The Base of the Pyramid (BoP) refers to the poorest of the poor in developing countries – or those that live in rural villages or urban slums. That’s about 4 billion people that live on less than $2.50 per day. There are many businesses that wish to improve the lives of the world’s poor with their products and services.
Initially, the strategy was to offer products at low prices and sell enormous quantities of them in order to be commercially viable. However, such “enormous” quantities often prove difficult to achieve, requiring 30% market penetration with high operating costs and slow growth. It seemed that instead of lowering prices, businesses needed to raise them after all.
Still, a range of affordable devices, equipment and services have been designed and manufactured over the last two decades to provide the 4 billion people at the Base of the Pyramid with life-changing benefits. The challenge has been to create the enormous demand needed for the business to sustain by efficiently market these devices to the poor.
According to a report about best business practices in serving the BoP, businesses have to recognize that it is not about the price. Rather, it is about the risk as perceived by the poor. Marketing Innovative Devices for the Base of the Pyramid is a report compiled by Hystra, a global consulting firm that designs innovative business solutions to solve social problems. The report reminds us that the poor have a tight monthly budget of only $100, 70% of which goes to food. It is very risky for the poor to give up a $10-25 investment for, let’s say, a solar lantern over a smoky kerosene lamp when they are not certain if the solar one will work – even if it could potentially save them $2-3 monthly in kerosene.
The report argues that serving the BoP will always be a high gross margin business. To illustrate, it can get expensive to deploy salespeople to educate rural villagers of the product in order to reduce the perceived risk of buying it. However, businesses have to see this kind of marketing as a long term investment since word-of-mouth is the most effective way to generate future sales with the BoP. The trust in the product or service will increase if a friend or neighbor tried and tested it first. Selling the product via retail will only work when the product becomes widely known and trusted.
The Hystra report offers 15 examples of businesses that had success with the BoP market. One example highlights Patrimonio Hoy (PH), a subsidiary of the Mexican cement manufacturer CEMEX. Before launching PH, CEMEX tried to sell smaller (and thus less expensive) bags of cement to lower income neighborhoods. In spite of the good intentions, sales never took off. The company then realized that their customers were not interested in buying cement, but in building a room for their growing families.
Focusing on their customers’ needs, PH turned the cement bags into a comprehensive package to protect customers from the many risks involved in building an additional room: architect advice to avoid weak construction design, fixed material price during the scheme to eliminate the risk of price increase, flexible delivery to avoid waste, theft or damage to building materials, and – probably most critically – fixed weekly payments. The program has experienced great success with more than 350,000 families served, and what’s more Patrimonio Hoy is today one of the most profitable sales channels of Cemex, with sales tripled compared to selling cement alone.
– Maria Caluag
Sources: Harvard Business Review, Hystra
Photo:Wall Street Journal