The Bottom Of The Pyramid

The Bottom of the Pyramid theory is one of the widely acclaimed theories of Marketing proposed by C. K. Prahalad through his book The Fortune at the Bottom of The Pyramid. The pyramid is India. The top of the pyramid consists of niche market, large masses in the middle of the pyramid and the largest part of the Indian population i.e. undernourished and totally ignored at the bottom of the pyramid (BoP). For the countries which are classed under “developing country”, the size of the bottom of the pyramid is huge and in case of developed countries, the real worry is that the size of the top of the pyramid i.e. niche market is really growing. Now in India, there are two pyramids, one that is big and one that is small labeled “Rural” and “Urban” respectively. Now each of these pyramids can be again subdivided into 3 segments- top, middle and bottom. Hence we can see that bottom of the pyramid population exists both in rural as well as urban areas.

Before BoP emerged, all the companies would formulate their strategies and products according to the top segment of the Pyramid. Marketing at the BoP are yet to be explored and the MNCs need to start targeting the lower income customers to provide products and services according to their needs. By doing so, these companies can fulfill their CSR (corporate social responsibility) and in the process of doing so, they will help eradicate poverty by improving the living conditions of the poor people that comprise the BoP. The BoP in India is emerging as multi- trillion dollar business opportunities for the companies who are struggling to grow their business in the recent saturated markets. This shows that the poorest markets in India can be revenue generating for companies if their marketing strategies and products are made according to these markets. The companies need to study this segment of the pyramid and then fashion their strategies, products and services accordingly. Why hasn’t the business world already taken advantage of this opportunity before? The answer is simple- corruption, poor infrastructure, no distribution channels, illiteracy, lack of enforceable legal framework, racial conflicts, etc.

“At present, BOP consumers spend 42 percent of their income on food and beverage, tobacco, transportation and housing. However, by 2025, the spending on food, beverage and tobacco is estimated to decline to 25 percent as disposable income increases. Meanwhile, spending on transportation, healthcare, personal products and services, recreation and education are likely to increase steadily. The changing spending pattern has necessitated a change in marketing strategies to unlock the full potential of the Indian market.” [1] 

Selling to the bottom of the pyramid is a sandbox of innovation. But you have to have a thorough understanding of the market. It is not important to sell the products and services cheaper but the companies have to come up with products and services that meet the need of BoP. And if today’s companies don’t come up with these innovative products and services then someone else will.

LITERATURE REVIEW

The Journal of Management & Public Policy(2012) , a research titled “A Critical Approach in Understanding Bottom of the Pyramid Propositions” by Mrinmoy Majumder talks about a very important issue that we need to consider while planning innovative marketing strategies for the BoP- Are the poor people concerned about the product/service that they use? The research conducted for development using the framework of BOP, has argued that poor people are well aware of the products and services they use. Across the globe, poor people are supposedly brand conscious. The key learning for any corporation is to use the similar knowledge at the core of their business process and not to invest in gimmick event like corporate social responsibility. On the contrary, corporation can generate ample profit through selling products and services at the lower end of the pyramid. Poor people are not to be seen as victims but should be looked as resilient, innovators and value-driven consumers.

The market dynamics are changing fast. New markets are emerging rapidly and are becoming attractive destinations for marketers. These markets open up a gateway of possibilities for experimentation and opportunities to move away from the convention. The real market promise in the future is expected to come not from the developed markets and the sophisticated market segments but from the underprivileged segments and the tier IV markets across the world which, though largely untapped till now, have the potential of exhibiting a substantial rate of growth if catered to properly. “Managers who focus on gross margins will miss the opportunity at the bottom of the pyramid; managers who innovate and focus on economic profit will be rewarded” (Prahlad and Hart, 2002).

