the quest for the fortune at the bottom of the pyramid: potential and challenges

The quest for the fortune at the bottom of thepyramid: potential and challenges

Dennis A. Pitta

The University of Baltimore, Baltimore, Maryland, USA, and

Rodrigo Guesalaga and Pablo MarshallPontificia Universidad Catolica de Chile, Santiago, Chile

AbstractPurpose – The purpose of this article is to examine the bottom of the pyramid (BOP) proposition, where private companies can both be profitable andhelp alleviate poverty by attending low-income consumers.Design/methodology/approach – The literature on BOP was reviewed and some key elements of the BOP approach were proposed and examined.Findings – There is no agreement in the literature about the potential benefits of the BOP approach for both private companies and low-incomeconsumers. However, further research on characterizing the BOP segment and finding the appropriate business model for attending the BOP canprovide some answers to this issue.Practical implications – The article provides some guidelines to managers as to how they need to adapt their marketing strategies to sell to the BOPmarket, and what type of partnerships they need to build in order to succeed.Originality/value – The article presents a thorough analysis of the key elements involved in the BOP initiative: companies’ motivations,characterization of the BOP consumers, and the business model to attend the BOP.

Keywords Private sector organizations, Emerging markets, Consumers, Poverty, Disadvantaged groups

Paper type Research paper

An executive summary for managers and executive

readers can be found at the end of this issue.

Introduction

The bottom of the pyramid (BOP) approach to earning

corporate profits has gained considerable attention in themarketing literature. It has awakened managers to the

potential of serving an unserved market and alleviating thelevel of global poverty while still earning a profit. However,the BOP proposition, while clear, appealing, and enlightening

has not been accepted in an unqualified manner. One branchof the BOP literature puts forth the elements of the BOP

proposition and supports its findings with numerous casestudies (Prahalad, 2004). Those studies portray the poor as

motivated by similar desires as the rich. They want qualityproducts and any company that can supply those products at

the right price will gain their business. Some of the casestudies show the strategies for reducing the effective price ofproducts through packaging and developing lower cost sizes.

Prahalad and others describe the untapped potential of theBOP, and list strategies that companies may use to tap that

potential.An opposing branch of the literature (Karnani, 2007a;

Martinez and Carbonell, 2007) analyzes the nature of theBOP market, the applicability of the case studies that

underpin the concept, and refutes its basic premises. Instead

of a market of untapped potential, this literature stream sees a

financial desert that BOP principles may harm more than

help. The BOP may be a less a source of significant profits

than a source of serious losses. Karnani’s analysis posits that

the poor may want the same products as the rich do but by

virtue of being poor, they cannot afford them. The poor

spend most of their income on food, clothing, and fuel. For

the poor, the mathematics are clear: buying a branded

product reduces the funds they must devote to survival. In

contrast, Karnani suggests that raising income will alleviate

their poverty, provide cost effective products to other

consumers, and allow the formerly poor to consume more.

Raising their incomes may require that they become

producers with stable jobs and wages.Both viewpoints concentrate on the poor but draw different

conclusions about how to alleviate their poverty. The two

positions also differ in the nature and proper role of industry

and government. In light of the differences, the argument

would benefit from empirical data that tests the underlying

premises of each viewpoint. Verifying the premises would

allow further logical analysis of implications and applications

of the concept. In fact, the need for clarification is recognized.In the next section, the authors provide some foundations

for the most traditional and still dominant approach to

market, i.e. the focus on the “top of the pyramid” (TOP). The

rest of the article focuses on the “bottom of the pyramid”

(BOP); it explores Prahalad’s proposition and the opposing

viewpoint, reviews key aspects of the BOP initiative –

companies’ motivation; the BOP business model; the role of

microfinance; and the key participants – and proposes some

implications and challenges for marketing theory and

practice, and finally some implications for marketers.

The current issue and full text archive of this journal is available at

www.emeraldinsight.com/0736-3761.htm

Journal of Consumer Marketing

25/7 (2008) 393–401

q Emerald Group Publishing Limited [ISSN 0736-3761]

[DOI 10.1108/07363760810915608]

393

The “top of the pyramid”

Not surprisingly, the “top of the pyramid” (TOP) approach is

at the heart of Western business practice. Traditionally,

businesses require a set of four conditions to operate

successfully in a market segment. The segment must be

identifiable, measurable, substantial, and accessible. In

Western economies, business and communication

infrastructures are developed sufficiently to meet all of the

criteria for most segments. Arguably, while all four conditions

are important, the substantial and accessible elements are the

more important. For a profit-making firm, the segment must

be large enough to generate profits. If that condition is

satisfied, it is critical that consumers in the segment be

reachable by communications media to receive promotional

messages. In addition, they must be physically accessible to

distribution alternatives. From a profit perspective, companies

concentrate on those areas in which they can be effective,

namely segments that meet all four requirements.Serving the TOP inevitably means a focus on profits instead

of revenues, and profits are central to Western business. In

practice, over time, numerous Western companies have ceded

market share or entire markets to others when the profits

declined. One prime example is the computer memory chip

market. Memory chips were once produced exclusively in the

US and Europe. As Asian competitors entered the market,

they cut prices at the expense of profits. Their goal was to

make chips; the US firms wanted to make profits.

