Casas Bahiaemployees receive and the relationship thatthe company forms with its consumers.Employees are taught how to assess thecredit risk of a potential customer, evenwhen the customer may not have a formalcredit score. Employees may ask questionsabout livelihood and income, and may even

follow-up with technical questions about aparticular job to determine of the customeris telling the truth. Employees are alsotaught how to tweak consumers desires ifit is determined that Casas Bahia cannotfinance an expensive product for theconsumer. The employee will help theconsumer understand that they mustpurchase goods that are in their budget. It isestimated that around 16% of potentialCasas Bahi customers are denied financing

by the company.

41

Casas Bahia further reduces the risk offinancing poor consumers by forming a

40Prahalad 2006

41Sami Foguel and Andrew Wilson, Casas Bahia:

Fulfilling a Dream (University of Michigan Business

School, 2003)
http://www.afrika.no/Detailed/20728.htmlhttp://www.afrika.no/Detailed/20728.htmlhttp://www.afrika.no/Detailed/20728.html



17

permanent, physical relationship with thecustomer. When a customer buys a productfrom Casas Bahia on credit, they are given aphysical passbook that reminds themwhen and how much they have to pay. The

passbook is designed to fit in a shirt pocketand offer a constant reminder of the CasasBahi bill that needs to be paid. When themonthly payment is due, customers actuallywalk in to a Casas Bahia store to make thepayment. This in-store interaction furthercements the relationship between CasasBahia and its customers.42

If a company operating in a ruralemerging market decides that customers will

need to buy its products on credit, thefollowing lessons about how to avoidcustomer defaults can be derived from CasasBahias experience:1. Carefully screen customer credit-

worthiness using in-person interviews.2. Prevent the customer from

overextending themselves financially onyour products.

3. Design a payment plan that ismanageable by BoP customers.

4. Create a customer-payment system thatconstantly reminds customers about therequirement to pay their bills.

Self Help Groups

Another method that companies have foundto work well in reducing the probability ofdefault among BoP consumers is the conceptof a self help group (SHG). SHGs wereinitially made popular by Grameen Banks

microfinancing program in Bangladesh as away to help poor consumers (and almostalways women) save money and obtaincredit from financial institutions. In the SHGmodel, individual women in the group takeout small loans, and the entire group isresponsible for making sure the loan is paid

42Foguel and Wilson 2003

back on time. If one woman defaults on herloan, the entire SHG is penalized. Becauseof the close social contact of the women,and the resulting peer pressure to beresponsible with money and pay back loans

on time, SHGs have proven to be asuccessful model for lending money to therural poor.

According to Dean Karlan and JacobAppel in their book More Than GoodIntentions, SHGs decrease the risk ofdefault by BoP customers for three reasons:

Determining credit worthiness. Mostconsumers in rural emerging marketswill have no credit history. The SHG

model passes on credit screening towomen in the local community who willlikely know the wealth andtrustworthiness of a potential borrowerbest. The SHG is incentivized to screencarefully because if one women defaultson her loan, everyone pays.

Encouraging payment. SHGmembership also places pressure onwomen to actually pay back their loansonce they have received financing. SHG

members will have good insights into thedaily workings of an individual in thegroup, and if it is noticed that oneborrower has stopped working, or isspending excess money on frivolousitems, the SHG can intervene.

Collecting on defaults. If a SHG memberactually does default on their loanpayments, in rural emerging markets thefinancing institution likely has no way tosinglehandedly track down the

individual and demand payment. In theSHG model, the group can more easilyfind the delinquent member. In addition,the SHG may actually pay theindividuals loan in order to avoid a



18

penalty being placed on the entiregroup.43

Companies can tap into the power ofSHGs to increase sales in rural emerging

markets. A company that had has successwith this is CEMEX in Mexico. CEMEX isone of the largest producers of cement in theworld, and while the company has a verysuccessful business in supplying formalconstruction, it also wanted to build a robustbusiness in the informal sector. In Mexico,the rural and semi-urban populations oftenbuild additions to their house with concretewhen they have the money to do so. Whilemany women were saving money for

construction costs, CEMEX found that mostof that money ended up being spent onthings like emergencies, clothes, or schoolfees.44To combat this trend and increase itssales, CEMEX created a program calledPatrimony Hoy. The core of thePatrimony Hoy program is the formation ofSHGs made up of three women, orsocios. Once a SHG has been formed, thewomen go to a CEMEX store together andfill out an application. Then, the SHG is

responsible for making weekly payments toCEMEX, with each woman in the grouptaking a turn as the payment collector. Asthe SHG makes payments and builds itscreditworthiness, CEMEX delivers buildingmaterials on credit to the women.

