by Allen L. Hammond & C.K. Prahalad; Foreign Policy, Washington, DC, May/June 2004
Searching for new customers eager to buy your products? Forget Tokyo’s schoolgirls and Milan’s fashionistas. Instead, try the world’s 4 billion poor people, the largest untapped consumer market on Earth. To reach them, CEOs must shed old concepts of marketing, distribution, and research. Getting it right can both generate big profits and help end economic isolation throughout the developing world.
When the Indian industrial and technology conglomerate ITC started building a network of Internet-connected computers called “e-Choupals” in farming villages in India’s rural state of Madhya Pradesh in 2001, soy farmers were suddenly able to check fair market prices for their crops. Some farmers began tracking soy futures on the Chicago Board of Trade, and soon most of them were bypassing local auction markets and selling their crops directly to ITC for about $6 more per ton than they previously received. The same ITC network enables farmers to buy seeds, fertilizers, and other materials directly, at considerable savings, as well as to purchase formerly unavailable soil-testing services. Today, the growing e-Choupal network reaches 1.8 million farmers, and ITC is receiving demands from rural farmers for new products and services—the beginnings of consumer market power at the poorest level of Indian society.
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The ITC network is one example of how access to information can increase productivity and raise incomes. It also reveals what happens when large businesses stop regarding the world’s 4 billion poor people as victims and start eyeing them as consumers. For decades, corporate executives at the world’s largest companies—and their counterparts running wealthy governments—have thought of poor people as powerless and desperately in need of handouts. But turning the poor into customers and consumers is a far more effective way of reducing poverty.
Why hasn’t the business world caught on? The explanations are well known: Infrastructure in the developing world is often poor or nonexistent, creating the need for substantial upfront investment. Illiteracy tends to be high, requiring nontraditional marketing approaches. Tribal, racial, and religious tensions, as well as rampant crime, complicate hiring and business operations. Governments—especially local and provincial authorities—often do not function effectively or transparently. Corruption is widespread.
Yet many multinational companies already overcome such problems to serve middle-class customers in developing countries. The fundamental barriers to serving poor customers in low-income nations exist within companies and governments in rich nations, where leaders have uncritically accepted the myth that the poor have no money. In reality, low-income households collectively possess most of the buying power in many developing countries, including such emerging economies as China and India. If businesses ignore the bottom of the economic pyramid, they miss most of the market. Another myth is that the poor resist new products and services, when in truth poor consumers are rarely offered products designed for their lifestyles and circumstances, leaving them unable to interact with the global economy. Perhaps the greatest misperception of all is that selling to the poor is not profitable or, worse yet, exploitative. Selling to the world’s poorest people can be very lucrative and a key source of growth for global companies, even while this interaction benefits and empowers poor consumers.
The market for goods and services among the world’s poor—families with an annual household income of less than $6,000—is enormous. The 18 largest emerging and transition countries include 680 million such households, with a total annual income of $1.7 trillion—roughly equal to Germany’s annual gross domestic product. Brazil’s poorest citizens comprise nearly 25 million households with a total annual income of $73 billion. India has 171 million poor households with a combined $378 billion in income. China’s poor residents account for 286 million households with a combined annual income of $691 billion. Surveys show that poor households spend most of their income on housing, food, healthcare, education, finance charges, communications, and consumer goods. Multinational corporations have largely failed to tap this market, even though the rewards for doing so could be substantial.
In poor countries, the distribution of households by income level is heavily skewed toward the bottom rungs of the economy. With the bulk of the population—and buying power—residing in the low-income segments of poor nations, smart companies need to start concentrating their efforts there, where demand is high and competition is sparse. Governments, too, should take note. Poor people are asking why they should not share the benefits of globalization, and there is growing awareness that traditional development solutions have not worked. The private sector can and must do better.
BUSINESS SCHOOL BASICS
Markets in the developing world can nurture global business through their sheer size, rate of growth, and consumer demands. Consider three examples: cell phones, table salt, and cosmetics.
Cellular technology was originally developed as a luxury for the rich, but today poor countries drive the explosion in wireless communications. Sub-Saharan Africa is now a leading region in percentage growth of cell phone usage, expanding 37 percent during 2003. India boasts 22 million cellular customers and is adding around 1.5 million new customers every month. By 2005, China, India, and Brazil will have a combined 500 million cell phone users, compared to 150 million in the United States. The sheer size of these markets will necessarily change the dynamics of the business—shifting to the poor the power to determine both the preferred features of cell phones and their technological makeup. The pacesetting customers will no longer be found in Tokyo and Rome, but rather in Xian and Bangalore.
