What is BoP?
“Bottom of the Pyramid” (BoP) was first used by U.S. President Franklin D. Roosevelt in 1932 while he was talking about « the forgotten man at the bottom of the economic pyramid ».
In economics, the bottom of the pyramid is the 2.5 billion people who live on less than $2.50 per day. The phrase “Bottom of the Pyramid” is used in particular by people developing new models of doing business that deliberately target the poorest regions. From multinational companies’ perspective (MNC), there is a growing interest in the potential market of developing countries on the small upper-middle-class segments.
But corruption, illiteracy, currency fluctuations, inappropriate infrastructures and so on make MNCs skeptical they they can do business profitably. These factors and also the outdated representation of the poor hide the real potential of BoP markets.
BoP from MNCs’ perspective
BoP economic potential may be underestimated because of four main misperceptions of poverty :
1/ Income is too low, the poor can’t buy MNCs’ products.
The buying power of individual BoP customers is low but as a group, the aggregate buying power allows communities to buy goods like computers or cellular phones. The large number of poor communities in Asia, Africa and South America represent an enormous economic potential when products are bought collectively.
2/Goods sold in developing markets are so cheap that MNCs can’t make reasonable profit.
The costs of essentials are much higher for the poor than for their middle-class counterparts. In a Harvard Business Review article called « Serving the world’s Poor Profitability » (2002), C.K Prahalad and A. Hammond show the difference in costs of essentials between poor and middle-class in Mumbai, India. The annual charge interest for credit is more than 50 times higher for the poor. Municipal grade water is more than 30 times more expansive for the poor (infrastructures for running water are underdeveloped in slums) than for the middle-class and upper-class communities. This double penalty –poor living conditions and higher prices– also applies to food, medication and many other products.
3/The poor don’t waste money on luxury products, they only fulfill basic needs.
Buying a house or installing running water may not be a viable option: people who live in slums can’t reasonably obtain a credit to own their own house, but it doesn’t mean they can’t buy anything. The poor often buy luxury items like televisions, gas stoves or domestic electrical appliances. These more affordable products -considered as luxury products- are a much more realistic investment and they improve the quality of life right now, not in a hypothetical future.
4/The poor don’t have the required skills for the use of advanced technology.
In poor rural areas of India or Bangladesh, cell phones were dispatched a few years ago. Despite never before using such equipment, people have had no difficulty using GSM cell phones. Also with computers, there are many examples showing that in a few weeks, people are able to understand how technological products work. The poor are willing to buy and use new technologies especially when it can improve their living condition.
BoP economic potential
In the light of the four misconceptions of BoP markets and because MNCs’ actual markets are nearly saturated, companies should consider the huge potential of BoP economy which is still in its infancy. Due to the large number of countries involved, economic expansion can be extremely fast and lasting. However, MNCs will have to show some audacity and creativity to have a low enough cost to be profitable: innovation, new business methods and a great understanding of BoP customers are the key to success.
Some traditional services used in developed countries cannot be sold to BoP consumers at a low-enough cost to be affordable and profitable. High speed internet protocol or fast data access on cell phones cannot be massively deployed now whereas GSM infrastructures are almost inexistent today. However, thanks to alternative technologies and to innovations, MNCs should find a way to make profit while offering affordable products and services. For example, there are some experiences in South America with a smart credit card system. MODEM, a microfinance organization, created a credit card shared by different users. Each user has a personal secret code and transactions are made separately from one user to another. This innovative system significantly reduced the cost of the service and the amount of potential customers became widely enlarged.
2/Margin versus volume
Traditional business in developed countries is mostly based on high gross margins. The low buying power of BoP consumers makes this approach inappropriate. MNCs will have to develop a very tight and effective lean management in order to optimize their supply chain. Cost-savings management will become a key to performance and success in these huge new low-cost markets.
3/Target aggregated customers
MNCs will have to consider a “pay-per-use” system. Like a laundry system in developed countries, refrigerators, computers or even cars could be collective. There are some experimental systems of individual customization of public computers. Individuals have a special thumb drive and when they plug it in on a computer, the thumb drive takes control of the computer. Consequently, the computer’s appearance remains the same for the owner of the thumb drive, no matters which computer he uses. Software brands or, more broadly, companies powerful enough to invest in BoP market, must start to consider the growing potential of BoP markets.
As developed markets become saturated with goods and as population growth there stagnates, MNCs have the potential to achieve revenue growth and improve the lives of millions by learning how to serve the Bottom of the Pyramid.