45

CEMEXs Patrimony Hoy programtakes advantage of the Self Help Groupdynamics to increase sales and decreasefinancing risk for the company. In addition,

the SHG model helps women save money toimprove their homes, an activity they were

43Dean Karlan and Jacob Appel, More Than Good

Intentions(London: Dutton, 2011)44

Anne Coughlan, CEMEX: Targeting the Low-End

Housing Market in Mexico (Kellogg School of

Management, November 2007)45

Prahalad 2006

previously having trouble following throughon. The SHG model is appropriate forcompanies with products and services thatmay be too expensive for the rural poor toafford immediately, and for communities in

which long-term saving is handicapped bylocal culture practices. Following is adifferent affordability model that achievessimilar results.

Layaway

For companies seeking to sell relativelyexpensive goods in rural emerging markets,offering layaway programs is beingrecognized as a successful model to

facilitate sales. In a layaway program, thecustomer commits to wanting to purchase anitem, and then pays for the item over time insmall installments. Once the total purchaseprice of the item has been paid, the customerreceives the product. In this way thecompany forms a payment relationship withthe customer without actually extendingcredit to the customer. For this reason,layaway may be a good affordability optionfor new companies that do not yet have

access to the capital or financing needed toextend credit to customers.

KickStart International, a company thatsells water pumps in rural Africa, has foundsuccess with a layaway program whenselling products to individuals. According toCharlene Chen, a program manager at thecompany, many potential customers say theywant to buy a water pump, but that theycant afford it immediately because of the

sporadic nature of their incomes. In addition,Ms. Chen reports that in Kenya there is aculture in which if person is asked for apersonal loan, and that person has cash onhand, the person must almost always say yesto the personal loan. This cultural tendencymakes saving for large purchases hard.KickStart combats these challenges by



19

offering a layaway program for its waterpumps. By working with M-PESA, a mobilebanking service in Africa that allowscustomers to bank from their mobile phonesand retail outlets in rural areas, KickStart

allows customers to pay for water pumpsover time when they have access to capital.KickStart has found that while it takes afarmer on average one year to buy a waterpump after expressing interest when payingthrough normal methods, farmers that usethe layaway program buy the water pump onaverage only two-and-a-half months afterexpressing interest.46

Dont Target theBoP

The last affordability option I will discuss isactually a customer targeting strategy. Somecompanies entering rural emerging marketshave found success in focusing theirmarketing and sales strategy on relativelywealthier individuals in the underdevelopedareas. These individuals could be farmowners, business people, or governmentemployees. It is a mistake to assume that allpeople in rural emerging markets have the

same level of income and prosperity. Inreality there is an enormous range ofincomes in these areas. Companies thatdont have excess reserves of operatingcapital and that need to start selling productsquickly would be smart to begin theirbusiness by targeting customers that have aneed for their product, but that also arerelatively wealthy and that have theimmediate means to afford their product. Iwill discuss this further in the paper when I

examine the case of d.light Design.

One startup company that has foundsuccess in targeting relatively wealthiercustomers is Tecnosol in Nicaragua, makerof rural electrification systems. Thecompany focuses its sales efforts on

46Charlene Chen, August 2011

wealthier people in underdeveloped areas.As an investment officer at the firm thatprovided tecnosol with startup capital said,Tecnosol taught us a lesson. It is notalways necessary to go after the poorest

people firstthere are often manycustomers who are willing to pay higheramounts even what would be consideredunderdeveloped areas.47SELCO, maker ofrural electrification systems in India, isfinding success with a similar strategy.SELCOs Chief Financial Officer explainedthis by saying:

We have still not reached thosecustomers who are there at the BoP,

and we have to keep on doing theseinnovations in terms of products aswell as making these productsaffordable to poorest of thepoor.But if you just ask us can webreak even with the current same setof products and with the same set ofcustomers, yes, must be another 3 or4 years.48

While many companies want to target BoP

customers both because of the sheer size ofthe market and because of the social goodthat will come from bringing thosecustomers into the market, for companieswith relatively expensive products andlimited capital, this may not be a realisticfirst goal. Rather, those companies shouldfocus on building a business with customerswho can more easily afford their currentproduct offerings and then develop plans totarget true BoP customers later.