Consequently, US firms abandoned the marketplace and

searched for targets that were more profitable. European and

US companies still make chips. Their dominance of the

microprocessor markets is the result of the strategic quest for

profitability. However, European or US players do not

dominate the huge market for memory chips. To be

accurate, the US companies’ actions are not driven solely by

the desire to earn profits. Their organization, corporate

culture, and internal processes require economies of scale,

which demand exploiting the richest target markets. In many

cases, successful companies have evolved into efficient

machines whose foundation is high structural cost. Thus

targeting the most lucrative segments is vital for continued

success.Profit, in its simplest form, is the surplus of revenue over

costs. If companies can drive costs low enough, it is

conceivable that prices might be low enough for the poor to

afford and high enough to generate a profit. However, earning

a profit with such customers today takes enormous effort.

More important, companies that exist today may be unable to

drive costs low enough to succeed. In fact, costs are only one

part of the equation. The underlying problem is that

companies are ill equipped to serve the poorest customers.

They don’t really know what the poor want and don’t know

what benefits they seek in products and services. In addition,

companies may not know what mix of product benefits, price,

quality, promotion, and distribution works best for this

segment. However, the focus on profits has led to success.Recognizing the importance of profits, Zeithaml and her

colleagues have worked on the customer pyramid concept

(Zeithaml et al., 2001). Without using the term, they focused

explicitly on the “top of the pyramid,” those consumers with

the highest lifetime customer value (LCV). By dividing the

customer pyramid into four sections called customer

profitability tiers, they identified the “best,” most profitable

customers, and labeled them as Platinum or Gold. In

contrast, those with lower to very low LCV’s earn the valuelabels, Iron and Lead. They point out that a single Gold or

Platinum customer may have a Lifetime Customer Value,

many times higher than that of someone in the Iron or Leadtier. Specifically, one Platinum customer may be worth more

than “tons” of those labeled as Lead. Conceptually,identifying value and potential profit deriving from the top

of the pyramid is straightforward and represents traditionalorganization goals. Companies can use standard market

segmentation and product differentiation to satisfy these tiers.Dealing with these customers requires professionalism, but

the normal market research processes, product development,channels of distribution, promotion, and credit functions

should result in success. Thus, Zeithaml and her coauthorsshowed companies how to use their tried and trusted

marketing approaches to maximize effectiveness andprofitability. The key is to serve those customers most likely

to generate profits instead of losses. The justification is clear:companies have limited resources and should concentrate

their efforts where the returns will be the highest. Theydemonstrated the value at the top of the pyramid (TOP) and

shared strategies for serving those customers whilediscouraging or even “firing” the lower, money-losing tiers.

For profit seeking companies, the customer pyramid approachis appropriate and allows them the best chances to survive in

typically competitive markets.

The “bottom of the pyramid” approach

Prahalad’s proposition

In the book The Fortune at the Bottom of the Pyramid:Eradicating Poverty through Profits, C.K. Prahalad (2004),

provided that initial conceptualization that had been missingin marketing thought. His book succeeded in planting the

perception that consumers with low levels of income could beprofitable customers. He painted a picture of the double

bottom line: social goals combined with the businessobjective, profit (Harjula, 2005). Coincidently, he appealed

to the best motives among those at the top of the pyramid. Byciting examples of successful attempts to empower the poor

and share in global wealth, he kindled the imagination ofthose who want the world to be a better place. This is an

appealing proposition: “low-income markets present aprodigious opportunity for the world’s wealthiest companies

– to seek their fortunes and bring prosperity to the aspiringpoor” (Prahalad and Hart, 2002).Prahalad’s proposition is an invitation to company

executives, politicians, managers of non-profit organizations,

and ordinary citizens, to view poverty as something that might

be alleviated rather than inevitable. He presents a well-reasoned conceptual view – supported with case study data –

of how companies might mine profits from the lowesteconomic strata (Hart, 2005; Prahalad, 2004). Much of the

treatment centers on the nature and scope of profits and thecollective wealth of consumers at the bottom of the pyramid

(BOP).The main thesis of Prahalad’s work rests on the idea that

the potential growth for many multinational (MNC) andmedium sized companies does not rest on the small high-

income market in the developing world. Instead, its source isthe mass low-income people that are joining the market for

the first time. This idea goes against the following

The quest for the fortune at the bottom of the pyramid

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assumptions, which, according to Prahalad, most MNC’s

make: it is not profitable for them to attend the BOP due to

their high cost structure; the low-income segment cannotafford the products and services they sell; and only developed

markets value innovation and will pay for new technology.These arguments imply that governments and non-

governmental organizations (NGO’s) should take care of the

low-income segment.According to Prahalad, marketers who believe that the BOP

is a valuable unserved market also believe that even the poorcan be good customers. Despite their low level of income,

they are discerning consumers who want value and are well

aware of the value brands favored by more affluentconsumers. This school of thought recognizes the obstacle

that low income creates. It postulates that if companies takethe correct steps and devote sufficient resources to satisfying

the needs of the BOP, they can overcome barriers to

consumption. This view rests on Prahalad’s calculations of theimmense size of the global BOP, in his view, a $1.3 trillion

dollar market.Prahalad recognizes that serving the low-income sector

requires a commercial strategy in response to the needs ofthose people; to succeed, other players have to get involved –

mainly local and central government, financial institutions,

and NGOs. He proposes four key elements to thrive in thelow-income market:1 creating buying power;2 shaping aspirations through product innovation and

consumer education;3 improving access through better distribution and

communication systems; and4 tailoring local solutions.

