Daring to take the 'bottom of the pyramid' approach

The addressable opportunity hidden beneath the poverty line. About 4 billion people across the globe exist on less than 7 US dollars per day. Located at the base of the income ladder, these individuals constitute ‘The Bottom of the Pyramid’ (BOP). This article focuses on the role of the enterprise relative to this population segment.

Examples taken from telecommunications, banking, utilities and the consumer goods sector suggest a viable market made up of billions of individuals

By selling large volumes of products at very low prices, firms could be profitable whilst enabling the poorest populations to access goods and services.

Considering the significant constraints on the BOP market however, how can businesses realistically target very low-income populations and convert this potential into a genuine opportunity? This point of view is based around three recommendations:

  • Grasp the opportunities (and understand the challenges) of the ‘BOP segment’
  • Dare to try a learning-based approach, to address the needs of the segment in a viable manner
  • Rethink the boundaries in terms of how initiatives are financed

Seizing the opportunities presented by the BOP segment

In this section we explore core elements of Bottom of the Pyramid theory to demonstrate the potential of the ‘BOP market’. Building a picture of market size, its composition and main weaknesses lead to a better understanding of the opportunity it represents.

Estimating the size of the BOP market

We note from the outset that it is difficult to evaluate the size and composition of the BOP segment with any accuracy. The familiar pyramid model showing income per head of population has been improved in recent years, notably in a report from the World Bank from 2007, which identifies six segments at the base of the pyramid, from the segment ‘BOP500’ to the segment ‘BOP3000’ for people whose resources reach $3000 in PPP (‘parity of purchasing power’). This enables a comparison between countries according to a level of nominal income, adjusted relative to the global standard of living.

Using World Bank data, BearingPoint has evaluated the number of individuals constituting the base of the income pyramid. Traditional analysis such as PPP does not permit the full economic power of these populations to be considered, particularly in emerging countries. In fact, we believe that the buying power of the BOP population should not be sought in terms of individual incomes stated by formal, currency-based economic models at all but, as underlined by the World Bank, in terms of ‘hidden’ spending power, which can be found in less formal areas of economic exchange.

Such income levels are even harder to estimate, even though they carry significant weight in developing countries. For comparison, the poverty threshold in France is set at the equivalent of 49 US dollars per day, that is seven times the amount on which two thirds of humanity live. According to our estimates, 1 billion people live on less than 1.5 US dollars per day and 2.1 billion on less than 2.5 US dollars per day. Elsewhere, 2 million people have a daily income of between 2.5 and 7.5 US dollars. In total, 4.5 billion people live on less than 10 US dollars per day.

The vast majority of people in these categories live in developing countries; only 50 million reside in the 70 so-called ‘high income’ countries. We have used World Bank categories to create a global overview of this market, according to the income levels of individuals and their distribution according to the wealth of the country, as follows:

  • High income countries (70 countries) representing 1.1 billion inhabitants
  • Higher middle income countries (54) – 2.5 billion inhabitants
  • Lower middle income countries (56) – also 2.5 billion inhabitants
  • Low income countries (34) – 900 million inhabitants.

In market terms, the 4 billion humans living on less than 7 US dollars per day represent just under 5 trillion US dollars in annual revenues

In market terms, the 4 billion humans living on less than 7 US dollars per day represent just under 5 trillion US dollars in annual revenues. While most of the BOP market is situated in developing countries, we should not under-estimate low-income individuals in developed countries, who represent a segment in their own right, also largely ignored.

A detailed population breakdown is shown in Figure 1.

While the data can indeed be represented as a pyramid, such a shape distorts the overall view. Each ‘stratum’ is not proportional to the others, preventing the scale of the 4 billion people concerned from being fully visualised. This said, it does enable us to correlate the living standards of individuals and the wealth of the countries in which they reside. A comparison of structures at the base of the pyramid for Ukraine and Nigeria demonstrates the value of adopting a pyramid shape, for example (Figure 2).