CHALLENGE: LACK OF BRAND

TRUST

47Prahalad 2006

48Yale School of Management Case Research and

Development Team, SELCO 2009: Determining a

Path Forward,http://nexus.som.yale.edu/design-

selco/?q=node/97(2009)
http://nexus.som.yale.edu/design-selco/?q=node/97http://nexus.som.yale.edu/design-selco/?q=node/97http://nexus.som.yale.edu/design-selco/?q=node/97http://nexus.som.yale.edu/design-selco/?q=node/97http://nexus.som.yale.edu/design-selco/?q=node/97http://nexus.som.yale.edu/design-selco/?q=node/97



20

Any company selling products and servicesto consumers must first establish trust withthe consumer. For a company like Coca-Cola in the United States, this is easy

because the Coca-Cola brand is well knownand trusted by the entire consumerpopulation. In addition to the Coca-Colabrand, consumers in the United States willtrust a new product offering from Coca-Colabecause the countrys government enforceslaws that guarantee product safety andprevent fakes from being sold. The situationis very different for a company entering intoa rural emerging market with a new productor service and an unknown brand. Not only

will consumers be less aware of manybrands, they will also have less innate trustin new brands because of their lack of accessto information and because of the plethoraof fake and poor-quality brands beingoffered in the marketplace.49This is not tosay that rural consumers are not brand-conscious. As C.K. Prahalad points out, thepoor are actually very brand-consciousand seek out the brands they know well andtrust.50The challenge for a company

entering a rural emerging market with a newproduct or service is to establish trust in itsbrand so that consumers will buy it.

Professors Arjun Chauduri and MorrisHolbrook define brand trust as thewillingness of the average consumer to relyon the ability of the brand to perform itsstated function.51As described above, inrural emerging markets it is challenging forcompanies to build this trust with

49According to the The Rural Marketing Book, fake

brands are rampant in rural India and offered by

fly-by-night operators who frequently shutdown

and change locations. (Kashyap and Raut)50

C.K. Prahalad 200651

Arjun Chauduri and Morris Holbrook, The Chain of

Effects from Brand Trust and Brand Affect to Brand

Performance: The Role of Brand LoyalityJournal of

Marketing(April 2001)

consumers. Brand trust is essential,however, for the success of a product orservice. Chauduri and Holbrook go on tosay:

Brand trust and brand affectcontributed to both purchase loyaltyand attitudinal loyalty, which in turncontributed significantly to marketshare and relative price,respectively.52

Analysis by the rural marketing consultingfirm MART in India has also shown thatwhen trust is established with ruralconsumers, they become brand sticky53,

meaning they are resistant to switching tonew brands, further contributing to acompanys long-term success in the market.A good example of the power of brand trustin rural emerging markets is Bimbo, thelargest bakery in Mexico. C.K. Prahaladreports that the Bimbo brand is so highlytrusted in Mexico that Bimbo delivery menare often allowed by shopkeepers to opentheir stores to stock them with bread andcollect cash.54Companies entering rural

emerging markets with un-establishedbrands should recognize that one of the keysto their companys success will be buildingtrust with rural consumers.