The opposing viewpoint

The second literature thread emerged years later in the

discussion and represents a thoughtful attempt to verify the

bottom of the pyramid (BOP) concept. It questions the easewith which companies may tap the BOP and whether profits

exist there at all (Karnani, 2007a).First, this group dismisses the published calculations about

the size of the BOP and its wealth. They describe the

economic size of the BOP as considerably smaller thanPrahalad’s estimate and cite the inherent subsistence problem:

the poor spend 80 percent of their income on food, clothing,and fuel. There is hardly anything left to spend after that

(Karnani, 2007b).Second, they argue that it is very unlikely that companies

will be able to attend the BOP market profitably. In fact, the

costs of serving this segment can be very high. BOP customersare usually much dispersed geographically; they are very

heterogeneous, which reduces the opportunities for obtainingsignificant economies of scale; and their individual

transactions usually represent a low amount of money. In

addition, consumers at the BOP are very price sensitive,which, again, makes profitability a difficult goal to achieve.Those factors show that the ideal that both profits and

social good can result from serving the BOP is questionable.

First, each goal has different motivations, demands, and

mechanisms to satisfy and they can be contradictory. Thedifferences between business realities and development

imperatives are not easy to reconcile. Some recent casestudy work suggests that the early language around the

inclusive capitalism idea that emphasizes unlimited business

opportunities and poverty eradication through profits may setunrealistic expectations for business executives (McFalls,2007). Second, the traditional timelines for achieving socialgoods versus profits differ (Harjula, 2005). Businesses mayuse a five-year horizon as their benchmark for returns. Incontrast, social goals like reducing smoking and otherunhealthy lifestyle behaviors may take generations.Thus, rather than viewing the poor primarily as consumers,

this group suggest a focus on this segment as producers, i.e.potential entrepreneurs that can improve their economicsituation by increasing their income level. Companies must bewilling to invest time, resources and training to insure that theproducers create products with some barriers to entry and areasonable level of productivity. They need to do so to avoidthe trap of producing commodities that are easy to duplicateand, thereby, keep the poor, poor. Otherwise, alleviatingpoverty becomes very unlikely.

Reconciling the two opposing viewpoints

It is clear from the previous discussion that findings in theliterature about the nature, scope, and value of the BOPproposition are mixed. More research is needed on this topicto gain an accurate view of the presence and extent ofopportunities at the bottom of the pyramid.The following sections examine some key elements of the

BOP initiative that have been, acknowledged in the literature;specifically, the firms’ motivations to attend the BOP market,the characterization of the BOP consumers, and the BOPbusiness model. The latter element focuses on three majorissues: the role of microfinance, the importance ofestablishing alliances among different actors (e.g. for-profitfirms, NGOs, governments), and how for-profit companiesneed to adapt their marketing mix to attend the BOPprofitably.

Firms’ motivation to attend the BOP market

A comprehensive examination of the BOP approach requiresfirst an understanding of why for-profit companies engage insuch an initiative. The literature suggests two mainmotivations that companies have to attend the BOP market:1 they can convert this segment’s purchasing power into

profits; and2 they can bring prosperity to the poor, and thus alleviate

poverty.

For example, in the 1970s, Nestle was able to contribute tosocial progress while developing a competitive advantage andmaking profits in Moga, a district in India. With the purposeof establishing local and diverse sources of milk, Nestle builtmany refrigerated diaries and then sent its trucks to collectproduct while providing financing, nutritional supplements,and assistance and training to the farmers. With this action,Nestle increased its milk production and the suppliers’productivity, improved the quality of the product andprocesses, and increased the penetration of other Nestleproducts in the region. In turn, farmers raised their standardof living; Nestle was able to pay higher prices, and farmerswere then able to obtain credit.A second case illustrates how a focus on the BOP can be an

important strategic goal, with two dimensions: profitabilityand corporate social responsibility. Masisa is a leadingcompany in the production and trade of wood boards forfurniture and interior architecture in Latin America. It has




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established the goal of generating 15 percent of the revenues

from inclusive businesses, i.e. the bottom of the pyramid,before 2012. Under their definition, inclusive businesses must

be profitable, and socially/environmentally responsible. Theyexpect to help improve the standard of living for low-income

people by facilitating their participation in the value chain as

suppliers, distributors, or other element of the channel, andby providing them with access to products and services that

can help them improve their socio-economic condition.

Purchasing power and profitability

Karnani (2007a) notes that BOP concept rests on a fuzzy

definition of the target market. It is difficult to find an articlein the BOP literature that does not cite the now popular

figure: four billion. Four billion originally referred to those

people who primarily live in developing countries and whoseannual per capital income is under US$1,500 per annum.

Some of the literature takes as an article of faith that the BOPexists and earns that level of income. The perception is that

individually the consumers are poor but together theyrepresent massive purchasing power. However, authors

define the BOP income level using several standards, whichobscures its true nature. For example, Hammond et al. (2007)consider the bottom of the pyramid as composed of peoplewith per capita incomes below $3,000 in local purchasing

power.Prahalad (2004) states that there are more than four billion

people with per capita income below $2 per day at purchasingpower parity (PPP) rates ($750 per year). This is a significant

reduction in previous estimates: four billion people with percapita income below $1,500 per year ($4 per day) (Prahalad

and Hart, 2002), or four billion people with per capita incomebelow $2,000 per year ($6 per day) (Prahalad and Hammond,

2002). Other contemporary sources like the World Bankestimated the number at 2.7 billion, in 2001. However, other

researchers characterize the World Bank projection as anoverestimation, with some experts estimating the poor at 600

million (The Economist, 2004). The differences range fromfour billion to 600 million, a large enough gap to cause

concern.The three reported income levels range from $2-6 per day.