A second possible representation refines the pyramid model into more of a lighthouse shape, as shown in Figure 3. A number of demographic factors illustrate why a thorough review of the BOP segment is needed. Southern countries, whose populations represent the core of the BOP, are currently experiencing the strongest population growth. According to the UN, the least developed regions in the world will see population growth of 58% over the next 50 years, against 2% for the most developed; for example Africa should reach a billion inhabitants between now and 2050. As the hunger riots of 2007 and 2008 showed, these demographic shifts will not be without their challenges.

To justify private sector interest in targeting the BOP segment, the academics who formulated the Bottom of the Pyramid theory introduced the notion of a ‘poverty premium’, to be understood in the sense of a ‘double penalty’ of poverty. C. K. Prahalad showed that some of the poorest individuals pay more for goods and services than those with higher incomes. His study, carried out across two financially contrasting suburbs of the same town, compared the price of such commodity items as a kilo of rice, a litre of oil and a minute of telephone talk time.

Prahalad’s report highlighted that individuals at the bottom of the pyramid pay more for such goods than more affluent people, sometimes by up to 100%. For example a minute of telephone time costs more to a lower-income consumer because he or she has neither a bank account nor the resources to buy a bundled package, with which the per-minute costs would be lower.

As underlined the authors of a 2002 article, in the post-Cold War context, ‘The real source of market promise is not the wealthy few in the developing world, or even the emerging middle-income consumers: it is the billions of the aspiring poor who are joining the market economy for the first time.’

The academic craze for studying Bottom of the Pyramid theory has led to certain criticisms however, fundamentally that the theory was based on a limited number of examples. Indeed the theory is highly prescriptive, and insufficiently supported by empirical arguments. Furthermore, the description of a ‘fortune’ at the base of the pyramid appears greatly exaggerated, considering the challenges that characterise this market. 

The theory has been refined over a number of studies, and the quantity of field research aimed at proving the potential of the BOP approach is growing. Meanwhile, many universities have created posts to focus on the study of socially oriented business.

BOP: a business opportunity

The fundamental proposition of BOP theory is that a genuine opportunity exists for businesses to address the needs of very low income consumers. The potential of this segment is based not only on the volume of individuals concerned, but also on three important factors:

  • The segment is largely ignored by the private sector, which has historically considered the poor as having no money at all. The result is little established competition at the bottom of the pyramid.
  • The low-income factor frequently obscures the opportunity to benefit from the considerable size of the market, a factor reinforced by the growing population numbers in this segment.
  • Serving consumers at the base of the pyramid can enable access to middle classes with higher incomes, enabling a full range of consumers to be reached. Danone applies its ‘Growth across the Pyramid’ (GAP) method on this basis, to ‘reach new consumers at all levels of the pyramid.’

While we shouldn’t underestimate the inherent obstacles at the base of the pyramid, several examples show that it represents a viable market. The most striking illustration is mobile telephony, which has not only seen spectacular growth in the BOP segment of mobile telephony in its own right, but other sectors (such as mobile banking) also impact investment strategies in this sector.

The number of subscribers to mobile services on the African continent passed from 51.8 million in 2003, to nearly 400 million in 2010. Furthermore, the growth of the mobile market and the Internet has been twice that documented globally. Market studies of mobile telephony across Africa shows a growing penetration rate from 0.8% in 1998 to 33% ten years later, whilst fixed line penetration has remained static. Although large differences exist by country, all have seen a significant increase as two examples from very different countries demonstrate: in South Africa, the penetration rate went from 36% in 2003 to 83% in 2006; while in Ethiopia; this ratio has gone from 0.8% in 2003 to 1.09% in 2006.

different notions about 'the bottom of the pyramid':

Repeated study of very low income populations has led to numerous, frequently quite similar approaches covering the same topic. Not least:

  • ‘Bottom of the pyramid’ or ‘base of the pyramid’ – represented by the acronym BOP
  • ‘Next 4 billion’ – an expression used by Allen Hammond of the World Resources Institute
  • ‘Making Markets work for the poor’ (M4P) or indeed, ‘inclusive markets’, both defined as a strategy to enable markets to ‘function better’ with beneficial effects on poor populations.

