This is a summary of C K Prahalad & Allen Hammond’s seminal work "Serving the World’s poor profitably"
Improving the lives of the billions of people at the bottom of the economic pyramid is a noble endeavour. It can also be a lucrative one. Let’s look at two scenarios:
The global economy recovers from its current stagnation but growth remains anaemic
Deflation continues to threaten
The gap between rich and poor keeps widening
Incidents of economic chaos, governmental collapse, and civil war plague developing regions
Private investment and enterprise helps creates jobs and wealth in developing nations
Hundreds of millions of new consumers into the global marketplace every year
China, India, Brazil, and South Africa become new engines of global economic growth
Both of these scenarios are possible…
Which scenario comes to pass will be determined primarily by one factor: willingness of big, multinational companies to enter and invest in the world’s poorest markets.
Achieving this goal does not require them to spearhead global social development initiatives for charitable purposes. They need to act in their own self interest to reap the enormous business benefits of entering developing markets.
In fact, many innovative companies – entrepreneurial outfits and large, established enterprises alike – are already serving the world’s poor in ways that generate strong revenues, lead to greater operating efficiencies, and uncover new sources of innovation.
For these companies – and those that follow their lead – building businesses aimed at the bottom of the pyramid promises to provide important competitive advantages as the twenty-first century unfolds.
Everyone knows that the world’s poor are distressingly plentiful. Fully, 65% of the world’s population earns less than $2,000 each per year – that’s 4 billion people. But despite the vastness of this market, it remains largely untapped by multinational companies.
Companies assume that people with low incomes spend little on goods and services and what they do spend goes to basic needs like food and shelter. They also assume that various barriers to commerce – corruption, illiteracy, inadequate infrastructure, currency fluctuations, bureaucratic red tape – make profitable business impossible.
But such assumptions reflect a narrow and largely outdated view of the developing world. Many multinationals are already successfully doing business in developing countries (although most currently focus on selling to the small upper-middle-class segments of these markets) Their experience shows that the barriers to commerce – although real – are much lower than is typically thought.
Moreover, several positive trends– from political reform, to a growing openness to investment, to the development of low-cost wireless communication networks – are reducing the barriers further. Once the misperceptions are wiped away, the enormous economic potential that lies at the bottom of the pyramid becomes clear.
Let’s explode some popular myths:
Myth: The poor have no money
It sounds obvious on the surface, but it’s wrong. While individual incomes may be low, the aggregate buying power of poor communities is actually quite large. The average per capita income of villagers in rural Bangladesh, for instance, is less than $200 per year, but as a group they are avid consumers of telecommunications services.
Grameen Telecom’s village phones, which are owned by a single entrepreneur but used by the entire community, generate average revenue of roughly $90 a month – and as much as $1,000 a month in some large villages. Customers of these village phones, who pay cash for each use, spend an average of 7% of their income on phone services – a far higher percentage than consumers in traditional markets do.
Myth: The poor have no money for luxury items
Contrary to popular perception, the poor often do buy “luxury” items. That’s because buying a house in Mumbai, for most people at the bottom of the pyramid, is not a realistic option. Neither is getting access to running water. They accept that reality, and rather than saving for a rainy day, they spend their income on things they can get now to improve the quality of their lives.
In the Mumbai slums of Dharavi, for example, 85% of households own a television set, 75% own a pressure cooker and a mixer, 56% own a gas stove, and 21% have telephones.