The $2 per day criterion is consistent with previous literaturein development economics. It is important to understand that

how to alleviate poverty depends on the definition of poverty.Using the $2 per day figure presents different challenges than

the higher levels: people who earn less than $2 per day havevery different needs and priorities than people who earn $4-6

per day. Adopting the higher poverty line obscures these

differences (Karnani, 2007b) and overestimates the potentialat the BOP.In principle, it is clear that collectively the mass of poor

customers do hold wealth. However, an additional problem is

that they do not hold it in the right concentrations. If oneconsiders a hypothetical example, the nature of the wealth at

the BOP may become a bit clearer. If a village of 1,000 adultsearns an average of US$750 per year (the $2 per day figure),

the gross earnings of the village are significant. However, thequestion becomes how much remains after satisfying the

necessities. Even if an impressive 10 percent of incomeremains per household, that translates into $0.20 per day. It is

difficult to perceive how such small sums might generateprofits. Collectively, the village may have $200 per day in

“disposable income.” That might translate into community-

cooperatively owned items like a television, a telephone, an

electric generator, medical services, or even something to helpmake products for sale. Managing that sum for the common

good presents a major dilemma: community welfare versus

individual choice. People in the BOP would need a high senseof community involvement and consumer education to make

responsible choices. A non-profit community actionorganization or a socially conscious business would be very

helpful in marshalling cooperation. However, too many of thepoor make poor choices like spending money on tobacco

instead of food for their children. Even if this optimistic levelof potential purchasing power exists, harnessing it for profit

will be extremely difficult.One further concern questions this premise. Traditionally,

serving the poor was the role of charities, not for profit, andother non-governmental organizations. Much of the

excitement that the BOP proposition has generated stemsfrom the inclusion of profit making companies in the process.

The thought is that profit will be a powerful goad towardachieving success. Profit is clearly an incentive but beyond the

cases cited in Prahalad’s work, there is little proof that

companies can make the shift. More empirical data would aidthe process of developing purchasing power.

Poverty alleviation and prosperity to the poor

From a social responsibility perspective, there are distinct

differences between a market-based approach to povertyreduction and approaches that are more traditional.

Traditional approaches often focus on the very poor,proceeding from the assumption that they are unable to

help themselves and thus need charity or public assistance. Incontrast, a market-based approach starts from the recognition

that being poor does not eliminate commerce and market

processes: virtually all poor households trade cash or labor tomeet a significant part of their basic needs. The latter

approach is the one for-profit companies have embraced topursue the BOP initiative.The argument regarding poverty is that the poor face

undeveloped distribution outlets and must pay monopoly

prices for the goods they desire. In addition, they are unableto afford the standard quantities and qualities of products

offered to richer consumers. This is consistent withHammond et al. (2007), who describe people at the BOP as

having significant unmet needs, and being dependent oninformal or subsistence livelihoods. They are vulnerable,

poorly integrated to the formal economy, and impacted by aBOP penalty under which they pay higher prices for basic

goods and services than wealthier consumers.Successful attempts to bring quality products to the poor at

affordable prices would overcome the high price of poor

distribution (Martinez and Carbonell, 2007). In that sense, itwould increase their purchasing power by bringing previously

unaffordable goods within their budgets. However, the $2 perday income limit is a significant obstacle and may make this

goal impossible to attain.There is some hope in alleviating poverty but it is more in

line with Karnani’s vision of the poor as producers who areable to boost their income sufficiently to rise above the

bottom of the BOP. The very recent example of ITC Limitedoutlined the distribution based economic problems faced by

poor farmers in India. There are many factors that affect theflow of goods and services in and out of rural areas, and thus

reduce the rural population’s income and quality of life




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(Vachani and Smith, 2008). While the major source of

problems was the poor transportation infrastructure, other

factors operate to keep disadvantaged groups like poor Indianfarmers in poverty. Buyers bully them into accepting “buyers’

prices.” Moreover, farmers are ignorant of their rights and the

market value of their crops. In addition, they pay monopolyprices for the items they need. These factors act to keep them

at a disadvantage and unable to earn the proper income fromtheir efforts. By addressing farmers’ lack of information about

the current value of their crops, the best seed to use for high

yields, proper farming practice, and alternative outlets fortheir crops, ITC increased their welfare. To accomplish this,

ITC set up a parallel distribution system, which led toincreases in farmers’ income and consumption. The effort

started at the grassroots with ITC hiring agents already in the

field and rewarding them for improvements in farmer welfareand consumption. The company placed computers with

satellite based internet connections in each village and taught

farmers to use them to assess current crop pricing. ITCguaranteed to match or exceed the prices offered by others. In

addition, ITC provided products farmers needed like seed ata discount from the existing retailers. There was significant

“missionary” education aimed at allaying the farmer’s fears of

exploitation. After a few farmers tried the system, more ofthem signed on. The result was increased income, higher

satisfaction, more independence, and lower cost to purchase

supplies.The example is encouraging and demonstrates the

commitment and stamina organizations need to operate atthe BOP. ITC set up a private distribution network that was

more closely associated with a cooperative than the typical

channel. Farmers and grassroots agents who knew their needsvery well cooperated to operate the channel and share in its

economic benefits. In essence, ITC adopted Karnani’s modelof buying from BOP producers to raise their level of income

developing them into profitable customers. Can companies

really generate profits and alleviate poverty at the BOP? Thisexample seems to show that they can. It also shows the extent

to which companies will have to re-engineer their approaches

and operations to succeed.