Finally, a key element of BOP theory is corporate social responsibility (CSR), which considers the activities of a company relative to social, environmental and governance criteria.

Bottom of the Pyramid Theory:

The fundamentals of the Bottom of the Pyramid approach originate in the United States, where a number of university scholars created initial theories on the subject. C. K. Prahalad is generally presented as a leading thinker on ‘BOP theory’, particularly following publication of ‘The Fortune at the Bottom of the Pyramid’ in 2004. 

In essence, the initial publications on the subject aimed to promote the following principles:

  • Billions of individuals make up the base of the pyramid
  • Those on very low incomes should be seen as potential clients and not as charity cases
  • Multinational firms would do well to take advantage of this opportunity, helping reduce poverty while making a profit

400 million

The number of subscribers to mobile services on the African continent grew from 51.8 million in 2003, to nearly 400 million in 2010 

While this growth doesn’t only affect the BOP segment, the ways that mobile packages have evolved in African countries show a fundamental shift in strategy to reach those on very low incomes. The overwhelming growth of prepaid packages can be explained by enabling users to choose the total volume of communications they need, in advance and without a contract (pay as you go). The ‘top-up’ principle applies – purchase of a scratch enables access to units of communication, which can be used until credit has run out. As a consequence, the model is particularly adapted to individuals without bank accounts. In 2008, 96% of subscribers in Africa were using such a system.

From this example we can see that despite the obstacles to the spread of mobile telephony in Africa, operators have succeeded in developing innovative propositions adapted to the base of the pyramid.

Do not underestimate the obstacles

For a complete picture of the bottom of the pyramid, we need to recall the obstacles that have diverted the private sector’s attention away from those with very low incomes. Several factors cause this market to be of little interest to multinational corporations.

A primary hurdle is the lack of banking in use by populations at the bottom of the pyramid. In Africa, only 20% of households have a bank account, according to World Bank figures – this falls to 15% in Liberia and 5% in Tanzania. The inadequate development of a mainstream financial sector in developing countries keeps away investors; in parallel the sector is often limited in terms of competition.

Inadequate infrastructure also presents a major obstacle. Only about 60% of the 400,000 villages across Africa are covered by a telecommunications network. Access to bank branches is minimal, not least because few branches exist in rural areas. Furthermore, the ‘informal’ sector occupies a strong position – some 41% of the market in Latin America and 35% in transition countries in Europe and the ex-Soviet Union, compared to 13.5% in OECD countries.

A genuine opportunity exists for businesses to address the needs of very low income consumers

According to the World Bank, low savings is proving an additional brake on development. Savings levels equate to about 18% of the GDP in Africa and 26% in South Asia. These levels barely cover the 25% GDP investment levels which would allow poverty to be reduced. A study from BearingPoint on health in Africa showed a disquieting combination of imbalances including weak infrastructure and insufficient levels of personal health.

The reticence of the private sector to develop propositions aimed at low-income consumers are of a cultural nature and inevitably incorporate ignorance, or indeed prejudice commonly accorded to the base of the pyramid. The adage ‘Only lend to rich people’ has diverted the banking sector’s attention away from poor populations for years, their inadequacies and the irregular nature of available resources creating a fear of missed payments. The growth of micro-financing over the past decade has shown such prejudices to be misplaced, however.

A final difficulty in developing BOP strategies links to an ethical question: to what extent can the enterprise make a profit, using commercially driven approaches targeted directly at the very poor?

Daring to take a learning-based approach

Observations of BOP-related initiatives from a number of organisations show that the majority incorporate learning-based strategies by design.

These strategies enable innovative solutions to be tested, and their commercial sense gauged, prior to launching initiatives aimed at low-income consumers on a larger scale.