I propose that for companies enteringinto rural emerging markets with unknownbrands, the best solution to this problem is topiggybackon an existing known and trustedbrand or local entity. In their paper onpiggybacking, Terpstra and Yu describe how

the rider company benefits when anestablished carrier company lends its brandto the rider. They give the example of theWhirlpool brand being introduced toJapanese consumers in Sony stores: Sony

52Arjun Chauduri and Morris Holbrook, April 2001

53Kashyap and Raut, p 162

54C.K. Prahalad 2006



21

also has a strong service operation andreputation in Japan. Whirlpool was now ableto benefit from this association too.55 Thissolution to establishing brand trust with ruralconsumers is similar to how I propose

startup companies should partially solvetheir distribution problems. Given this,companies entering into rural emergingmarkets may want to seek out piggybackingrelationships in which the carrier lends bothits brand name and its strong distributionnetwork to the rider. Just like with thedistribution network solution, however,brand piggybacking will not solve theentirety of a companys brand-trust problem.There may be critical geographies in which

there is no compatible brand off of which topiggyback, and some facets of brand trust,such as delivering a working and durableproduct, cannot necessarily be solved by apartner. Despite these shortcomings,piggybacking on a trusted brand can boost acompanys chance and rate of success.

When seeking out a trusted brand topiggyback off of, the rider should look forthe following attributes:

1. The carrier does not already brand acompeting or substitutable product (forexample, if a company is producing ashampoo product, they wouldnt want toenter into a piggybacking relationshipwith Hindustan Unilever, which sellscompeting products.)

2. The carriers brand is compatible withthe brand image the rider is seeking toinstill in consumers.

3. The carrier has a long-term commercial

or social interest in allowing the rider topiggyback off their brand.The third point is important if thepiggybacking relationship is going to last.As with distribution network piggybacking,the interest can be either profit-motivated

55Vern Terpstra and Chwo-Ming J. Yu, 2001

(for a company), or social welfare-motivated(for a NGO or local trade organization).

Broadly, there two types of brand-piggybacking relationships a company

entering into a rural emerging market with anew brand can form.

Commercial Brands

Just as Whirlpool did with Sony in Japan, anentering company can piggyback on acompany that has a trusted brand in thetarget geography. A famous example of thisin an emerging market is Coca-Colas entryinto India in 1993. Although Coca-Colas

brand is strong worldwide, the companywanted to quickly gain brand equity in theIndian market. To accomplish this, Coca-Cola purchased local beverage brands thatwere popular in India like Thums Up,Limca, and Citra. Thums Up, in particular,is known as the most trusted brand inIndia.56Coca-Cola, and its subsidiarybrands, is now thriving in India.

For a company with limited capital that

is unable to purchase a popular local brandwhen entering a rural emerging market, thenext best option is to seek association with atrusted local brand. One way to do this isthrough product placement at trusted smallretailers. Due to the lack of education andtrustworthy information in rural emergingmarkets, small retailers are trusted brands inthemselves and have inordinate power inhelping consumers decide which products topurchase. In addition, due to their proximity

in the local community, consumers andretail shop owners often form closerelationships, further cementing the powerof the retailer in product recommendation.Startup companies like Tecnosol andKickStart International have found successby stocking their products in select local

56Jenifer Kaye, 2004



22

retailers. KickStart, for example, uses aprocess to identify the best local dealers inthe companys geographic region ofinterest.

57Similarly, Tecnosol uses a

sophisticated network of nine dealers in

Nicaragua to sell its rural electrificationsystems.58Both KickStart and Tecnosolgradually give retailers more inventory tostock as the retailer proves that cansuccessfully sell their products.

Companies seeking to build brand trustin rural emerging markets can alsopiggyback on the brands of trusted corporateretailers, similar to what Whirlpool did withSony in Japan. In rural India, ITC is a

trusted brand that operates large hypermartscalled Choupal Sagaars. When a consumersees a brand stocked in a Choupal Sagaar,the brand receives the consumers trustbecause of its association with ITC. BharatPetroleum, the second largest oil companyin India and a trusted brand amongconsumers, also has rural retailers that stockconsumer brands. When providing productsto these retailers, many companies go so faras to co-opt the trusted Bharat brand name

and put it on their own product packaging(see the top right of exhibit 5). Piggybackingon the trust that rural consumers place inlocal and corporate retailers can providemuch needed credibility and trust for a newand unknown brand.

57Charlene Chen, August 2011

58Scott Baron and George Weinmann, Case on E+Co

and Tecnosol (The University of Michigan Business

School, December 2003)

Exhibit 5. An apron with the Bharat

Petroleum brand on the package.

