- The Power of Dominant Logic
- The Nature of the BOP Market
- The Market Development Imperative
- Benefits to the Private Sector
This chapter is from the book
This chapter is from the book
This chapter is from the book
The Market Development Imperative
The task of converting the poor into consumers is one of market development. Market development involves both the consumer and the private-sector firm. We consider the risks and benefits to the private-sector firm later. Here, we reflect on the incentives for the BOP consumer, who is so far isolated from the benefits of access to regional and global markets, to participate. What are the benefits to the BOP consumer? Our examples are drawn primarily from the stories that appear in the book.
Create the Capacity to Consume
To convert the BOP into a consumer market, we have to create the capacity to consume. Cash-poor and with a low level of income, the BOP consumer has to be accessed differently.
The traditional approach to creating the capacity to consume among the poor has been to provide the product or service free of charge. This has the feel of philanthropy. As mentioned previously, charity might feel good, but it rarely solves the problem in a scalable and sustainable fashion.
A rapidly evolving approach to encouraging consumption and choice at the BOP is to make unit packages that are small and, therefore, affordable. The logic is obvious. The rich use cash to inventory convenience. They can afford, for example, to buy a large bottle of shampoo to avoid multiple trips to the store. The poor have unpredictable income streams. Many subsist on daily wages and have to use cash conservatively. They tend to make purchases only when they have cash and buy only what they need for that day. Single-serve packaging—be it shampoo, ketchup, tea and coffee, or aspirin—is well suited to this population. A single-serve revolution is sweeping through the BOP markets. For example, in India, single-serve sachets have become the norm for a wide variety of products, as shown in Table 1.3.
Table 1.3. Creating the Capacity to Consume: Single-Serve Revolution
|
Single-Serve Value at Retail |
||
|
Rs. |
$ |
Typical Products |
|
0.50 |
0.01 |
Shampoo, confectionary, matches, tea |
|
1.00 |
0.02 |
Shampoo, salt, biscuits, ketchup, fruit drink concentrate |
|
2.00 |
0.04 |
Detergent, soap, mouth fresheners, biscuits, jams, spreads, coffee, spices |
|
5.00 |
0.10 |
Biscuits, toothpaste, color cosmetics, fragrance, bread, cooking oil, skin cream |
|
Note: Shampoo and biscuits are shown under different price ranges because these items are available in multiple single-serve and low unit pack quantities. |
||
The number of products sold in the single-serve format is rapidly increasing. The format is so popular that even firms producing high-end merchandise have to adopt it to remain viable long-term players in the growing markets. For example, in the shampoo business, the situation in the Indian market is shown in Figure 1.3.
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Figure 1.3 Single-serve sachet as a percentage of total shampoo market in India.
Measured in tons, the size of the Indian shampoo market is as large as the U.S. market. Large MNCs, such as Unilever and Procter & Gamble (P&G), are major participants in this market, as are large local firms. Because the poor are just as brand-conscious as the rich, it is possible to buy Pantene, a high-end shampoo from P&G, in a single-serve sachet in India. The entrepreneurial private sector has created a large market at the BOP; the penetration of shampoo in India is about 90 percent.
A similar approach to creating capacity to consume is through innovative purchase schemes. More BOP consumers in Brazil can buy appliances through Casas Bahia because the firm provides credit even for consumers with low and unpredictable income streams. Through a sophisticated credit rating system coupled with counseling, Casas Bahia provides access to high-quality appliances to consumers who could not otherwise afford them. At the same time, the firm ensures that its consumers are not overstretched. The default rate is low at 8.5 percent, compared to more than 15 percent for competitor firms. Casas Bahia has also created a new pool of repeat customers. CEMEX, one of the world’s largest cement companies in Mexico, follows a similar approach in its “do-it-yourself” business focused on the BOP market. The idea is to help the consumers learn to save and invest. By creating a pool of three women who save as a group and discipline and pressure each other to stay with the scheme, CEMEX facilitates the process of consumption by bundling savings and access to credit with the ability to add a bathroom or a kitchen to their homes.
Creating the capacity to consume is based on three simple principles best described as the “Three As”:
- Affordability. Whether it is a single-serve package or novel purchasing schemes, the key is affordability without sacrificing quality or efficacy.
- Access. Distribution patterns for products and services must take into account where the poor live and their work patterns. Most BOP consumers must work the full day before they can have enough cash to purchase the necessities for that day. Stores that close at 5:00 PM have no relevance to them, as their shopping begins after 7:00 PM. Further, BOP consumers cannot travel great distances. Stores must be easy to reach, often within a short walk. This calls for geographical intensity of distribution.
- Availability. Often, the decision to buy for BOP consumers is based on the cash they have on hand at a given point in time. They cannot defer buying decisions. Availability (and therefore, distribution efficiency) is a critical factor in serving the BOP consumer.