The cellular industry proves that if companies wish to engage poorer markets, they must shed traditional business models developed with wealthy consumers in mind. Prepaid phone cards are now the dominant business model for the cell phone market worldwide. Such cards crush the perception that business with the poor is risky; prepaid cards eliminate phone companies’ collection costs and debt, and firms are paid before they connect a call. Yet even with prepaid cards, some companies initially misjudged the nature and depth of the market. In Venezuela in 1995, for example, U.S.-based BellSouth International started selling $10 and $20 phone cards, largely aimed at the middle class.
Today the company sells enormously popular $4 phone cards at more than 30,000 retail outlets, reaching even Venezuela’s poorest citizens and, because of the lower unit price, reaching a far larger market. By forcing corporations to rethink costs, business models, and industry standards, poor consumers are initiating a revolution in cellular communications.
Selling to poor consumers also requires innovative research and development. In rural India, for example, only four out of 10 households use iodized table salt, even though iodized salt provides a critical and convenient nutritional supplement. Due to India’s environmental conditions, much of the iodine in salt is lost during transport and storage. The remainder often disappears in the Indian cooking process. To overcome this problem, Hindustan Lever Ltd., a subsidiary of Europe’s Unilever Corp., has developed a way to encapsulate iodine, protecting it from transportation, storage, and cooking, and releasing the iodine only when salted food is ingested. The new salt required Hindustan Lever to invest in two years of advanced research and development, but if its salt sells successfully, the company could sharply reduce iodine deficiency disorder, a disease that affects more than 70 million people in India and is the country’s leading cause of mental retardation. The lesson: Successful product development requires a deep understanding of local circumstances, so that critical features and functionality—salt with protected iodine—can be incorporated into the product’s design.
Modernizing distribution channels is also crucial for companies hoping to reach low-income markets in the developing world. “Person-to-person” cosmetic giants Amway Corp. and Avon Products, Inc. use direct-distribution strategies in India and Brazil, respectively, to sell beauty products among a wider circle of customers—increasing the corporations’ reach and employing poor people as entrepreneurs. Amway, for example, has enlisted around 600,000 self-employed individual distributors in India. Hindustan Lever is mimicking the approach with a direct-distribution system for personal-care products. The company expects to sign on more than 500,000 self-employed Indian distributors within five years.
Similar transformations in business models, research and development, and product distribution are underway or imminent in healthcare, education, finance, agriculture, building materials, and other goods and services. But these changes will only lead to a true business revolution if corporate perceptions regarding the world’s poor shift dramatically. Managers in multinational corporations are conditioned to think mainly of rich consumers.
They are prisoners of their own logic. Poor consumers challenge virtually every preconception parroted by business schools and marketing seminars. Yet, thanks in part to role models such as Brazilian entrepreneur Samuel Klein, the number of firms doing well by doing good is growing. Klein started Casas Bahia, a successful retail chain, when he fled Europe’s Holocaust and started selling inexpensive linens and blankets to poor Brazilians. Klein learned quickly that the poor are willing to pay but they are often unable to afford lump sums for purchases. Allowing customers to pay in installments was the obvious solution. What started as a one-man blanket operation has grown into a business with more than $2 billion in sales last year. Casas Bahia employs more than 22,000 people, operates over 350 stores with 10 million customers, and the company’s credit system has one of the lowest default rates in Brazil.
POWER TO THE POOR
When multinational corporations attempt to penetrate new markets in the developing world, critics sometimes condemn them for preaching the gospel of consumer culture to the poor, for exploiting the poor as cheap labor, and for extracting and despoiling natural resources without fairly compensating locals. In truth, some multinationals have been guilty on all these counts. But the private sector may do more harm by ignoring poor consumers than by engaging them. After all, if the poor can’t participate in global markets, they can’t benefit from them either.
Poor families benefit in several ways when large companies target them as consumers. Access to new products, expanded choices, and increased purchasing power improves one’s quality of life. New services and information that improve efficiency help increase productivity and raise incomes among poor citizens. Processes that are fair to the consumer and treat poor customers with respect—as when ITC uses electronic scales that give accurate weights for grain and offers a farmer a chair to sit in while the sale is completed—builds loyalty and trust in the company and in the global economic system. And the exercising of collective consumer market power forces attention to the needs of poor people.
When a retail chain in Mexico started selling chicken parts instead of whole chickens in its outlets a few years ago, sales quadrupled. Smaller unit packages—enough for a single, immediate use—enable poor consumers to buy a product that they otherwise could not afford, thus unlocking their purchasing power. The same principle applies to personal-care products. In India, Hindustan Lever, Procter & Gamble, and most of their competitors make “single-serving” versions of their products, from detergents to shampoo. More than 60 percent of the value of the shampoo market and 95 percent of all shampoo units sold in India are now single-serve. Many are designed explicitly for the poor and do not even require hot water. Because of these efforts, nearly all Indians now enjoy access to shampoo. Companies selling small unit sizes at affordable prices make money, expand markets, and generate broader access to goods and services that improve people’s quality of life.