However, catering to these lesser tapped markets, including the rural markets, calls for a radical restructuring of the business process and developing marketing approaches to suit the demographics and psychographics of the newly discovered markets. While the MNCs aspire to capture a substantial market segment in emerging markets, their marketing strategies are ill adapted to cater to the consumers in the market. “The result is low market penetration, disappointing market shares and poor profitability.” Thus, an effective penetration into the emerging markets calls for a rethinking of the marketing programs directed at these markets (Davar and Chattopadhyay, 2002). Such a need directly points to the essentiality of innovation in business systems, business processes and marketing programs. Innovations targeted at the bottom of the pyramid markets are less about discovering the new ‘Who’s’ and much more about discovering a new value proposition (a new What) and a new value network (a new How) (Anderson and Markides, 2006).

As in the bottom of the pyramid market, an effective penetration into the rural market also requires a careful use of innovation. Innovation must be used in such a way so as to avoid undesirable inclusion or undesirable exclusion. In order to effectively survive in the rural market and to bring about a sustainable growth, it is important that the neglected rural lots are not merely treated as consumers but as strengthened producers (Jaiswal, 2008). Thus, sustainable growth in the newly discovered rural markets requires the use of innovation not only to penetrate into these markets as sellers but also to ensure a simultaneous exploitation of the resources in these segments, develop business propositions around these resources and sell the resultant produce in the other markets. Such use of innovation to bring about a balanced growth in the rural markets and develop these markets both as producers and consumers would also ensure survival for the practicing companies. Some entrepreneurs from these underprivileged markets have started evolving and moving towards the international markets riding on some sort of innovation. Studies show that entrepreneurs from emerging economies are increasingly using innovation to enhance their customer support capabilities with the aim of efficiently serving their important international customers and penetrating the global markets in an effective way (Khavul et al., 2010).

In the 1970s, the early marketing activities of Hindustan Unilever (HUL) in India tended to focus on the urban middle class and elite. Meanwhile, an Indian entrepreneur produced and marketed a detergent, Nirma, targeting the lower consumer segments sector and the brand turned to be the second largest volume seller in the country by 1977 (Sabharwal et al., 2004).

BODY COPY

Bottom of the pyramid-

The BOP global economic system as defined by Prahalad and Hart (2002) refers to the enormous untapped potential of emerging markets previously thought of as unreachable or difficult to reach. More than four billion people, nearly 70 percent of the total world, are in the BOP, earning $1,500 or less annually. These markets are often unlinked to the global supply chain and global marketing channels. The lack of development of marketing infrastructure, such as communications channels for advertising, distribution channels to supply the market, and the low income of this target market made it difficult and many times unprofitable to penetrate this market. However, the BOP market is perhaps the world’s largest and the accessibility of this market is becoming easier. [2] 

Innovation-

A mindset, a pervasive attitude, or a way of thinking focused beyond the present into the future vision. Innovation is something that generates new products, new services, businesses and jobs. Invention generates new ideas, patents, prototypes, designs, breakthrough experiments, and working models. [3] (Kuczmarski)

Innovation is one of the ways that companies can tap the BoP. There are many features of innovation that help it to create a breakthrough in the market.

Product Customization – in BoP markets, the price and the features of the products play a more important role than product form in capturing the market. In FMCG, the companies are using “Sachets” culture of the existing products. Besides sachets, smaller packaging at lower price points is success across other income segments too. HLL started “Operation Bharat” to reach rural markets by offering small packs of toothpaste, fairness creams, targeting 20 million households. [4] Thus companies should develop customized product to tap BoP market.

Cross-functional Coordination – Coordination across different functions in an organization is the key to formulate effective BoP marketing strategies. The companies should also focus on efficiency. For example, HLL, through its Project Shakti launched in 2000, encouraged rural women to spread awareness about HLL personal care products. The project was test-marketed in Andhra Pradesh and was aimed at creating “income-generating capabilities for underprivileged rural women by providing a small-scale enterprise opportunity, and improving rural living standards through health and hygiene awareness”. The project, besides being an initiative to help rural women, helped enhance the company’s distribution network at a low cost. It exemplified the significance of close coordination between marketing and supply chain/distribution functions of HLL in creating awareness about HLL products, thereby increasing brand visibility and ensuring easy access to HLL products. [5] 

Pricing – it plays a very important role but it doesn’t lead to higher product penetration. Product functionality is a much more important factor as compared to Pricing.

