Bottom of the Pyramid Strategies

If all you have is a hammer, everything looks like a nail - Abraham Maslow

Standardisation can be good, and it can be bad.

Ashoka is targeting the top of the BoP with their Housing for All project, but they can still say they are targeting the base of the pyramid - those who can't afford current housing solution, but who are not the poorest of the poor. But Aneel Karnani talks about the destitute poor and how the BoP is misconstrued. It's apples and oranges.

There is much use for there being one definition for what we used to call the poor segment. But it seems like people get confused by the 'bottom' in 'bottom of the pyramid'. In fact, it's a rabbit hole and the rabbit hole goes deep.

It is now common-sense business thinking that the markets are not unison. We don't take the whole World and consider that our market. You will never get VC funding with an idea like that. We zoom in on the continent, which can be divided into countries, which divide into regions, into areas. The people in different micromarkets have different buying behaviour, different wants and aspirations. And catering to those wants and needs is different. Selling snow mobiles in Helsinki is different than selling them in the north of Finland where Santa Claus lives. For one, it is entertainment, for the other, about survival. We know that. Think of the BoP in the same way - divided into tiny segments all over. Some marketing strategies are replicable across areas, income segments and sexes, but many are not.

While I was explaining the base-of-the-pyramid concept in Estonia, somebody asked me a definition question - about what is and what is not a BoP strategy. Is Groupon and the numerous clones that proliferate the scene in developed countries something that could benefit the poor? I explained that Groupon-style voucher systems offer joys of discount for the rich, who have the money to spend at the time when the voucher turns up for sale. The poor consumers, who delay their purchase until a purchase is absolutely necessary, are typically left in the mercy of the retailer/service-provider (and the current price) and can be charged a premium accordingly. That makes money management harder.

Vouchers are a type of investing in future consumption that the poor at the base of the pyramid are usually unable to undertake. Or is it?

In fact, vouchers are also a clever way to promote investment for the poor. For instance, for farmers, cash is most readily available right after the harvest has ended. Now its time to celebrate! But it would also be wise for farmers to invest that cash, let's say in fertilizer for next year, so that they can enjoy even greater yields and more cash next year. In reality, purchases of fertilizers are usually done at the last possible moment, when the cash situation is dire. And that leads to very few fertilizers being bought and used.

Vouchers are exactly the kind of device that would encourage investment on time into something that will create value for the farmer. Add in free delivery as an extra perk.

The result. The farmer gains yields. The fertilizer provider gains a client (who otherwise would not have bought anything next year), a pre-paid purchase (better cash-flow and management of stocks for the company), and a healthier customer base (increased yields mean more money for next year's fertilizer). Clever from Innovations for Poverty Action.

The mobile is quickly becoming the ubiquitous electronic device across the developing world (clocking double digit growth rates in increases in subscription numbers) but even with the mobile you are wise to choose a medium. An SMS delivered through a service provider might not be as effective as an announcement heard on the radio (see graph above). And a radio is increasing its presence through the mobile.

Where I am there's no electricity or water, but there's a radio. - Daba, Senegal

The other influentials according to the study are "the neighbour" and the local leader, which is not all that surprising (if I think back on other studies). It seems like the voice still plays a big role in what the people believe. Whatever you print is not as strong as a kind word from the village leader or radio show host.

One of the first and hardest things in the bottom of the pyramid is knowing where to sell and getting the positioning right. This is the geographic area which would be the best way for you to start. It is not like you get readily available market research on the purcahsing habits of villages in any given region for your brand or product. For example, in India, rural market research still only makes up 10% of the entire market research area.

Here's how Hindustan Lever, the Indian arm of the behemoth Unilever, uses IT to pinpoint the crucial places to be and build a network:

It started by conceptualising a model, which helped us find the right places to go. We then leveraged our scale and technology in a manner which was never done before. We digitized the whole thing. All the villages were put on an IT map. The name of the village, its total strength, the nearest distributors available, whether it has a school, a hospital, a primary health centre, all of this was mapped. Using this information we were able to determine the opportunity the village presented to us. The presence of a school or primary health centre told us of the level of social development that the place could see, and hence our need to be present there.

