- January 15, 2010
It’s true that governments and non-profit institutions perform certain functions because markets and pursuit of profit can’t do everything. It’s also true that many social needs are met on a market basis most of the time by competing businesses. Many do quite well serving the wealthy; others do quite well serving the poor. In fact, as C.K. Prahalad shows in The Fortune at the Bottom of the Pyramid, marketing to the poor,when it doesn’t undercut up-market brands,only adds to the bottom line. As good economists will tell you, “keep on selling until marginal cost exceeds marginal revenue.” Many firms stupidly ignore this fact.
Published in 2003 by Wharton School Publishing, Prahalad’s book has caused a sensation, inspiring a reorientation of business strategy that targets the relatively poor. This includes the work of the Digital Dividend Project of the World Resources Institute, which has been holding high profile conferences and sponsoring research on “marketing to the base of the pyramid.”[i]
Prahalad first elaborates on the proposition that the relatively poor, say those with under $1,500 in annual income, constitute a considerable business opportunity, even for multinationals that can profit by selling to and servicing the poor.
He then presents case studies of how companies have adapted to reach this “base of the pyramid.” The Casa Bahia chain in Brazil, for example, has done well selling “white goods,” large appliances, to slum dwellers on credit. The CEMEX company of Mexico has done very well selling cement and building materials,and even architectural advice to relatively poor Mexicans.
None of this should surprise U.S. companies, which have been selling on credit to reach the base since early in the last century.[ii] The credit system flourished even during the Depression, and is now a key part of the U.S. economy. Critics spawned the complex U.S. regulatory system that tries to help consumers use credit while avoiding “exploitation.” Both Casa Bahia and CEMEX are exemplary in their efficiency and social responsibility as well as their enterprise scale but neither can avail themselves of the kind of credit information system the United States has, a system that was probably much more primitive when U.S. retail credit developed. The ultimate result of a consumer credit system is a relatively stable leveraging of the economies of finance with much of the credit financed by banks and financial markets. The financial institutions are double covered by the capital investment of retailers, home sellers etc., and by the relatively stable incomes of the mass of consumers.
Prahalad also examines Hind Lever, the Indian branch of Unilever that has developed very successful techniques for selling cosmetics, detergents, and similar goods to the poor in rural areas. These involve recruiting local sellers, small packet sizes, and creative advertising. In fact, consumer goods companies in South Asia have a heroic record of more than a century serving these markets. The first successful practitioners were probably the tea and match companies. Singer Sewing Machines was also an early and successful seller to the base. The Lever experience is very nicely covered in the memoirs of Prakash Tandon, the company’s first Indian CEO.[iii] In fact, a literary genre seems to have sprung up here: Gurcharan Das, the former Richardson Merrill executive, tells similar “war stories” and duller variants populate the marketing literature of Indian business.[iv]
Prahalad focuses on multinationals, but his stories of indigenously owned businesses are just as impressive the Sri Ram group with fans, the biri (indigenous cigarettes and bangle sellers), the Nirma detergent company, vendors of indigenous ayurvedic and unani medicines. In fact, selling simple consumer goods to the poor is so widespread that one wonders if it really merits so much attention but perhaps Prahalad wants to be sure that we do not underestimate the importance of these sales.
He also describes innovative uses of the internet, telephony, and computers to reach the base of the income pyramid. For example, Indian Tobacco Company, a subsidiary of International Tobacco, a broad-based company and agricultural products trader, uses computer kiosks in villages to provide information to and deal directly with farmers. Indian banks, like the ICICI, also use money machines to reach rural clients, as do a fair number of banks in Southern and Eastern Africa. The growing interest in remittances from overseas workers has use of two-party debit cards soaring in Latin America and the Philippines, inter alia. Prahalad also describes attempts by Indian commercial banks to downscale lending technologies. Similar efforts by Syndicate Bank were described more than 20 years ago in a still widely cited study.[v] But this should surprise no one who knows about the kinds of insurance sold to poorer Americans for more than a century. In the southern United States especially, tiny policies with high commissions have long been marketed extensively to the poor in rural areas.
Clearly, commercial banks can serve the poor, but usually don’t. Microlenders, like the Grameen Bank, have done much more. As specialized lenders, they are frequently nonprofits or have social missions. This is not the case with rural banks in Indonesia, Ghana, and the Philippines or with moneylenders everywhere. Prahalad mentions microfinancing in passing and describes financially sustainable but socially motivated efforts (mostly in India) to provide artificial limbs, cataract operations, and small-scale credit.
Nearly everything Prahalad says about marketing to the poor is true and many other examples be cited. Indian tea, match, and toiletries companies, for example, have performed prodigies of market penetration, as have the great international marketers,Unilever, Cheeseborough Ponds, Coca-Cola, and Pepsi.
Of course, many are uncomfortable with the fact that corporate profits and pandering to consumers, urges could have social benefits. Some have reacted strongly to The Fortune at the Bottom of the Pyramid, and Prahalad himself is not entirely unaffected. For example, he is so unhappy about the activist Vandana Shiva’s anti-corporatism that he manages to misspell her name in describing an effort in Kerala to get people to use soap, sponsored, naturally, by soap companies. Ms. Shiva doubted that the sanitation-conscious Keralans needed such a program, but Prahalad shows that before the campaign 60 percent of them weren’t using soap routinely to wash their hands.
The real issues are whether corporations can profit marketing on a large-scale versus to narrowly defined niches, and whether poor consumers are getting the best deals they can versus being defrauded. On both counts Prahalad argues convincingly for the affirmative: businesses profit and consumers are well served.
Selling to the poor “the base of the pyramid” is a key part of the economy and an important aspect of social existence. Those who do these things could learn much from the cases presented in Prahalad’s book.[i]http://www.digitaldividend.org
[ii]Calder, Lendol, Financing the American Dream, Princeton, NJ: Princeton UP, 1999; Rosa-Maria Gelpi, Francois Julien-Labruyere, The History of Consumer Credit: Doctrines and Practice, NY: Palgrave-McMillan, 2000.
[iii]Prakash Tandon, Beyond Punjab, Berkeley: “University of California Press,” 1971.
[iv] Gurcharan Das, IndiaUnbound, NY: A.A.Knopf, 2001.
[v]From the History.the Pygmy Deposit Scheme,? Finance for the Poor I, 1, July 2000, pp. 6-7, citing V.V. Bhatt, “On Financial Innovations and Credit Market Evolution”, World Development 16, 1.