Distribution – The Organized distribution systems in India reach only small towns of 5000 or more. For an effective BoP, Distribution and communication system is very important. A company, even a MNC, cannot create commercial infrastructure at the BoP. Viable partnerships with local people and community agents who have the social capital to bring people together and build incentives should be emphasized. India’s telecom revolution has improved connectivity across the country and mobile phone penetration in this segment is increasing. However, poor infrastructure in low-income markets increases operations cost. Thus, the involvement of local population in the distribution not only improves product distribution, but also fuels entrepreneurial aspirations, thereby creating more job opportunities.

Promotion – Only 16 percent of the rural people have access to newspaper or any other form of print media and that’s why a company needs to be very careful in choosing its vehicle for communication. The rich cultural forms like puppet shows, folk dances should be exploited to produce a high impact product campaign.

Advertising – In India, each region has a distinct language, culture, religion and rituals. Along with high illiteracy rate, absence of traditional media has posed a big challenge for the companies to advertise in BoP areas. Word of mouth is the best form of advertising in these areas. For example, Nokia and LG run vans through villages demonstrating and selling their products.

Need to build sustainable models – Companies should offer cheaper institutional credit in order to focus on improving the purchasing power of BoP segment.

Marketing challenges –

There are four main challenges that are faced by the organization’s that are willing to enter the BoP with their products. These challenges are none other than the 4A’s, which are the pillars without which an organization cannot succeed.

Availability – India’s 627,000 villages are spread over 3.2 million sq. km. Approximately 110 million Indians live in rural areas, and reaching them is not easy, especially given the poor road infrastructure. Hence, operations costs increase and sometimes it is even higher than that in urban markets. Therefore, companies are finding it increasingly difficult to protect their margins in the BOP market.

Affordability – Given the low disposable income of BOP consumers, pricing is key to higher product penetration among rural consumers. Further, people in rural areas are not only price sensitive, but also quality conscious. Therefore, producing quality products at lower price points has posed a challenge for companies trying to protect their margins in the backdrop of monumental cost pressure.

Acceptability – In the BOP market, product functionality is a key success parameter. Therefore, a product form that has worked well in traditional markets may not be acceptable to BOP consumers if the product functionality is not in line with their unmet needs.

Awareness – India is home to people speaking several languages and dialects. Further, the cultural heterogeneity makes it difficult for marketers to create awareness among BOP consumers. In addition, low literacy rates, coupled limited reach of the electronic media, are likely to act as a barrier to promotional efforts. It has been identified that the best places to promote products or services are local haats and melas or promotional campaigns during local festivals. However, organizing such affairs is not easy because of the high costs involved.

Apart from the 4 A’s, companies also face the following challenges:

Aggressive pricing by local brands, Distribution costs and route to market challenges, Small retailers struggle to maintain inventory in absence of sufficient credit support from companies, Rural-urban divide in terms of social and cultural lifestyle, Lack of skilled workforce.

The relationship between the four Ps of marketing-product, price, place and promotion-and the four marketing challenges-awareness, availability, accessibility and affordability-provides a broad marketing framework. By leveraging the 4A’s, the companies can achieve profit and growth.

Marketing mix –

For a company to be successful in BoP market, it needs to have a combination of products/services which are low cost, good quality, sustainable and profitable. Hence companies needs to understand how BoP differs from upper tiers and adapt a marketing approach to meet the characteristics of these customers. Since affordability is the heart of serving the BoP market, product modifications will help lower the price and improve affordability. Reducing the packet size, example sachets, do promote the product consumption but are not the answer. There is a higher cost of packaging involved which erodes any possible profit and also adds to discarded packaging, hence adding to pollution. The answer to this is to create a product with fewer features, example Nirma detergent which is affordable by the BoP customers making it compete with HUL’s leading market detergent Surf. Surf is an excellent product due to which is gained market share. It had many additives which makes it gentle for humans yet very effective. The cost is also more compared to Nirma. It doesn’t have too many ingredients, it can cause blisters to the hands. Despite its harshness, the poor embrace it because it is affordable. The idea of closeness in distribution channels for consumers at the BOP is very important. This means, for example, having stores that are both geographically close and affectively close. In other words, emotional proximity is also very important.