Of course, the ideal is to create the capacity to earn more so that the BOP consumers can afford to consume more. The ITC e-Choupal story illustrates how farmers with access to the Internet and thereby access to the prices of commodities around the world can increase their incomes by 5 to 10 percent. These farmers can decide when and how much to sell based on their understanding of the likely price movements for their products. Modern technology not only allows them to realize better prices, but also to improve their logistics. The aggregation of food grains allows for efficiencies for both the farmer and the buyer.
By focusing on the BOP consumers’ capacity to consume, private-sector businesses can create a new market. The critical requirement is the ability to invent ways that take into account the variability in the cash flows of BOP consumers that makes it difficult for them to access the traditional market for goods and services oriented toward the top of the pyramid.
The Need for New Goods and Services
The involvement of the private sector at the BOP can provide opportunities for the development of new products and services.
Amul, a dairy cooperative in India, has introduced good-quality ice cream at less than $0.05 per serving, affordable by all at the BOP. This product is not only a source of enjoyment; the milk in it is also a source of nutrition for the poor. Now, Amul is planning to introduce a natural laxative-laced ice cream called “isabgol-enriched.” It is too early to tell whether the product can be a success. However, the experimentation is what the game is about. Similarly, the popularization of pizza by the same company allows the poor to obtain an adequate quantity of protein.5 PRODEM FFP, a Bolivian financial services company, has introduced smart automated teller machines (ATMs) that recognize fingerprints, use color-coded touch screens, and speak in three local languages. This technological innovation allows even illiterate BOP consumers to access, on a 24-hour basis, high-quality financial services.6 CEMEX, as we saw earlier, provides access to good quality housing. Through Tecnosol, the BOP consumers in rural Nicaragua have access to clean energy from renewable sources—solar and wind power. Previously, these consumers did not have access to grid-based electricity and were dependent on more expensive sources, such as kerosene and batteries. Now they have energy that is affordable enough to run their households. Casas Bahia not only sells appliances, but has also introduced a line of good-quality furniture oriented toward the BOP markets. Furniture has become one of the fastest growing businesses for the company and a source of pride and satisfaction to its consumers.
Dignity and Choice
When the poor are converted into consumers, they get more than access to products and services. They acquire the dignity of attention and choices from the private sector that were previously reserved for the middle-class and rich.
The farmers we interviewed at an ITC e-Choupal were clear. The traditional auctioning system at the government-mandated markets (mandis) did not offer them any choices. When they went to a mandi, they had to sell their produce at the prices offered on that day. They could not wait for better prices or haul their produce back to their villages. More important, the local merchants who controlled the mandi were not respectful of the farmers. One farmer remarked, “They make rude comments about my produce. They also raise the prices in the auction by $0.02 per ton. It is as if they have already determined the price you will get and they go through the motions of an auction. It used to be very demeaning.” Not any longer. Now, the same farmers can access information on the Web across all the mandis and can decide where, when, and at which prices they want to sell. Similarly, women in self-help groups (SHGs) working with ICICI Bank in India also have had their dignity restored. As a group, they decide which borrowers and projects receive loans. This involvement of women in leadership development and in learning about finances and bank operations has given them a new sense of personal worth. The single-serve revolution has created a revolutionary level of choice for consumers at the BOP. For example, the “switching costs” for the consumer are negligible because she can buy a sachet of shampoo or detergent or pickles; if she is not satisfied with her purchase, she can switch brands the next day. Firms must continuously innovate and upgrade their products to keep customers interested in their brands, thereby improving quality and reducing costs.
Trust Is a Prerequisite
Both sides—the large firms and the BOP consumers—have traditionally not trusted each other. The mistrust runs deep. However, private-sector firms approaching the BOP market must focus on building trust between themselves and the consumers.
This is clearly evident when one visits a Casas Bahia store. BOP consumers here venerate the founder, Mr. Klein, for giving them the opportunity to possess appliances that they could not otherwise afford. Although the shanty towns of Sao Paulo or Rio de Janeiro can be dangerous to outsiders, Casas Bahia trucks move freely around without worry. The same is true for Bimbo, the provider of fresh bread and other bakery products to the BOP consumers in Mexico. Bimbo7 is the largest bakery in Mexico, and its trucks have become symbols of trust between the BOP consumers and the firm. The truck drivers are so trusted that often the small store owners in the slums allow them to open their shops, stock them with bread, and collect cash from the cash boxes without supervision. Both Casas Bahia and Bimbo believe that the truck drivers who deliver their products to the BOP consumers are their ambassadors and neither company will outsource the delivery process. In fact, all managers at Bimbo must work as truck drivers for the company to become better educated about their customers.
MNCs often assume that the default rate among the poor is likely to be higher than that of their rich customers. The opposite is often true. The poor pay on time and default rates are low. In the case of ICICI Bank, out of a customer base of 200,000, the default rate is less than 1 percent. The default rate at Grameen Bank, a microfinance pioneer in Bangladesh, is less than 1.5 percent among 2,500,000 customers. The lessons are clear. Through persistent effort and the provision of world-class quality, private-sector businesses can create mutual trust and responsibility between their companies and BOP customers. Trust is difficult to build after 50 years of suspicion and prejudice based on little evidence and strong stereotyping.