They mapped the lucrative regions by their proxy, either a school or a primary health center. Using proxies is a great way to find the sweet spots for your distribution plans. A.K. Singh and S. Pandey in their book Rural Marketing: Indian Perspective, offer some more proxies to identify the potential of rural areas:

• Gross cropped area
• Gross irrigated area
• Area under non-food crops
• Average size of land-holdings
• Use of agricultural inputs like tractors, fertilizers, pump sets and tube wells, rural electrification, rural credits and deposits

The logic here goes, if using agricultural inputs aside from traditional means shows willingness to pay and springing development. Of course, depending on your product, the choice of indicators might vary. The fact is, with market research data badly available, you need to rely on an as-good-as method - a good proxy.

*The satellite map graphic shows the Aravind Eye Care network. Green lines indicate links from the central hospital to rural vision centers in five rural towns. All distances are in kilometers. (Graphic by Sonesh Surana)

Gandhi did not recognize the separation of economics from ethics, and what he wanted to achieve in the economic field was the ethical ordering of the economic life of society. He wanted to reinstate the human element and the value factor into economics and, thereby, achieve the integration of moral sentiments and the science of economics: "True economics stands for social justice, it promotes the good of all equally, including the weakest, and is indispensable for a decent life."

Linking your profits to other's wellbeing - Creating Shared Value by Porter, 2011

Gandhi strips the illusion from those who conceive of modernity and progress in terms of a high standard of living measured by conspicuous consumption, instead defining true civilization thus: "Civilization, in the real sense of the term, consists not in the multiplication but in the deliberate and voluntary reduction of wants." He considered poverty to be materially harmful and morally degrading. "Earth has enough to satisfy everyone’s legitimate needs but not anyone’s greed." Given the finite nature of earth’s resources, any attempt to continue artificially multiplying human wants is doomed to failure. Thus, the limitation of wants becomes a sine qua non for sustaining the earth’s Eco-system.

It will take four Earths for 9 billion people in 2050 to consume like the top 15% do today - Calling for a more sustainable consumption at the BoP by Simanis et al, 2008

Gandhi wants to substitute mass production with production by the masses. He advocated decentralization as a remedy for the evils of industrialism. The need for a decentralized order has been emphasized by eminent economists and thinkers such as Gunner Myrdal, E.F. Schumacher, Wilfred Wellock, Bertrand Russell, Aldous Huxley, and Herbert Marcuse. Decentralization has also been included in the manifestos of such groups belonging to the New Age movement as the German Greens.

The poor are not only consumers, they are producers, they are a hotbed for innovation - Co-creation by Simanis et al., 2008; Altman et al., 2009

Gandhi did not accept the concept of ownership as such, whether it be private or state. He considered both as equally exploitative and hence inconsistent with Nonviolence. In tune with the basic tenets of non-possession and non-stealing, Gandhi formulated the theory of Trusteeship in order to save society from rampant capitalism and bureaucratic socialism. Gandhi’s economic ideas are perfectly consistent with his metaphysical and ethical propositions. The end sought in a nonviolent economic order is happiness combined with full mental, moral and spiritual growth.

Shared use is a way to achieve affordability - Anderson & Billou, 2007

On Gandhi from "Mahatma Gandhi’s Weltanschauung and Future Generations" by Geeta Mehta

1.6 billion people in the world still don't have access to electricity. That doesn't mean they don't spend on energy. It is a problem of access of energy, not spending - each year the 4 billion at the base of the pyramid spend $500 bn (PPP) on energy. How does this amount of spending not grant all of them electricity?

A report recently surfaced that discusses how to solve the need for energy, giving straight opportunities and things to do. The report itself gives an idea of the market opportunity behind energy in the BoP, with hard facts and numbers. It also gives detailed recommendations to various parties, from aid agencies to multinational companies. Like our own model, this report pronounces the importance of recreating the value chain and collaboration between sectors. Without cooperation these opportunities might be left too much out of grasp. With efficient cooperation, the benefits are clear for all stakeholders. The report is also a cooperation between Hystra, a BoP consultancy, and Ashoka Foundation, to fulfill an order of three big energy companies.

Have a look at the video that summarizes the report, and gives a list of opportunities for creating access to energy in the BoP.

This article intends to get your attention to a video on how to secure access to finance in the BoP arena.

An event was hosted in Cape Town by Business Call to Action to discuss business in Africa and inclusive business models. A big part of being a social entrepreneur is to acquire the needed funding to run your project. This is an issue for both the high-minded private entrepreneur as well as the intrapreneur looking to create a bottom of the pyramid business inside a large organisation. That creates the need for this debate on how to secure access to finance for "Pro-Poor Business Solutions". 