Local Non-Profit and Individual Brands

Companies entering rural emergingmarkets with new brands can also gainconsumer trust by piggybacking on the trustthat they place in local non-profitorganizations and local citizens. ITC, forexample, chose to piggyback on thereputation of prominent farmers when itstarted its e-Choupal initiative to extend itsdistribution channel deep into ruralcommunities in India. As C.K. Prahaladdescribes, rural farmers in India may at firsthave been hesitant to trust the ITC brand.Prahalad writes, For generations, the Indianfarmer has been betrayed by institutions,individuals, and even the weather. Trust isthe most valuable commodity in ruralIndia.59ITC combated this mistrust byappointing a Sanchalak, the prominentfarmer, in every village to which the

59Prahalad 2006



23

company extended its services. TheSanchalak ran ITCs local agriculturepurchasing, information, and distributionbusiness. While rural farmers possesseddeep distrust in traditional crop purchasing

agents because of years of mistreatment andcorruption, the farmers trusted the Sanchalakbecause he was one of their own. Byextension, ITC became a trusted brand in therural communities.

ICICI bank in India has taken a similarpiggybacking approach to ITC in buildingbrand trust in rural areas. ICICI useswomens Self Help Groups (SHGs) toextend banking into rural communities. Prior

to ICICIs program, commercial banks werenot trusted by some rural consumers due totheir past experiences with untrustworthybank agents. In helping proactive womenform SHGs that would then take out grouploans, ICICI was able to increase itsbusiness by piggybacking off of the trustplaced by women consumers in the SelfHelp Group institution. Furthermore, once awoman has proven her ability to formmultiple SHGs, she is brought onto ICICIs

payroll in order in order to facilitate thefurther extension of ICICIsbusiness andbrand in the rural communities.

60

CHALLENGE: LACK OF EDUCATION

Rural consumers lack of education in topicslike hygiene, health, and modern agriculturepractices also poses challenges for acompanys marketing channels in anemerging market.. Often times, before a

company can begin sales of its product orservice, the company needs to educateconsumers about the benefit the product orservice will have on their lives. Companiesshould consider this activity as an exercisein unlocking latent need for their product orservice, and it should be considered just as

60Prahalad 2006

important as branding and distribution. AsPradeep Kashyap, founder MART, writes:For a brand to establish itself, the companyneeds to educate rural consumers, developtheir interest through interactive

communication, encourage their desire toown/use new products and deepen theirconfidence in the brand through livedemonstrations.61C.K. Prahalad agreeswhen he states simply: Education ofcustomers on product usage is key.62

Several companies have shown greatsuccess in unlocking latent product needthrough the education of rural consumers.These companies often partner with local

government and non-profit organizationswho are also seeking to educate ruralconsumers. One example of a company thathas followed this model is Hindustan Lever(HUL) in India. HUL began its programwhen the sales growth of its hand soap brandLifebuoy was declining. At the same time,HULs CEO was pushing forward aninitiative to differentiate HUL products fromcompetitors by focusing on health benefits.Diarrhea is a large health concern in India;

the country accounts for 30% of the 2.2million deaths worldwide that occurannually from the disease.

63The best

prevention against diarrhea is regular handwashing with soap. HUL set out todetermine if it could increase sales ofLifebuoy by educating rural consumersabout the benefits of washing their handswith soap. During focus groups, HUL foundthat most Indian consumers associatedcleanliness with the absence of dirt, and they

were not aware that bacteria could reside onhands that otherwise looked clean. Working

61Kashyap and Raut

62Prahalad 2006

63Mindy Murch and Kate Reader, Selling Health:

Hindustan Lever Limited and the Soap market (The

University of Michigan Business School, December

2003)



24

with marketing company Ogilvy & Mather,HUL designed a program to educateconsumers about the dangers of invisiblebacteria, how bacteria causes diarrhea, andhow the bacteria can be killed using

Lifebuoy hand soap. HUL then partneredwith schools and doctors in rural villages tospread its message about the dangers ofdiarrhea-causing bacteria. According toHUL, the company targeted students inschools because, through them we arereaching out to the mothers, the elders andtheir parents, because [the students] are theones who are most educated in the family.64