Characterization of BOP consumers

A fundamental requirement to attend the BOP market

successfully is to know deeply the characteristics of the peoplein this segment. Some academic studies and reports from

NGOs have contributed refining the understanding of the

BOP: how many they are, where they are located, what theirincome level is, and what some of their characteristics in

terms of needs and habits are.According to Hammond et al. (2007), the BOP is

concentrated in four regional areas: Africa, Asia, Eastern

Europe and Latin America and the Caribbean. 12.3 percentof the BOP lives in Africa, 72.2 percent in Asia, 6.4 percent in

Eastern Europe and the remaining 9.1 percent lives in Latin

America and the Caribbean. Rural areas dominate most BOPmarkets in Africa and Asia while urban areas dominate most

in Eastern Europe and Latin America and the Caribbean.Estimates of the size of the BOP in US dollars or buying

power approximate $1.3 trillion. The Asia market has a

buying power of $742 billion, Latin America market is $229billion, the Eastern Europe market $135 billion and Africa

$120.

There is some data on the changes in the size of the BOP

that aid in forecasting the future. Chen and Ravallion (2007)

report a decline in the proportion of people living under thepoverty line in the developing world over the period 1981-

2004. That represents a reduction of about 0.8 percent points

per year over the period.Separate from the numbers, the question remains, “Who

are BOP customers?” Current demographic labels such as“blue-collar’ or working-class,” fail to capture the extreme

level of poverty. As marketers gain more experience with the

BOP, it is possible that other useful differentiations mayemerge based on specific variables, such as behavioral or

psychographic.The global distribution of BOP customers adds another

factor to consider: culture. The cultures of Latin America,

Asia, and Africa differ widely. It is logical that differences in

culture will affect future attempts to understand the needs ofthe BOP segments. In general, D’Andrea et al. (2004) find

that consumers at the BOP spend a higher portion of their

income on consumer goods (50 to 75 percent), as comparedto wealthier segments (around 35 percent). These authors

also find that, due to their limited and unstable cash flow, low-income consumers tend to shop daily and spend small

amounts of money each time. Then too, they are reluctant to

buy in places that are located far away from their homes. Thefindings show that “stay at home” mothers make most of the

purchases and family spending decisions; by doing this, they

fulfill roles as wife, mother, and household manager.Companies currently devote resources to listening to the

voice of the customer and are confident in their efforts with

currently serviced segments. A change of focus to the BOPwill require new techniques, and freedom from “accepted

knowledge.” The BOP is so radically different that companieswill have to ignore what they know as “truths” that may not

apply anymore. Faulty new product development eradicates

the potential for profit and unfamiliar product development(NPD) territory increases the risks of failure. Firms can

increase their NPD success rates by integrating consumers

into the process as boundary spanning team members insteadof mere respondents to surveys. Thus, product development

will benefit from the input of customers at the lowest levels of

income (Pitta and Franzak, 1997). However, that initiativewill be supremely different from current successes.A good example of how companies, NGOs, governments,

and other institutions can collaborate in this aspect is the

formation of BOP learning laboratories (McFalls, 2007). The

laboratories were designed to investigate the complex factorsthat interact at the BOP as well as opportunities for both

sustainable and human development. More initiatives like this

one are needed, as well as research on the characteristics ofthe BOP consumers.

The BOP business model

In spite of the opposing viewpoints in the literature regardingthe extent to which there is a business opportunity at the

BOP, there is agreement that serving the low-income sector

profitably requires a different business model (Chesbroughet al., 2006; Prahalad and Hart, 2002). Prahalad and Hart

(2002) state “doing business with the world’s four billion

poorest people – two thirds of the world’s population – willrequire radical innovations in technology and business

models”. Moreover, the market at the BOP requires a




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combination of low cost, good quality, sustainability, and

profitability (Prahalad and Hart, 2002). As a result, for-profitfirms need to understand how the BOP segment differs from

upper tiers, and adapt the marketing approach to meet the

characteristics of consumers at the bottom.Prahalad’s concentration on the bottom of the pyramid

requires a sea change in a company’s approach to business.Attempts to reap profits from the BOP using current

marketing techniques will fail. Failure will result because theproducts are too expensive or complicated, are not available in

small enough quantities or sizes, or are simply not what thepoor want. The BOP is not low hanging fruit. It is a market

with potential, and achieving that potential will require costlyeffort and innovative strategies (Seelos and Mair, 2007). Even

with a completely new management approach, evidencesuggests that profits at the bottom of the pyramid may be

elusive (Karnani, 2007a).The literature suggest that the three most critical aspects in

developing a new business model to serve the BOP are theaccess to credit, the establishment of alliances, and the

adaptation of the marketing mix. The following subsections

address these issues.