A primary hurdle is the lack of banking in use by populations at the bottom of the pyramid

Initiatives designed as pilot projects

Such initiatives generally assume the form of pilot projects, experimental test-beds operating in the BOP segment. In 2007 for example, Veolia initiated a pilot to treat, transport and distribute drinking water to poor rural populations in the locality of Goalmari, in Bangladesh. To test the economic viability of the system, Veolia developed a ‘micro-factory’ with a design and components adapted to the local context. Treatment enabled drinking water to be supplied to local inhabitants; to counter the absence of local distribution, the organisation created a water transport network serving distribution points (taps) managed by local entrepreneurs, each charged with selling the water. This pilot project will last 5 years, which will enable the project to be refined, or to serve as a basis for new ideas.

Such projects, also initiated by Essilor (in India), Schneider Electric and Danone, are preferred by companies as they:

  • Provide a well-bounded framework within which they can experiment with new solutions
  • Enable investment to be bounded from the start and the financial viability of the initiative to be checked
  • Allow effective best practices and solutions to be acquired which can be replicated on a larger scale
  • Permit measurement of the impact on the living standards of the populations concerned
The viability of a business strategies targeting the BOP depends on the ability of a company to adapt its products to the specific needs of the segment. Analysis of Danone’s Bangladesh initiative shows how it is important to innovate across the value chain:

the poor consumer and mobile telephony: the case of phom huy

Married father of 4 children Phom Huy is a 60 year old rice grower, living 25km from Siem Rep in the north-west of Cambodia. His house does not have any electricity: he uses energy supplied by a petrol generator for light in the evenings, for television and to charge his mobile phone. His family also has a battery-powered radio. He listens to French radio station RFI because his generation, unlike their children, is French-speaking. Despite the oppressive heat of his country, he does not have a refrigerator – this would be too expensive as it would need to be switched on all the time, unlike his other equipment which only uses energy when necessary. Its constant need for electricity renders a fridge more of a luxury than the TV. For the past 5 years Phom Huy has owned a portable telephone, which he uses little. In part he uses it in a ‘classic’ way, to keep contact with his youngest daughter who is studying to become a teacher. He also uses his mobile to negotiate group purchases: for example when his family (12 adults including brothers, sisters and parents) want to buy fish, he collates the needs of everyone which will amount to several kilos in total. He calls the fishmongers in his address book (about ten) and negotiates the best price. He then agrees a day for the delivery, when the fishmonger is next passing through the village.

  • Collection of milk: Danone implemented a cooperative milk collection system, in partnership with local farmers who gained the guaranteed purchase for their produce.
  • Production: while Danone normally useslarge factories (the Tatebayashi factory in Japan has a capacity of 1200 tonnes per year, for example), the organisation created small-capacity plants using equipment that was less complex to maintain.
  • Product: how to sell yoghurt to populationsthat do not possess refrigerators, or address the absence of a cold chain? Innovation enabled the design of a product which was resistant to several days outside the cold chain, reinforced with nutrients to respond to the specific needs of the population.
  • Pricing: to adapt to the limited resources ofthe population, the organisation has proposed individual sachets of yoghurt at a low unit price.

We can also look to the initiative started by Essilor in India to sell eyeglasses to the BOP population – translating to a 2 euros entry price for the glasses and lenses.

bop for banks 

Previous BearingPoint studies have highlighted the potential of markets where the base of the pyramid is centrally placed, notably in Africa.

M-Banking

A flagship example of the continued growth of genuine innovation in Southern countries is ‘M-payment’, referring to using mobile (‘M’) telephony as a payment mechanism. While cash is the preferred mechanism for 90% of the African population, M-banking demonstrates a major upheaval with three facets:

  • Africa is the continent where M-payment has met the greatest success of anywhere in the world. Kenya has shown the strongest growth, with 30% of transactions now taking place via mobile
  • M-payment services are genuine benefit for the populations concerned, notably in rural areas, as it allows payment without having to travel and without needing a personal bank account.
  • Across the continent, collaboration between telecoms operators and banks is significantly better today than in the past.

