This chapter is from the book
This chapter is from the book
This chapter is from the book
Defining the Base of the Pyramid
In the first seminal articles published on the BoP, the global population was divided into a pyramid containing three socioeconomic segments, with the bottom segment being labeled the “base of the pyramid” (BoP). This segmentation was developed from per capita income adjusted for purchasing power parity (PPP). PPP is a measure that equates the price of a basket of identically traded goods and services across countries, providing a standardized comparison of real prices. It provides a useful, albeit crude, measure for dividing the world’s population into different income levels.
Since then, different BoP authors have articulated different PPP lines, which has generated some confusion. These values range from $1,500 to $3,000 per annum and $1 to $4 per day per capita, which both provides a broad sense of the variation within the BoP socioeconomic segment and generates some troubling inconsistencies. In the most detailed effort to date, the World Resources Institute (WRI) and the International Finance Corporation (IFC) conducted an in-depth study to develop a deeper understanding of the population size and aggregate purchasing power of the BoP.9 These authors used $3,000 PPP in 2002 U.S. dollars (or $3,260 when adjusted to 2005 U.S. dollars)10 as the per capita annual income threshold defining the BoP. Using data from household consumption surveys from Africa, Asia, Eastern Europe, Latin America, and the Caribbean, WRI and the IFC estimate the BoP segment as approximately 4 billion people, with total annual household income of $5 trillion PPP (or $1.3 trillion when adjusted for U.S. dollars).
One outcome of using PPP demarcation lines has been increased scrutiny of some of the earliest claims in the BoP literature about the size of the market opportunity.11 Given that the BoP was initially framed as a business opportunity (for example, the book The Fortune at the Bottom of the Pyramid), these efforts at further clarification are not surprising. Unfortunately this line of inquiry, as noted, ultimately guides the conversation into an arena of diminishing returns. Therefore, we submit that PPP lines demarcating the BoP should instead be viewed as sources of empirical and illustrative convenience, rather than as a rigid definition.
Few would support the notion that an increase in an individual’s annual income from $2,999 to $3,001 has a material impact on that person’s state of poverty or whether or not they are considered part of the BoP socioeconomic demographic. Few would also support the idea that a business venture should stop serving a person if his or her income moves above some predetermined poverty line. Calculating a specific market size is therefore fraught with difficult-to-defend assumptions and questionable attempts at pseudoprecision. Indeed, the most effective BoP strategies can actually build capacity and generate income among the poor, not simply extract wealth in the form of increased consumer spending. Furthermore, as we will discuss in the following chapters, BoP markets may need to be created, rather than discovered, which has important implications for how one assesses potential market size.
The BoP is also not a homogeneous “mass market.” In the WRI/IFC report, the BoP is segmented into $500 PPP income increments that are shown to have markedly different characteristics across regions, countries, and industry sectors. If nothing else, this seems to confirm the relative fruitlessness of trying to precisely identify the BoP segment simply by referencing a specific income level (and also underscores the challenge of scaling, which is addressed in subsequent chapters). Again, as in the debate over poverty lines, income is at best an imperfect indicator of a more complex phenomenon.12 In the poverty-alleviation community, income is viewed as a measure of convenience and is widely recognized as an imperfect one at best. Again, a specific PPP level—while a potentially useful empirical indicator—has clear limitations as a definition for the base of the pyramid.
How else, then, can the BoP be defined? In the BoP literature, this segment is consistently defined by one characteristic: It is the population of the world that is generally excluded from the current system of global capitalism.13 The IFC and the Asian Development Bank uses the term “inclusive business” to describe efforts to develop new ventures that will serve the BoP. Many other organizations also adopted the term inclusive business or something similar. The Inter-American Development Bank created a special program called “Opportunities for the Majority” to support ventures that focus on improving the quality of life of low-income communities that constitute the majority of the population of Latin America and the Caribbean. The United Nations Development Programme calls it “Growing Inclusive Markets.” So an alternative definition of the BoP is the low-income socioeconomic segment that is not well-integrated into the formal economy. This perspective aligns with the BoP literature on venture capability-building, which addresses the challenge of business development in the absence of a “Westernized” market environment that is characterized by legally recognized boundaries, enforceable contracts, and property rights protection.14
This view also links into important work from the development community. Hernando de Soto, for example, describes how the vast majority of the world’s population is excluded from the predominantly western global capitalist system.15 The poor, while possessing substantial amounts of unregistered assets and entrepreneurial talent, operate in an essentially extralegal environment, in which property rights are not officially recorded, and contracts and other agreements lack legally enforceable mechanisms. In many developing countries, in fact, the informal economy—most of it perfectly legal—accounts for a substantial portion of the current economic activity. Due to the cost, complexity, and unfamiliarity of transitioning to the formal economy, most transactions and business activities conducted by the poor are likely to remain in the informal economy, at least for the foreseeable future. This suggests that the base of the pyramid is the socioeconomic segment that primarily lives and operates their local enterprises in the informal economy and often has annual per capita income of less than $3,000 in PPP. (Note: This income line comes from the WRI/IFC report, which based PPP data on 2002 U.S. dollars. The Inter-American Development Bank used $3,260 when it adjusted the same PPP per capita to 2005 U.S. dollars, which again shows the limitation of a “fixed” income line that fails to transcend time and context.)
Managers, development professionals, and academics can therefore define the BoP by a combination of income and characteristics. Income levels, however, hide heterogeneity, and characteristics such as informality can vary depending on how they are operationalized. Those seeking absolute precision could argue about this indefinitely and most likely never reach consensus. Respectfully, we and our fellow authors are less interested in this kind of elusive precision. The key point is that the BoP segment has the following characteristics:
- Is heterogeneous across multiple dimensions.
- Includes the portion of the world’s population with the least amount of income.
- Contains local enterprises that generally are not well- integrated with the formal capitalist economy.
- Lives primarily in the informal economy.
- Constitutes the majority of humanity.