Microfinance

Microloans are well known and originally seemed like theanswer to self-sufficiency. The concept that a poor consumer

could gain a small loan and become a producer contributingto family income and independence is tantalizing. There is

evidence that microloans have succeeded in aiding the bottomof the pyramid. There is also evidence that many of the

would-be entrepreneurs failed to capitalize on such credit.They got deeper into debt (Karnani, 2007a). Some authors

point out that the entrepreneurial skill that can lead to success

is rare. Most individuals would rather have a guaranteedincome rather than assume the risk that entrepreneurship

entails. This adds to the argument that if businesses cancreate jobs and boost the poor’s income, then consumption

will follow. Those businesses may not be able to obtainoutside financing. The BOP segments are not able to generate

sufficient profits to justify a high cost of capital. To reduce thecost of capital, perhaps collaboration with funding sources like

the World Bank or other NGO will be necessary. Withfinancial aid, companies trying for the BOP market may be

able to succeed.The creation of buying power is one of the key elements

that allow low-income segments to reach product andservices. Formal commercial credit has been unavailable to

this market and the cost of accessing and getting financialservices in the informal financial market is enormous. Since

the pioneering initiative of Grameen Bank, in the mid of the

1970’s, several financial institutions have been very successfulin offering financial services to low-income people who were

not traditionally served by the formal bank system. Programsfor microcredit have characteristics that are specific and

different from those of the traditional banking sectors. Thesedifferences include property and corporate governance of the

institutions, characteristics of the consumers, the technologyused to manage credit, and the characteristics of the product

and service.The growth of the microcredit market has been

heterogeneous across countries. For example, in LatinAmerica, the microfinance industry has had a significant

growth in countries like Peru, Bolivia and El Salvador but it is

still in its early stage in countries like Brazil, Mexico, and

Argentina.Most of the banks that have participated in microfinance

are large commercial banks in search of new and attractive

markets. The main reasons for commercial banks to attend

the BOP have been:. the strong competition among large banks;. the evidence by NGOs supporting the BOP initiative;. the social responsibility dimension;. the opportunity to diversify their business operation; and. the possibility of working together with other institutions,

like NGOs and governments.

According to Westley (2007), by the end of 2005, there were

30 commercial banks in Latin America oriented to the micro-

entrepreneurs.

The establishment of alliances

There is recognition that serving the BOP requires the

involvement of multiple players, including private companies,

governments, nongovernmental organizations (NGOs),

financial institutions, and other organizations – e.g.

communities – (Prahalad and Hart, 2002).By infusing the profit motive into value creation, the hope is

that private companies will take the leading role in serving the

BOP and, thus, the purpose of alleviating poverty will more

likely succeed. Prahalad and Hart (2002) suggest that, among

private companies, multinational corporations (MNC) with

extensive financial resources are in the best position to lead

the process of selling to the poor. However, MNC’s have

built-in weaknesses that limit their potential for success with

these consumers. They are simply too large, too rigid and too

far from the customer to be effective. Instead of the top down

approach that MNC’s represent (McFalls, 2007; Harjula,

2005), a bottom up process is necessary (Karnani, 2007a).

Changing perspectives from top down to bottom up is so

complicated that if MNC’s are to be involved, they may have

to create flexible subsidiaries free from the corporate

structure, processes, culture, and assumptions. ITC has

succeeded using that model and has done so at the grassroots

level. Therefore, more research is needed to find out under

which circumstances MNC’s or other types of private

company should lead the BOP initiative. This line of

reasoning is consistent with D’Andrea et al. (2004) who, in

the context of retailing in Latin America, suggest that small-

scale independent supermarkets and traditional stores are

more likely to reach emerging consumers than MNC’s.Likewise, NGOs have been critical in the development of

the business model infrastructure in several successful cases of

for-profit firms serving the BOP. For-profits have created

sustainability for the technology used (Chesbrough et al.,2006); NGO’s, understand people’s needs. In addition,

NGO’s are closer to people at the BOP, and are better

prepared to educate them. For example, in Uganda, Africa,

the NGO Infectious Disease Institute in Kampala

collaborated with Pfizer by educating people about the

causes of AIDS, and how to prevent and combat it. This

facilitated Pfizer’s initiative to provide these people access to

drugs that combat HIV/AIDS (Chesbrough et al., 2006).Lastly, the public sector has an important role in developing

the BOP proposition. The focus is changing from traditional

governmental assistance delivery, to different ways of creating

a sustainable environment for aiding the BOP. For example,




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the provision of funding and training to entrepreneurs is a way

governments can support consumers and producers at the

BOP. Another example is engineering supportive taxstructures that promote private sector investment in BOP

initiatives.

The marketing mix

It is no surprise that serving different market segments may

require different marketing mixes. Therefore, for-profit firmsneed to understand how the BOP segment differs from upper

tiers, and adapt the marketing approach to meet thecharacteristics of these consumers.Since affordability is at the heart of serving the BOP,

product modification will help lower the price and improve

affordability. The parallel strategy, reducing product sizeworks in higher customer tiers but has limited usefulness at

the lowest levels. In India, unit-use reduced size cachets of

shampoo do promote consumption but are not the answer.The higher cost of packaging erodes profits, and the resulting

discarded packaging adds to pollution. The problem remainsthat the customer still has to allocate scarce income to the

shampoo.One answer is to create a bare-bones product with fewer

product features that the poor can afford. One example,Nirma detergent made in India, highlights a “poorer” product

that is affordable. A single entrepreneur created Nirma tocompete with Hindustan Lever’s market leading detergent,

Surf. Surf gained market share because it is an excellent

product. It has numerous additives that make it effective yetgentle to humans. Its cost was significant. In fact, Nirma does

not contain many of the ingredients and safeguards of its rival.It works but can cause blisters on the skin (Ahmad and Mead,

2004). Despite its harshness, the poor embraced it becausethey could afford it. The implication is that “research must

also seek to adapt foreign solutions to local needs” (Prahaladand Hart, 2002).Evidence shows that consumers at the BOP care about

branded products, because leading brands are a guarantee of

product quality, which is particularly important to thissegment because “the financial loss from an underperforming

product is greater for people with limited incomes”