A field study carried out by CGAP concerning subscribers to WIZZIT, an M-banking start-up in South Africa, shows that the innovative services have been a great success. While consumers spend on average 2.27 US dollars and take 32 minutes to go to the closest bank, M-banking enables them to check their balances, make payments and transfer money with family members. For the same levels of service, a WIZZIT account is on average 33% cheaper than an account at a major South African bank.

International money transfers

The rate of money transfers grew significantly in sub-Saharan Africa, for example increasing by 11% between 2006 and 2007. In that period USD 19 billion was sent to sub-Saharan Africa, or about 2.5% of the GDP of the region, according to the World Bank. This figure, representing about 9% of GDP in Morocco and 24% in Comoros, has a significant socio-economic and financial impact.

An African Development Bank (AfDB) study titled ‘Migrant remittances, a development challenge’ indicates the amount of money transferred informally, outside of mainstream banking. The percentage varies between 25% and 80% according to country (46% in Senegal, 73% in Mali and 82% in Comoros). Reducing these informal methods of financial transactions represents a significant challenge. However the formal banking sector has increased in size by 15% in recent years, indicating that the strategies implemented are starting to bear fruit.

Involving the whole ecosystem

For players operating close to the BOP segment, a learning-based approach often works hand in hand with a partnership strategy with organisations such as NGOs and local institutions. The major benefit is to facilitate access to the bottom of the pyramid, as local players possess an understanding of this segment lacking in many companies. For example Danone launched its Bangladesh initiative in partnership with Grameen Bank, which has much experience of the very low income populations concerned.

However such partnerships can lead to misunderstandings and even conflicts, arising from differences of approach or divergent priorities (for example between charitable aims and commercial objectives). It is therefore important to devise partnerships carefully, not least to reconcile social objectives with economic necessity.

By studying initiatives undertaken by corporations aimed at the BOP, we can identify four steps to be undertaken and a set of ‘key success factors’ for each. Clearly this framework needs to be adapted for each organisation wishing to use it, but it provides a useful starting point for companies wanting to target populations at the base of the pyramid.

Rethinking the boundaries of financing

How should organisations design their BOP strategies for financial viability?

As well as a learning-based approach, it is important to be clear about the motivations behind launching a BOP strategy: are they perceived by the business as non-core programmes of corporate sponsorship, as communications paths to the wider population, or as genuinely commercial approaches?

We have identified three factors enabling the creation of viable strategies to target the BOP.

  • First, a detailed evaluation of the timescales required for both the learning process, and then for developing the strategies on a larger scale.
  • Second, both success stories and failures of programmes targeting the BOP illustrate how it is important to maintain continuity of financing for such initiatives.
  • Finally, observation of initiatives created for low-income consumers show how the organisations concerned place Corporate Social Responsibility (CSR) at the heart of their activity.

BOP and CSR strategies: removing ambiguity

While commonly experiences of positioning BOP (such as that of Danone in Bangladesh) underline the positive social and environmental impact of BOP propositions, we should not reduce such initiatives to merely tactical programmes for large companies wanting to develop sustainable relationships. Strictly speaking, a BOP strategy reflects an organisation’s will to commercialise its products or services viably for poorer populations, albeit still wanting to generate a profit. Furthermore, such products or services will not always satisfy generally expected ethical criteria (for example, the market for cigarettes and alcohol already reaches right to the bottom of the pyramid).

However, an organisation stands to gain considerably from linking its BOP strategy to a CSR approach. A major risk concerns the potentially harmful consequences that a poorly scoped strategy can have on poor populations. Given the vulnerability of the poor, it is therefore crucial to research the economic impact of products developed for this segment.

Furthermore the risk of BOP strategies to the brand is high, as the general populace associates poor people more readily with donations than with profit-making. Some businesses have chosen to limit their public exposure (for example Schneider Electric and its BIBOP programme), while others promote their initiatives more widely (Danone publicises its Danone Communities programme using an Internet community, a large-scale annual event and so on). In consequence, general communications about BOP programme can be less challenging if positioned at the heart of a CSR approach.

