Monday, April 25, 2011

"Bottom of the pyramid" marketing

Social Businesses that target people at the "bottom of the pyramid" with products and services have a very tricky path ahead of them. The examples of social businesses who have done it successfully are very few.

From the magazine Miller-McCune we are introduced to a University class that has the sole purpose of developing products for the poor. Writer Vince Beiser says the students at this Stanford class conduct a very unique method of market research.

The class, dubbed “Entrepreneurial Design for Extreme Affordability,” is premised on a counterintuitive idea: You can enrich the poor by selling them stuff. It brings together teams of graduate students from business, design, engineering and other disciplines to research a specific problem in developing-world communities, design a product to address it, and then, with the help of local and international organizations, sell that product as cheaply as possible to as many people as possible. The course has yielded some impressive results. Students have designed low-cost solar-powered lanterns, extra-efficient irrigation pumps and other useful products now being used by tens of thousands of people from India to East Africa.

“We are not treating the poor as recipients of charity, but as customers,” says Jim Patell, a professor at the Stanford Graduate School of Business who founded the program. “That means you need to figure out what they really want. That means treating them as equals. Charities don’t have to do that.”

For decades, the main model of Third World aid has been the obvious: Give stuff to poor people – be it hydroelectric dams, surplus food or medical equipment. But Western countries have poured some $1.5 trillion into such efforts over the last 60 years, and more than 1 billion people worldwide still live on less than a dollar a day.

The Extreme Affordability program is an experiment with a dramatically different approach to fighting poverty, one that in recent years has generated tremendous buzz among academics, development workers, entrepreneurs and corporate executives. It’s called “bottom of the pyramid” marketing. The idea is to harness capitalism to solve the problems of the world’s poorest — those at the bottom of the global economic pyramid. If you design a useful product for a market rather than for charity’s sake, the theory goes, the target population is more likely to actually want it and use it. If businesses can turn a profit making that product, it not only creates jobs but will keep getting made even if Western donors lose interest. And there should be colossal profits to be made: The world’s poor don’t have much money individually, but there are billions of them.

Get rich by helping the poor. It’s a powerfully alluring idea. A surge of books, symposia, blogs and corporate annual reports champion it. Major organizations, including the World Bank and the United Nations Development Program, have set up programs that support it. Venture capital funds are giving millions to startup firms trying to implement it. MIT, Penn State, Cornell and other top universities in the U.S. and other countries are teaching MBA students about it. “It’s picking up, big time,” says Luiz Ros, manager of a $250 million Inter-American Development Bank fund dedicated to supporting bottom-of-the-pyramid ventures.

But all of that reasoning holds true only if one major condition is met: The business must actually be profitable. For several reasons, profit is where the bottom-of-the-pyramid principle runs into trouble in practice.

First, it’s hard to make a quality product that’s cheap enough for poor people in the developing world to buy. D.light’s lanterns, for instance, cost from $10 to $45 – a major outlay for someone living on $2 a day. “It’s not yet at a price where most of the people we’re targeting can afford it,” Estrada admits.

Distribution is also a massive challenge. “Companies here can just assume that FedEx or a trucking company will carry their products to wherever they need to go,” Coulson says. But in the developing world, there’s no guarantee that there will be trucks to move your goods — or even roads for the trucks to drive on. Coulson once visited a village in Indonesia that wanted to install a micro-hydropower station to generate electricity from a nearby river. “It was an eight-hour jeep ride from the nearest town and then another mile from the asphalt, and then you had to cross a rope bridge over the river to get to the village,” he says. The generator had to be designed in pieces small enough to be carried by hand over the bridge.

Market research, a key component of any business plan for the Western world, is another hurdle. Bottom-of-the-pyramid consumers often lack the education to answer written surveys, and the marketplace has few comparable products from which to extrapolate potential sales. “Solar technology is a brand-new concept for most of our customers,” says Dorcas Cheng-Tozun, a D.light spokesperson. “Some have never even seen electric light before. Our marketing efforts have to incorporate an extra level of information that helps our customers understand what the product is, how it is used and how it can benefit them.”

As a result, so far, there are precious few major success stories for bottom-of-the-pyramid products. “Only a handful of enterprises in low-income markets are commercially viable and operate at scale,” note the authors of a 2009 study by the Monitor Group, a Cambridge, Mass., corporate consulting outfit. With all that in mind, Aneel Karnani, a professor at the University of Michigan’s Steven M. Ross School of Business, concluded in a 2010 paper that “there is no fortune at the bottom of the pyramid. Marketing socially useful products to the poor offers only limited business opportunities.”

Hart draws a different conclusion: Businesses have been doing it wrong. Most corporations that have tried selling to the bottom of the pyramid have done so simply by making cheaper versions of their existing products, he says. “That doesn’t work well,” he says. “What we’re discovering is we need to move from a mentality of finding the fortune at the bottom of the pyramid to creating the fortune with the bottom of the pyramid.”

To create products the developing world will buy, Hart says, companies must more or less do what Patell does: send their people into urban shantytowns and rural villages so they can connect with locals and figure out what they really want and how it can be made and sold to them — with the help of local entrepreneurs. He has even developed a research protocol to guide companies through this process.

There are at least a few clear-cut cases of corporations doing very well with, while also doing good for, the bottom of the pyramid. The astonishing proliferation of cell phones throughout the developing world is the standout example. Eight million new users sign up for mobile service in India alone every month; more than 60 percent of the population already has one. China’s biggest mobile carrier boasts more than half a billion subscribers.

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