Another common health problem in rural

emerging markets is drinking untreated,dirty water. WaterHealth International(WHI), producer of community-ownedwater treatment facilities, places a largeemphasis on educating potential customersabout the dangers of drinking untreatedwater. WHI does this by partnering withlocal non-profit organizations that go intorural communities and speak with residentsabout the benefits of drinking treated water.WHIs education initiative has the dual

effect of creating healthier people andincreasing business for WHIs clean-waterproducts. After the completion of aneducation initiative in a rural Indian village,followed by the installation of WHIsproduct, the head of the village said, I feelas if I have given a new lease on life to myvillage. By drinking good water, they willenjoy good health and live a good life.65

When a company is educating

consumers about a product that will benefitthem in some way, it is important that thecompany use explanations the consumer canempathize with. For example, TERIproduced a cooking stove for the ruralIndian market that significantly reduced the

64Murch and Reader 2003

65Faheem and Purkayastha, 2010

amount of black carbon released fromcooking fires. Women in rural India facedamaging health effects from inhaling blackcarbon produced by indoor cooking fires.When TERI first released its cooking stove,

the organization attempted to explain towomen the health benefits they wouldreceive from using the product. Thismessage did not resonate with the women,however, because their families had beencooking over open wood fires forgenerations, and they couldnt believe thatthere was something wrong with thisactivity. TERI changed its education tacticand began speaking to women about theamount of time it takes to boil water over an

open flame. Because TERIs stove wasmuch more efficient than an open wood fire,it produced more heat and boiled waterfaster. Women in rural India spend much oftheir day preparing food and drinks, and thetime-saving message resonated with them.After changing its educational message,TERI began to see adoption of its stoves.66

Based on the evidence about theimportant of consumer education presented

above, I recommend that companies enteringrural emerging markets with new productsand services do the following:1. Interview consumers to understand their

current understanding level about thebenefits of the product or service.

2. Design education initiatives that helpconsumers understand the benefit of theproduct or service in terms that they canrelate to.

3. Partner with local non-profit

organizations to spread the educationalmessage.

66Abhisheck Kar, Interview in New Delhi at TERI

headquarters, August 2011



25

CHALLENGE: AFTER-SALES

SERVICE

An important component of marketingchannel design that many companies in rural

emerging markets overlook is providingquality after-sales service to customers. Inhis paper What Does Product QualityReally Mean?, David Gavin describes theimportance that consumers place on after-sales service:

Consumers are concerned not onlyabout a product breaking down, butalso about the elapsed time beforeservice is restored, the timeliness

with which service appointments arekept, the nature of their dealings withservice personnel, and the frequencywith which service calls or repairsfail to resolve outstandingproblems.67

Companies should consider after-salesservice an important component of buildinga consumers trust in the companys brand.Although the activity takes place after a

purchase has already been made, if acompanys after-sales service is poor,customers will likely not purchase thecompanys products again and will tell otherpotential customers about their badexperience. C.K. Prahalad explains thatbecause word of mouth through existingcustomers is a primary driver of new buyers,quality and service satisfaction takes on anadded importance.

68

While clearly important, providingquality after-sales service to customers inrural emerging markets poses the same setof challenges that product distribution does.

67David A. Gavin, What Does Product Quality

Really Mean? (Sloan Management Review, Fall

1984), p 3268

Prahalad 2006

The cost of shipping in spare parts andreplacement products, along with the cost ofmaintaining repair staff, is high due to thegeographic dispersion of demand and poortransportation infrastructure. Companies

have found, however, that good after-salesservice is expected by consumers in ruralemerging markets and that providing qualityservice can increase consumers trust in acompanys brand. Tecnosol in Nicaragua isa good example of this. The companyfocuses on offering excellent service, andtechnicians travel any length to reach acustomer.69This includes sendingrepairmen into rural areas by horseback ifthat is what is required to reach a customers

location. WaterHealth International (WHI),producer of water purifying technology, alsoplaces and emphasis on after-sales service.While it franchises out its technology tolocal community organizations, WHImandates that it must be contracted toprovide service for the water purifyingfacilities to ensure that consumers alwaysreceive quality water.70