A learning-based approach often works hand in hand with a partnership strategy

Ultimately, organisations need to integrate business with CSR when designing BOP initiatives, such that their DNA conforms to established CSR best practice. Experience suggests that taking social factors into account while defining BOP strategy is not only about managing risks to the brand image, but also about making the initiative permanent and beneficial for the target population.

Financing: new paradigms for the long term

Given the generally accepted hypothesis that a company should not finance the creation of products or services that are not financially viable in turn, can businesses justly engage in costly learning phases with the long-term goal of targeting the BOP segment in a more global and profitable fashion? In response, it is necessary to review the role of public financing to encourage private sector investment in low-income populations. In areas that public authorities see as a priority (for example, access to fundamental necessities), preferential lending rates can support the creation of BOP strategies. Public funds can be seen as business loans, enabling BOP initiatives to be initiated while ensuring that they have a positive impact on poor populations.

We strongly recommend the use of public financing to support periods of experimentation, particularly where private sector investment into low-income consumer segments is required to aid development. In 2004 for example, the French Development Agency (Agence Française de Développement) and other international backers helped finance the creation of a private mobile operator in Haiti. The new operator greatly helped stimulate the mobile telephony market, initiating a virtuous circle of economic development with the operator accounting for 20% of the country’s GDP growth between 2005 and 2007.

In addition to access to sources of public finance, increased flexibility is also important when devising sustainable financing methods. Customised financing models that support organisations until they achieve financial stability enable them to create BOP initiatives. Indeed, this is the model adopted by the Enhancing Financial Innovation programme from the Bill and Melinda Gates foundation.

rethinking the entire value chain: an example of essilor's strategy in india

In 2003 Essilor, global ophthalmic optics leader, launched a project to target the Bottom of the Pyramid in India. According to figures from the organisation, only 7% of the country’s inhabitants own eyeglasses. Difficulties in accessing specialists, as well as the purchase cost for glasses, prevents the majority of potential consumers from accessing such a product.

The Essilor initiative relies on mobile units to reach rural areas, providing a diagnosis service then assembling the glasses in situ. On average teams spend 2 days in each village, where about 40% of patients seen will then buy a pair of glasses. The price of the lenses and frames is on average 6 euros, with an entry-level price of 2 euros.

As well as the weak spending power of those at the bottom of the pyramid, the organisation was confronted with a lack of knowledge from potential buyers about the benefits of wearing glasses. It therefore relied on partnerships with local medical organisations to better reach customers and to improve remote diagnosis.

Such financial flexibility should last for the duration of the return on investment period. When dealing with customers from the BOP segment, a private organisation cannot expect to achieve the same margins as for customers with higher incomes.

For example, while it is well known that telephone operators show significant margins from their activities in Africa, these margins are generally achieved from the ‘better-off’ segment of the population and not directly from the BOP segment.

Rather than expecting levels of profitability comparable to traditional markets, a private enterprise will have to accept that the return on investment will be over a longer term, compared to normal standards. An organisation’s ability to engage for the longer-term is ultimately what distinguishes between those that will be profitable and the rest. By way of example Danone, Schneider and Veolia are starting several small-scale initiatives in different regions to study their effects and to identify the most efficient business models. Subsequently, successful initiatives will be replicated in larger markets.

These considerations should ensure that BOP initiatives are considered on a long-term basis, as they cannot solely depend on the goodwill of one senior executive, nor survive an absence of economic profitability. When a proposition is tabled by way of a single board decision, its sustainability is limited by its renewal phases: new management may well rush in and ‘reduce costs’ for propositions judged insufficiently profitable.

Consequently, while goodwill at a senior level may be necessary to kick things off within an organisation, it is not sufficient to ensure the sustainability of an approach. In this environment, where the ROI horizon is frequently more distant than envisaged, companies should only develop BOP strategies supported by a clear, business-focused rationale which fits with organisations’ long term business strategy, rather than management best intentions. 

