Post on 20-Aug-2015
Sol DeLeonThe Market at the
Bottom of the Pyramid
Is There a Market at the Bottom of the Pyramid?
Author, Distinguished University of Michigan Business Professor, C.K. Prahalad (1941 – 2010)
Wharton School Publishing, 2004
Economics 100
More goods = increased utility (benefit) Capitalism is the best system we have found for
delivering goods to consumers
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What is the Bottom of the Pyramid?
> $20,000
$1,500 - $20,000
$1,500
< $1,500
4 Billion People
75-100 Million People
1.5 – 1.8 Billion People
Do the poor have money? / The Poverty Penalty
Comparison of prices in Mumbai shanty town (Dharavi) vs. wealthier neighborhood (Warden Rd.)
Item Dharavi Warden Rd.
Poverty Premium
Credit per annum 600-1000% 12-18% 53.0
Diarrhea meds $20.00 $2.00 10.0
Phone call per min.
$0.04 - $0.05 $0.025 1.8
Changing Nature of BoP
Increasingly urban
Increased connectivity
Increased acceptance to use advance technology
Global Distribution of Poverty
© Copyright SASI Group (University of Sheffield) and Mark Newman (University of Michigan).
Capacity to Consume
Three As to Capacity to Consume
• Affordability – a change in size or method of payment to reach BoP customers without loss of quality
• Access
• Availability
Three As to Capacity to Consume
• Affordability
• Access – a distribution pattern that reaches the poor where they work and live, at convenient times
This requires Geographic Intensity of Distribution
• Availability
Three As to Capacity to Consume
• Affordability
• Access
• Availability - “Often the decision to buy is based on the cash [the poor] have on hand at a given point … They cannot defer buying decisions.”
This requires Distribution Efficiency
Twelve Principles of Innovation for the BoP Market
• Innovation: Hybrids
• Identifying Functionality
• Process Innovation
• Interfaces
• Education of Customers
Twelve Principles of Innovation for the BoP Market
• Scale of Operation
• Deskilling of Work
• Price performance
• Sustainable (Environment-conscious) Development
Twelve Principles of Innovation for the BoP Market
• Designing for Hostile Infrastructure
• Distribution: Accessing the Customer
• Challenging Conventional Wisdom in Delivering Products and Services
Conclusions of “The Fortune at the Bottom of the Pyramid”
• Greater consumer choice = greater dignity
• The presences of multinational corporations and e-governance will oppose corruption and encourage better systems
• The above two conclusions will lead toward an elimination of poverty
Effect of BoP
Criticism 1: The Size of the BoP
Size of BoP
Daily Consumption
Annual Economy
Prahalad's Estimate
4 – 5 Billion
$2 per day $13 Trillion in PPP
Critic's Estimate
2.5 – 3 Billion
$1.25 per day $1.2 Trillion in Global FX
PPP = Purchasing Power Parity FX = Foreign Exchange
Criticism 1: The Size of the BoP
http://www.oxfamblogs.org/fp2p/?tag=growth
Criticism 2: The Issue of Quality
There are only three principle ways to lower real prices for the BoP (or anyone):
• Reduce profits
• Lower the cost of production through innovation/technology
• Lower the quality of the good
Criticism 3: Should we even sell to the BoP?
- “Getting the poor to consume more will not solve their problems, contrary to the BoP argument. Their problem is that they cannot afford to consume more.” -UMBS professor, Annel Kanari
- “... in their in depth study [they] find that 'over 10% of male respondents report spending as much as (or more than!) their regular income on alcohol.' … The rich also often make choices not in their self-interest, but the consequences are not as severe in their case.” - ibid
Criticism 3: Should we even sell to the BoP?
Nobel-prize Economist Amartya Sen:
“The deprived people tend to come to terms with their deprivation because of sheer necessity of survival … The mental metric of pleasure or desire is just too malleable to be a firm guide to deprivation and disadvantage. Social and economic factors such as education, elementary health care, and secure employment are not only important in their own right, but also for the role they can play in giving people opportunity to approach the world with courage and freedom.”
My Thoughts / Are you still awake? / Questions
Thank you for listening!
Sol DeLeon
Thank You!