Companies can choose among several

methods for providing after-sales service.TERI, for example, chooses to educateretailers and repairmen in rural areas on howto repair their products, and then suppliesthese partners with spare parts.71Many citiesand towns have repair shops that consumersalready take their broken products to, and acompany can work with these shops toprovide service (an example this can be seenin exhibit 6). While this method mayimprove the timeliness of repair and reduce

employee salary and transportation costs, the

69Prahalad 2006

70Hadiya Faheem and Debapratim Purkayastha,

WaterHealth International: Providing Safe Drinking

Water to the Bottom of the Pyramid Consumers

(ICMR Center for Management Research, 2010)71

Rehman, Kar, Raven, Singh, Tiwari, Jha, Sinha,

Mirza, 2010



26

quality of the after-sales service experiencethat customers receive cannot be explicitlycontrolled. On the other hand, Tecnosol, asdescribed above, sends employees deep intorural areas to make product repairs. In

contrast to TERI, Tecnosol is guaranteeingthat its customers receive a quality after-sales service experience, but the companyalso faces higher costs from its operations.

Exhibit 6. A repair shop in rural India.

Given the importance of after-salesservice for building and maintaining aconsumers brand trust, I recommend that acompany choose the after-sales serviceoption that will best meet the needs and

expectations of its customers. In addition, itis critical that companies take the cost ofproviding good after-sales service intoaccount when designing their marketingchannels and when deciding on the size ofthe market they want to serve. As will beseen in the case of d.light Design, growingproduct distribution beyond a companys

ability to provide timely and effective after-sales service will create discontent amongconsumers and retailers and tarnish thecompanys brand.

A FRAMEWORK FOR MARKETINGCHANNEL STRATEGY IN RURAL

EMERGING MARKETS

As I have described in the sections above,there are several activities a company with anew product or service and an unknownbrand in the region needs to take whilebuilding their marketing channels in a ruralemerging market. The resulting marketingchannel will consist of multiple

interdependent organizations

72

workingtogether to enable a consumer to derivevalue from a companys product or service.The framework I propose for buildingmarketing channels in rural emergingmarkets (seen in exhibit 7) is centered on theneeds of the consumer and focuses onactivating customers, delivering products,and maintaining customers. Customeractivation and product delivery are requiredto enable consumers to purchase products,

while maintaining customers is required forthe consumer to derive long-term value fromthe product or service. By building amarketing channel that can perform theseactivities effectively and in a cost-efficientmanner, a company entering a ruralemerging market with a new product orservice will greatly increase its chances ofsucceeding in the marketplace.

72Anne Coughlan and Erin Anderson p 4



27

Exhibit 7

Although I have described many of theindividual points in the framework in detail

above, I will outline them again now toprovide a central checkpoint for companies.

Activating Customers

Before a consumer in a rural emergingmarket will even consider purchasing aproduct or service, the consumer needs to beenabled to make the purchase. A companysmarketing channel must includeorganizations (either the company itself or

partners) undertaking activities that unlockthe latent desire in the consumer to make thepurchase. Below are the customer activationactivities that should be included in themarketing channel.

Education

Consumers in rural emerging markets oftenlack knowledge about topics like banking,

modern hygiene practices, and modernagriculture practices. Companies shouldperform first-hand interviews andethnographic research (or partner with ruralmarketing research firms like MART inIndia) to determine how consumerscurrently perform the targeted behavior orfunction, and to learn what gaps inknowledge consumers currently have. Then,the company should design educationinitiatives targeted at the rural consumers

and partner with local non-profit andgovernmental organizations to deliver thecompanysmessage.

Affordability

Consumers in rural emerging markets havelow and sporadic incomes, often subsisting



28

off of less than $2 USD per day and earningtheir incomes from periodic agricultureharvests. While some companies havestruggled to sell products into this market,others have cracked the affordability

challenge and thrived. Entering companiesshould consider the type of product orservice they are selling, the financial needsof the target consumer, and the financialneeds of the company itself whenformulating their payment scheme strategy.Strategies that have worked well forcompanies in the past include shrinkingtraditional products to decrease their price,offering consumer financing, partneringwith womens Self Help Groups, layaway

programs, and targeting consumers in thearea who have higher and more consistentincomes.