(D’Andrea et al., 2004, p. 6). However, emergingconsumers are not very loyal to specific brand names,

although they do not experiment with unknown brands. Inpractice, they switch among a few known brands (D’Andrea

et al., 2004).D’Andrea and colleagues also argue that low-income

consumers prefer products in small sizes, even if the per-unit cost is higher, because of their income and space

constraints. Moreover, too many varieties of products canharm emerging consumers’ purchasing experience. They may

feel tempted to buy things they don’t need or can’t afford,

which can produce a feeling of inferiority or frustration(D’Andrea et al., 2004).Marketers also need to revisit distribution channels also to

attend the BOP market effectively. Vachani and Smith’s

(2008) recent work dealing with inclusive distribution hasmerit as a model for success. In essence, their examples

infused a social action philosophy into a business model. Oneof their focal companies, ITC, demonstrated the vision

necessary to discern profits in the future and thedetermination to invest in a new distribution channel as a

win-win proposition. Undoubtedly, the high cost of

distribution makes the poor poorer. Today, with escalating

global fuel costs adding to the cost of transportation, the poorface an increasingly rigorous future. The lack of infrastructureserving rural areas also increases prices. For example, inChile, consumer goods prices in the remote North and Southof the country are 20-25 percent higher than the more highly

populated central zone of Santiago and Valparaiso (Ferreiraand Litchfield, 1999).The idea of closeness in distribution channels for

consumers at the BOP is very important. This means, forexample, having stores that are both geographically close andaffectively close. In other words, emotional proximity is alsovery important. A good example is Banco Estado, a state-owned commercial bank, which consumers consider the“closest” to the BOP segment. The reasons are its extensive

distribution, its perception of being adaptive to people’sneeds, its flexibility, and its position as affectively close. In thecontext of retailing, D’Andrea et al. (2004) show that thedevelopment of personal relationships with the stores’personnel has a positive effect on consumers’ self-esteem

and well-being.Pricing for the bottom of the pyramid is, of course, also very

critical. The challenge here is twofold. On the one hand, there

is the issue of affordability: prices need to be affordable toBOP consumers. Ramaswamy and Schiphorst (2000)demonstrate the challenges in companies trying to serve thepoor. In order to achieve affordability, they must reduce thecosts of production and simplify the products. On the other

hand, flexibility in payments is also very important. Providingoptions of how and when low-income consumers can pay fortheir products and services constitutes both a challenge and asource of competitive advantage to private companies. To dothis, private companies may need the assistance of

commercial banks and NGOs as key partners.Some marketing theorists (Karnani, 2007b) view the BOP

as a collection of producers rather than consumers.Therefore, innovative payment models, which allow BOP

consumers to pay using a marketing exchange model wouldincrease their ability to pay for the things they consume. TheNestle milk agricultural exchange model cited above comes tomind. In that model, Nestle actually paid farmers for theirmilk at attractive prices. They could use the money to buy

seed at equally attractive prices. It is a small step to consider amore traditional barter system. As long as the barter systemoffered fair pricing it would present a win-win situation thatwould help sustain the arrangement.

Conclusions and challenges for marketing theoryand practice

While the picture is not completely clear, the bottom of thepyramid may offer opportunities to create value for both thepoor and companies. Early promises of a fortune seem to have

been overstated. The degree of wealth present among thepoor is much lower than first reported. In addition, thatwealth is too fragmented to be tapped under the currentbusiness models. It now appears that the basic conceptoverestimates the role that BOP consumers can play in

contributing to company profits.There is still no agreement in the literature about how

beneficial selling to the BOP can be for private companies, or

for alleviating poverty. However, there are several elements ofthe BOP proposition that have been identified as critical to




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succeed. First, an accurate characterization of the low-income

sector – both as consumers and as producers – is required to

understand their needs, perceptions, and behavior, which inturn will help companies to design a better business approach.

Second, it is important to recognize that serving the BOP

market requires a different business model, one incorporatingaccess to microcredit, the establishment of alliances of

collaboration among different types of institutions, and the

adaptation of the marketing mix. “Until companies betterunderstand the needs of emerging consumers and adapt their

business models to serve them more efficiently and effectively,

their growth will be limited” (D’Andrea et al., 2004, p. 3).It is well known that BOP markets involve managing

substantial challenges in technical and economicinfrastructure, education, financial resources, and cultural

differences. As participants from the economic sectors

progress, a number of questions need to be addressed.Gardetti (2005) articulated them clearly. They include: “How

can a company turn its strategy at the BOP into a competitive

advantage? What kind of business model will work? How canit build trust in the informal economy? What kind of

education do business schools need? How does new

technology integrate? How can we develop the educational/social infrastructure? Moreover, from the viewpoint of

regulatory and policy formulation, if entering the markets at

the base of the pyramid is a sound choice for bothdevelopment and business, what does it take to turn this

into a reality?”Scholarly research, as well as practitioners’ participation in

BOP initiatives, can provide some answers to clarify the true

nature and scope of the fortune at the bottom of the pyramid.

Implications for marketers

In general, if profit-seeking companies plan to serve the BOP,

numerous factors will have to change. First, marketers willhave to approach the BOP in a novel manner different from

any they used in their prior successes. The BOP is mostly

unknown territory. They may have to reinvent themselves orcreate divisions with substantial independence. If the old

segmentation rules that worked at the TOP no longer apply,

neither will the product development, sales, pricing,distribution policies, and management. In addition, the

profit objectives and revenue goals will have to be changed.