Pricing for the bottom of the pyramid is, of course, also very critical. The challenge here is twofold. On the one hand, there is the issue of affordability: prices need to be affordable to BOP consumers. In order to achieve affordability, they must reduce the costs of production and simplify the products. On the other hand, ¬‚exibility in payments is also very important. Providing options of how and when low-income consumers can pay for their products and services constitutes both a challenge and a source of competitive advantage to private companies. To do this, private companies may need the assistance of commercial banks and NGOs as key partners. Some marketing theorists (Karnani, 2007) view the BOP as a collection of producers rather than consumers. Therefore, innovative payment models, which allow BOP consumers to pay using a marketing exchange model, would increase their ability to pay for the things they consume.

Case summary -At the beginning of 2008 Tata Motors unveiled the Tata Nano, a small car made for India’s poorer population. Four years earlier Tata had come up with a new concept of developing a car for people who previously could not afford one. A price tag of 100,000 rupees (about US$2,350 or £1,500) became the goal and by 2008 the reality. Tata is convinced that selling low-cost cars with low margins can be profitable when volumes are high.

Tata achieved low cost by using less and cheaper materials. They showed that it is possible to build cars for poor without compromising on safety and comfort. Tata was able to create a cost advantage by innovative product development and distribution set-up. They set up a large disperse distribution channel called “open distribution system” at low cost. By encouraging the set-up of local assembly units, Tata was able to eliminate one level in the distribution chain and emphasize the importance of trust between a company and the poor as customers. [6] In this way, using innovation with the way of low pricing and disperse distribution channels, Tata achieved

a lot of media attention in international and Indian press since its unveiling in January 2008.

STRATEGIC FRAMEWORK

The Strategic framework that applies over here is Porter’s Five Forces –

By using Porter’s Five Forces, the companies can understand the market that they are about to enter in the BoP by leveraging each of the 5 virtues in favor of the company.

Threat of Rivalry: Looking at the segment rivalry from the company’s point of view I find that the innovative way of doing business, particularly the innovation in value networks, gives the much required cost advantage for operating in the BoP market and provides a competitive advantage over the other players.

Bargaining Power of Suppliers: Integrating the suppliers into the value chain of the business and making them a permanent and integral part of the business process would immensely reduce the bargaining power of the suppliers.

Bargaining Power of Buyers: Providing products at a lower price through innovative value networks and providing value addition through innovative value proposition strengthens the perceptual position of the product in the minds of the customers, enhances their preference of the company’s products and loyalty towards its brand and thus virtually eliminates their bargaining power.

Figure Porter’s Five Forces model

Threat from New Entrants: Establishing a strong value network and providing a unique value proposition raises the entry barriers for new entrants. Thus, an overall impact of enhanced distribution, lower cost, improved value and partnership with the customer is a reduced threat from casual players and new entrants.

Threat from Substitutes: An improved product at fair price which is easily available and offers value for money tremendously cuts down the threat of substitute products as well.

FUTURE SCOPE

The performance of global brands in BoP market segments is affected by its high transaction costs and coordination problems along the brand promotions, consumption and consumer value chain. Hence, firms managing brands in BoP market segments need to reduce brand costs by increasing sales volumes and creating consumer value. Advertising and point-of-sales promotions also strengthen the brands in BoP market segments.

An accurate understanding of the low income segment in terms of their needs, perceptions, behavior is required which in turn will help companies to design a better business approach.

It is important to realize that serving the BoP market requires a different business model and adaption of a different marketing mix.

CONCLUSION

BoP may offer opportunities to create value for the companies (CSR) and the poor. BoP is continuously evolving and is now a hotbed for future marketing activities. Also it has been established that BoP is very different from the other segments of the pyramid on several accounts, it demands a complete different mode of entry, marketing strategy, distribution strategy. This presents a wide scope for innovation in processes, delivery and value addition. The key to success for the companies that enter BoP segment lies in innovations which are continuous and cost effective. Simply modifying products and selling them is a path to failure. Success will depend on knowing the BOP intimately. Pricing is of paramount importance in serving the poor.