Potential business reasons are, in descending order:

  • The potential benefit of a ‘pioneer’ effect once the population has increased its buying power, creating larger future margins for organisations that invested earliest in the customer base.
  • Simultaneous access to a viable group of customers in return for meeting the needs of a non-viable BOP group (c.f. the case of ‘combined’ BOP or ‘forced’ BOP, below).
  • Economies of scale, where the average cost of a product or service diminishes for customers outside the BOP due to volume growth for BOP customers (for example, paying off cost of an industrial installation or mutualisation of purchases).
  • The principle of accessing a particularly dynamic growth driver, which has historically been under-exploited but which presents a clear opportunity.

New financing models between public and private

Public authorities can have an important role in creating propositions for low-income individuals – notably in areas judged to be development priorities. Public financing can be direct (in which a community covers the costs) or indirect (funding is paid to the organisation or its customers) and can be supplied by the community itself, or by an external body such as the World Bank. Experience collated by the World Bank about public-private partnerships in water utilities shows that successful public-private initiatives rests on two pillars:

  • Clear repartition of financing between parties
  • Transparency of operator margins

In summary, an activity which is not financially sustainable in itself should become the subject of public financing. A private operator should never take responsibility for financially unviable activity, simply because the company will not be able to sustain the activity over time. Note that the converse is not true: it is equally possible for either a private or public organisation to undertake a (theoretically) financially viable activity, with the obvious caveat of needing access to the right skills.

The water sector clearly shows the co-existence of the two models – local control versus delegation of central control. However, the water management sector presents clear challenges linked to a continued lack of transparency on actual margins, as well as a need for clearer allocation of responsibilities between services to be managed by the public authority and those which can be handled by an appropriate private organisation.

Such lessons learned from water distribution can be mapped onto any value chain where a private party wishes to target the BOP segment. Following CSR logic, the private party therefore has every interest in working in close partnership with a public body from the outset to identify each party’s boundaries of responsibility and financing.

Essentially, Public authority engagement is needed to assure a proposition is appropriate for the local BOP population, to correctly time delivery and to ensure that the expected long-term impact will be positive.

New financing mechanisms from the private sector

BOP projects do not have to depend on public financing, even during the learning phase. Businesses entering the BOP market have adopted several other solutions to provide financial backing, notably ‘combined’ BOP and ‘forced’ BOP. Both refer to protecting margins by linking the BOP segment with a better-off customer segment.

‘Combined’ BOP refers to an organisation’s decisionto mitigate risk by combining similar or geographically close customers from a variety of segments. By applying straightforward portfolio management logic to the larger set of customers, an organisation can offset the risk of serving the BOP segment with that of serving more stable customer segments.

‘Forced’ BOP reflects constraints imposed by localauthorities or regulators, who can encourage, or indeed impose, the creation of propositions for the BOP segment as a condition of access to the market. This is common where public services are outsourced, such as electricity distribution or other utilities.

For example, a local licensing authority can offer a license to distribute water or electricity in better-off areas, on the condition that more deprived areas are equally served. This model is independent of an organisation’s CSR approach.

Financial flexibility should last for the duration of the return on investment period

One success story concerns water management in Senegal, where the public authorities and a private operator were able to encompass two customer segments (BOP and non-BOP). While providing different levels of service (standpipes/ water pumps for deprived areas), the initiative nevertheless achieved real benefits for the BOP segment. This was made possible by way of a carefully designed financing plan, incorporating on one hand financing from international lenders and public authorities, and managed price increases on the other.

Dedicated financing mechanisms

Danone and Schneider, both seen as pioneers in BOP strategies among French companies, have taken their research of financing and risk limitation one step further by creating financing mechanisms specifically designed for their BOP activities.