One of the things going through the debate is that entrepreneurs are highly positive about the results in the planning stages. Here are two views:

"I have never seen a business plan that is not successful."

"They always tend to overestimate their success [when entrepreneurs submit their business plan]. If you divide the revenue by half and multiply the cost by two, and it still works, then you can start looking at it."

It is an interesting debate and well worth a watch for anybody interested in financing pro-poor business solutions.

Securing Access to Finance for Pro-Poor Business Solutions: Panel Discussion from Business Fights Poverty on Vimeo.

Recently, GIM (Growing Inclusive Markets) has released 60 new case studies into its empiric database of examples, where the poor have been successfully included in business. GIM is a UNDP-led initiative that hopes to advocate for the use of more sustainable business models through giving rigorously researched case study evidence of various ways that would be possible.

The database itself is searchable by various criteria, and a real resource for either the BoP researcher or businessman looking to learn from what has worked for others.

As the Business Fights Poverty blog writes, the case studies range from a start-up company in Iran that produces affordable, earthquake-proof steel structures for houses, schools and hospitals (Saraman); a Bangladeshi NGO that runs a decentralized community‐private‐public partnership model to transform solid waste into organic compost using a low cost, low‐tech and labor‐intensive method (Waste Concern); the first and only national agricultural commodity exchange in Kenya linking small-scale farmers to national and regional markets (KACE); and a joint-venture between two major French companies aiming at electrifying rural regions of Morocco through solar energy sources (Temasol), among many others. With every case, the site releases background information on and/or a Q&A with the authors.

Here you can find the searchable database.

After summarising the learnings from the literature on innovation, the value chain, and of course the BoP strategies, some points become more apparent to highlight than others. Suggestions were gathered from various case studies and empirical literature, all with the objective to study MNCs entering the markets at the BoP, and then summarized in the illustration of the model below. In that sense, the model contains the main aspects that have already been proven above in this paper. The key points emerge in three groups, based on their nature for the different facets of business: the internal organizational, the (mostly) extrenal value chain, and the implementation-focused strategic suggestions.

What are the implications from the model for the business trying to enter the BoP? First off, it becomes clear that the building blocks of a sound business model include looking over your organization and the value chain, translating into a kind of organizational and network readiness for business in the BoP. Organizational aspects refer to how your own organization is internally ready for the BoP, while the value chain aspects describe external readiness that manifests itself through interactions with partners. Note that the Independent Business Model and the Interactive Value Chain lay the foundation to good organizational and value chain conduct.

The strategy itself (signified by the “roof” or the “ascending pyramid” on top of the foundation) signifies the approach needed to take to innovation and marketing in the BoP. The iterative in-market innovation and co-creating your products shows up on the sides, while enabling access refers to steps taken into distributing and marketing your ultimate product, before it can be scaled up in stages in the BoP, and why not also keep open the market entry to the MoP market.

This is the model house for building a BoP strategy.

This is the overview of the model. You may find a deeper analysis of the various factors on this page. As always, we welcome your comments, so the model can evolve. We continue to test this model on known cases.

There is a discrepancy between the metrics used in developed markets and in what leads to financial success in the BoP. It is widely discussed already, ever since the origination of the BoP theory (see, e.g. London & Hart, 2004, the first empirical study in the field). Nevertheless, what is wrong is not maybe the financial ratios themselves, but how we perceive them. There is a useful example provided to us by Leavy (2010).

If explored from a more suitable angle, the same ratios reveal the source of profits in the BoP. Take the example of Return on Assets (ROA) from Leavy (2010, p 14). It is useful to expand the normal definition of Profits/Assets further down to Profits/Sales by Sales/Assets.

ROA =      Profits       /       Assets

ROA = Profits/Sales  x  Sales/Assets

              (Margin)          (Asset Productivity)

In effect, this translates to ROA being defined as Margin by Asset Productivity. What this does is show that “a business producing 5% margin and 8 asset turns will yield the same ROA as one with 20% margin and 2 asset turns.”

Two different business models emerge. It is a simplified example, that gives off the general idea – to achieve the same profitability in a different setting, the company needs to review its business model. It also shows we might not need new financial metrics, it helps to look at the same metrics in a new way.