Those who are not prepared to address the sea change inmarketing approach should avoid entering this market.Second, simply modifying products and selling them is a

path to failure. Success will depend on knowing the BOP

intimately. Currently the BOP is terra incognita in terms of

segments and their needs. To succeed, marketers must be ableto differentiate different income segments and their value.

Within the various BOP definitions, there are three apparent

segments, “under $2 per day”, “$4 per day”, and “$6 perday”. The needs and incomes of the segments seem to differ

enough to indicate that they be treated differently. Marketers

need to know which ones to serve and how to serve thosesuccessfully.Third, in order to understand the voice of the BOP

consumer, companies need grass roots sources of intelligence.

Collaborating effectively with agents “on the ground” who

have direct contact with relevant BOP segments is vital.Moreover, companies must train those agents to seek

information that will help serve those customers. The Nestle

example in India showed its value in distribution and in

customer relationship management. It will be equally valuable

in research, product development, pricing, and promotion.Fourth, pricing is of paramount importance in serving the

poor. In a for-profit enterprise, consumers must pay for the

cost of serving them. Microcredit is one potential solution. Itmay be a limited solution, useful only to consumers with the

skills necessary to manage it. However, innovative exchange

models may offer even those without financial managementskills a chance to improve their condition.Fifth, given the economies of the BOP, it is likely that if

profits come, they will come later rather than sooner.Organizations need to choose a long-term involvement in

order to avoid disappointment and a financially ruinous

midterm decision to exit.Finally, marketers should understand that some products

are simply not suited for the poorest of the poor. Someproducts of dubious value to this segment, like Armani

handbags, or even cheap counterfeits, will have no place at the

BOP. More importantly, some products and services related

to health care will always be simply too expensive. Altruisticsurgeons may care for uniquely disadvantaged patients by

donating their time but they are only one part of a surgical

team. Even if the hospital and every member of the teamdonate facilities, their time, and the resources to save a

patient, that model is not sustainable as a for-profit venture.

Similarly, the cost of a ten-day supply of a life-savingantibiotic cannot be reduced realistically using the “smaller

package size” option. The implication would be either

reduced daily doses or fewer full strength doses. Both arelikely to breed drug resistant organisms and thereby threaten

the life of the patient and society. To remedy this situation,

other players like governments and NGO’s will be important.Many marketers must realize that collaborating with them is

important.To be effective, the collaboration must be proactive.

Marketers wishing to serve the BOP, who recognize the

importance of alliances with others, should seek out

relationships with both government and NGO’s. Early andpersistent outreach will be valuable in alerting all of the

players to each other’s strengths and in creating an accurate

picture of the challenges. Politically, coalitions oforganizations with different fundamental objectives are

prone to misunderstanding. Often their terminology is

similar but the meaning is different. Alternatively, theirobjectives may be so totally different that they are

fundamentally foreign to one another. If the goal is poverty

eradication at a profit, all the players must collaborate. Thegoal may be so difficult and achieving effective teamwork is

essential.

References

Ahmad, P.S. and Mead, J. (2004), Hindustan Lever Limitedand Project Sting, Darden Business Publishing,

Charlottesville, VA.Chen, S. and Ravaillon, M. (2007), “Absolute poverty

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(The) Economist (2004), 13 March, p. 84.Ferreira, F.G.H. and Litchfield, J.A. (1999), “Calm after thestorms: income distribution in Chile, 1987-1994”, WorldBank Economic Review, Vol. 13 No. 3, pp. 509-38.

Gardetti, M.A. (2005), “A base of the pyramid approach inArgentina”, Greener Management International, Vol. 51,pp. 65-77.

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Hart, S.L. (2005), Inclusive Capitalism: The Unlimited BusinessOpportunities in Solving the World’s Most Difficult Problems,Wharton School Publishing, Upper Saddle River, NJ.

Karnani, A. (2007a), “The mirage of marketing to the bottomof the pyramid: how the private sector can help alleviatepoverty”, California Management Review, Summer, Vol. 49No. 4, pp. 90-111.

Karnani, A. (2007b), “Misfortune at the bottom of thepyramid”, Greener Management International, pp. 99-110.

Martinez, J.L. and Carbonell, M. (2007), “Value at thebottom of the pyramid”, Business Strategy Review, Autumn,pp. 50-5.

McFalls, R. (2007), “Testing the limits of ‘inclusivecapitalism’: a case study of the South Africa HP i-Community”, The Journal of Corporate Citizenship, Vol. 28,Summer, pp. 85-98.

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world’s poor profitably”, Harvard Business Review, Vol. 80

No. 9, pp. 48-57.Prahalad, C.K. and Hart, S.L. (2002), “The fortune at the

bottom of the pyramid”, Strategy and Business, Vol. 26,

January, pp. 54-67.Ramaswamy, E.A. and Schiphorst, F.B. (2000), “Human

resource management, trade unions and empowerment:

two cases from India”, The International Journal of Human

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and market creation in the context of deep poverty: a

strategic view”, Academy of Management Perspectives,

November, pp. 49-63.Vachani, S. and Smith, N.C. (2008), “Socially responsible

distribution: distribution strategies for reaching the bottom

of the pyramid”, California Management Review, Vol. 50

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Further reading

Anderson, S.N. (1994), “Unions/management create

collaborative culture”, Communication World, Vol. 4 No. 1.

Corresponding author

Dennis A. Pitta can be contacted at: [email protected]




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