Brand Trust

Due to a lack of credible information and aplethora of fake and low-quality productsoffered to them, consumers in ruralemerging markets will be hesitant to trustnew brands when they are introduced into

the marketplace. Despite this challenge,building a credible brand is essential to thesuccess of a product or company. Inaddition, once a brand gains trust in a ruralemerging market, it will more than likelyretain that trust due to the brand stickiness ofrural consumers. Companies entering intothis market with unknown brand have foundpiggybacking on established and trustbrands to be a successful strategy forgaining consumer trust. Entering companies

can choose to piggyback on commercialbrands like Coca-Cola did with Thums Up,or they can choose to piggyback on thetrusted local leaders and non-profitorganizations, like ITC e-Choupal does withthe prominent village farmers.

Delivering Products

Along with activating customers, asuccessful marketing channel must deliverproducts or services in an effective andcapital efficient manner. Important

considerations when making productdelivery decisions include:

Distribution Network Design

Many companies entering into ruralemerging markets have struggled to designdistribution networks that both deliverproducts to where consumers seek topurchase them and that are cost effective forthe company. This is challenging because

rural populations are widely geographicallydispersed, and because rural transportationinfrastructure is either poor or non-existent.Based on these challenges, I recommendthat entering companies match theirdistribution network design to the productthey are selling. If a company is selling fastmoving consumer goods, the products needto be placed at the village-retailer level. Toget products to these retailers, enteringcompany should mimic Coca-Colas

distribution network design and use a hub-and-spoke model in which the companydelivers products to a central distributionpoint and then independent entrepreneurspurchase the products and deliver them intothe villages. If a company is sellingconsumer durables, product demand shouldbe aggregated as much as possible intopopulation centers to decrease inventory andtransportation costs. Consumer durablecompanies do need to keep in mind,

however, that they may need to maintain alocal presence close to rural consumers inorder to provide installation and after-salesservice.

Distribution Network Logistics



29

In rural emerging markets, operating adistribution network can be even morechallenging that designing one. This is dueto poor infrastructure, highly fragmenteddistribution industries, and a lack of

accountability displayed by warehousingand logistics firms. As much as possible,companies should piggyback on effectivedistribution networks that have already beenbuilt by corporations or that already exist inthe fabric of society. Entering companiescan either partner with establishedcorporations to distribute products andservices through established networks, orthey can focus on business-to-business salesand allow companies and organizations

established in the target regions takecomplete ownership over distribution.Companies have also found distributionsuccess by partnering with local non-profitorganizations like womens Self HelpGroups and farmer federations. To enable itsown long-term commercial success, theentering company (the rider) needs to ensurethat the established organization (the carrier)it is piggybacking on has a long-termcommercial or social interest in partnering

with the rider.

Maintaining Customers

After-Sales Service

After a customer in a rural emerging markethas been has purchased a product, thecustomer may eventually need additionalassistance from the company if the productbreaks or requires regular servicing.

Offering quality after-sales service is animportant but often overlooked activity thatcompanies need to consider when they areconstructing their marketing channels inrural emerging markets. If a company doesnot continue to ensure a good experience forcustomers after they have purchased aproduct, the company will eventually see a

drop in sales as customers look elsewherefor their next purchase and tell theirneighbors and friends about their badexperience. Companies can provide after-sales service either through their own

employees or by partnering with localretailers repairmen. Companies shouldchoose the option that best meets the needsof their customers, and should carefullyconsider the cost of providing after-salesservice when determining the size of themarket they want to roll their product out to.

NOTE ON THE SOCIAL FUNCTION

OF COMPANIES OPERATING IN

RURAL EMERGING MARKETS

To this point in the paper I have notexplicitly discussed the social value that canbe created when companies operate in ruralemerging markets. Many business people,scholars, and social activists, however, havenoted the social good that can be createdwhen companies bring new products andservices into these markets that help localconsumers improve their lives. As C.K.Prahalad wrote:

For the BOP consumer, gainingaccess to modern technology andgood products designed with theirneeds in mind enables them to take ahuge step in improving their qualityof life.73

While many of the large companies I havementioned in this paper began business byoperating at the Top of the Pyramid and

have only recently focused on BoPconsumers, all of the smaller companiesdescribed in this paper were startedexplicitly with the dual goal of creatingprofits and creating social good in emergingmarkets. The road to success has beenchallenging for these comparatively small

73Praha

marketing channel strategy in rural emerging markets ben neuwirth

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