Nowhere are the benefits of access to new services more evident than in banking and the Internet. Prodem FFP, a Bolivian financial organization that targets low-income customers, installs automatic teller machines that recognize fingerprints, communicate via text-to-speech technology in three local dialects, and display a color-coded touch screen that illiterate customers can use. Prodem has expanded its market, and now more Bolivians have access to professional, secure banking services. On the other side of the world, in India, the wireless Internet service company n-Logue found that its customers in rural villages were slow to appreciate e-mail (many villagers do not normally communicate in writing) but quick to accept e-mail photos and video conferencing. N-Logue’s customers found value in sharing a photo of a new baby with distant relatives or sending a photo of a sick cow to a government agricultural agent for quick advice. Even in traditional business sectors such as construction materials, Mexico’s Cemex is expanding its market by combining a “pay as you go” system with delivery of materials and instructions as needed, enabling the poor to build better quality housing.
Beyond such benefits as higher standards of living and greater purchasing power, poor consumers find real value in dignity and choice. In part, lack of choice is what being poor is all about. In India, a young woman working as a sweeper outdoors in the hot sun recently expressed pride in being able to use a fashion product—Fair and Lovely cream, which is part sunscreen, part moisturizer, and part skin-lightener—because, she says, her hard labor will take less of a toll on her skin than it did on her parents’. She has a choice and feels empowered because of an affordable consumer product formulated for her needs.
Likewise, Amul, a large Indian dairy cooperative, found an instant market in 2001 when it introduced ice cream, a luxury in tropical India, at affordable prices (2 cents per serving). Poor people want to buy their children ice cream every bit as much middle-class families, but before Amul targeted the poor as consumers, they lacked that option.
GLOBALIZATION’S NEW FRONTIER
In 2003, Thailand’s Information and Communications Technology Minister Surapong Suebwonglee was looking for ways to extend the benefits of technology to the masses. So he challenged Thailand’s computer industry to come up with a $260 personal computer and a $450 laptop. In return, Suebwonglee guaranteed a market of at least 500,000 machines. The Thai computer industry met that price. But to do so, it had to omit Microsoft’s widely used (and costly) Windows and Office operating software and offer the open-source Linux operating system instead. Not wanting to be left out, Microsoft cut the price for its software to a total of $38 in Thailand, dramatically below normal retail prices.
The “people’s PCs” are now selling briskly (most with Linux, some with Windows) throughout Thailand. Nearly 300,000 computers were sold through early fall of 2003, with projected first-year sales of 1 million machines. In March 2004, Microsoft announced plans for a “tailored and limited” Thai-language version of its Windows XP Home software at reduced prices.
The Thai example shows that the global economy is open to both innovation and consumer market power originating in poor countries. Consumers in developing nations are increasingly willing to exercise that power, not least of all by rejecting trade or investment deals they see as unfair. Just last year in Bolivia, for example, popular discontent with the terms of foreign investment in a new pipeline to carry natural gas to global markets, including the United States, triggered protests and unrest that ultimately brought down the government of President Gonzalo Sánchez de Lozada. The president’s successor, Carlos Mesa, quickly canceled the deal.
The message for the private sector is clear: Ignore poor consumers at your peril. Blocs of poor consumers increasingly have the power to reject what a multinational corporation wants to buy or sell; via their governments, they can also empower a nontraditional competitor. It may not be wise for corporations to wait for governments to smooth the path of globalization, or to depend solely on formal trade talks to make developing markets safe for their products. Businesses must learn to serve poor markets by overcoming those markets’ unique constraints as well as their own antiquated business models and misconceptions about the developing world.
Ending the economic isolation of poor populations and bringing them within the formal global economy will ensure that they also have the opportunity to benefit from globalization. That is the world’s new entrepreneurial frontier.
Allen L. Hammond is vice president for innovation and director of the digital dividends project at the World Resources Institute.
C.K. Prahalad is Harvey C. Fruehauf professor of business administraion at the University of Michigan Business School and author of The Fortune at the Bottom of the Pyramid: Eradicating Poverty Through Profit (Philadelphia: Wharton School Publishing, 2004). He is a member of the board of directors of Hindustan Lever Ltd.
Foreign Policy
May/June, 2004
http://www.foreignpolicy.com
Originally published May 3, 2004