In 2007, Danone created a SICAV (‘Société d’Investissement À Capital Variable’ or Variable Capital Mutual Investment Scheme, an open-ended mutual fund) called ‘Danone Communities’. Management of the SICAV, which was entrusted to a bank, is subject to a voluntary roadmap incorporating the creation of social enterprises such as construction of factories in Bangladesh for Grameen Danone Foods, creation of other social enterprises, partnerships with local agencies and Non-Governmental Organisations (NGOs), and bringing together ‘new-breed’ investors interested in mutual savings schemes.

Companies should only develop BOP strategies supported by a clear, business-focused rationale

Similarly, in September 2009 Schneider Electric created a mutual investment fund ‘Schneider Electric Energy Access’ aimed at supporting initiatives that promoted access to energy by larger BOP populations. An objective of the fund was to support organisations providing energy access to rural and outlying suburban areas in developing countries, including deploying innovative solutions based on renewable energy sources (e.g. solar powered lamps).

These funds have the same goal – to benefit from the growing demand from investors for funds categorised as socially responsible.

Conclusion

While it would be a mistake to ignore the BOP market, it is also wrong to think that the market is straightforward. Numerous studies of BOP initiatives highlight a range of opportunities opening up to companies despite challenges inherent to this population segment. By taking a fresh look at their approaches to addressing the needs of very low income individuals, organisations may identify financially viable BOP strategies.

In summary, the elements of a workable BOP approach are that:

  • It addresses a market whose size is under-valued, and where few multinationals have already created targeted propositions. Knowing how to create a leadership position in such an area can prove particularly beneficial for an organisation in the long run.

veolia: prepaid water pumps for subsidised customers 

In 2009 Veolia Environnement Maroc (Morocco) deployed a novel automatic water pump system using the ‘Saqayti’ prepayment solution. The solution looks like a normal water distribution point, but it works using chip keys to enable access to the drinking water. This enables individualised and rationalised distribution of drinking water in rural areas or urban zones deprived of individual connections.

For each area targeted, the locality draws up a list of households to benefit. Each key is then credited monthly by Veolia Environnement Maroc group’s business agencies with the correct amount of water provided free by the locality.

Note: in August 2011, unsatisfied with the profitability of its contracts in Morocco, Veolia announced its plan to withdraw from the Moroccan water market.

  • Targeting this market enables a company to access large numbers of consumers, in a segment growing fast due to demographic expansion. An organisation wanting to access the middle classes of tomorrow can do so by targeting the lower-income people of today.
  • It considers the market in a broader sense than simply ‘emerging countries’: a BOP segment exists in each market, in France as elsewhere, so businesses should take this ‘forgotten’ group into account in their planning. If some organisations want to target financially well-off consumers exclusively, others should consider the viability of opening up the lower-income market.

The practices identified by our study constitute a framework for analysis and self-evaluation. To insist on a learning-based approach and pilot projects, to incorporate CSR as a central component of initiatives and to design sustainable financing models, all are key success factors that an organisation should take into account.

Even without investing in the poorest segment of the revenue pyramid, much can be learned from reviewing the opportunities presented by the BOP market. This not only enables the organisation to evaluate its ability to create innovative propositions in response to essential consumer needs, but also, the organisation benefits by encouraging its teams to have a positive attitude to new, innovative strategies that address new possibilities.

While targeting the very low income, savings-poor customer base requires considering a product or service across design and delivery, production and financing, the benefits are tangible. While it would be an error to steer the organisation clear of the BOP market without reason, even more of a mistake would be to ignore completely the opportunities it presents.

While it would be a mistake to ignore the BOP market, it is also wrong to think that the market is straightforward

Annexes

Country classification by income group (Source: World Bank, 2011)

Classification of countries by revenue group is based on World Bank categories. Countries are classified according to 2008 Gross National Income (GNI) per head of population, calculated using the World Bank Atlas method. The groups are as follows: Low income, USD 975 or less; lower middle income, from USD 976 to USD 3,855; higher middle income, USD 3,856 to USD 11,905; and high income, USD 11,906 or more.

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