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VALUE
AT THE BOTTOM OF THE PYRAMID
Juan Luis Martinez and Mara Carbonell refute common misconceptions about doing business with low-income consumers and provide a model for doing well while doing good.
Business Strategy Review Autumn 2007 2007 The Author | Journal compilation 2007 London Business School

uhammad Yunus, often called the father of micro-credit, garnered worldwide headlines by winning the 2006 Nobel Peace Prize. He was a pioneer in doing business with the Bottom of the Pyramid (BoP), the population segment with the least resources, which is a subject that is increasingly attracting special attention not only from companies but also from academic institutions. The conditions traditionally required to be able to operate in a market sector that it be measurable, substantial, accessible,

cannot do this without making essential adjustments, but these do not cancel out the advisability of directing attention to the marketplace found in the BoP. Low-resource consumers have traditionally been invisible to the business world since its efforts have been focused on the upper part of the income pyramid. Low-income consumers have been considered accidental consumers; and, when product marketing has met with success among them, most companies have been unable to explain

The company that is searching for new markets and business opportunities may nd a means of commercial revitalization and ethical commitment by concentrating on the most disadvantaged.
differentiable and operable can also be met by operating businesses that cater to the population group most neglected by companies until now: the low-income group or, without employing euphemisms, the poor. The potential of this low-resources market, not only in terms of development of business activity, but also in terms of strengthening ethical values and service, is now an unquestionable fact. The two pillars supporting the idea are:

The poor can manage BoP businesses have restored many a persons self-respect by considering him not as a passive and dependent subject but rather as the protagonist of his own development, able to resolve his own saving and consumer needs if given the opportunity. In more cases than not, such trust in the poors ability to manage their own affairs has proven accurate. Capitalism need not be restrictive An inclusive vision of capitalism, taking in population groups that are articially excluded from its economic logic, has proven to be good for society and good business as well.

it, since it was unintentional. Perhaps a degree of marketing myopia has prevented the business world from seeing reality and made it difcult to identify new opportunities to create value and do business in unexplored parts of the globe. This myopia is partly due to a fear of innovation but also due to the lack of comprehension of the needs of the poor. Many companies are working overtime trying to get a fraction of a per cent increase in market share in a developed country, but those same companies are taking a dangerous stance if they fail to address a large potential market: people who earn less than $2,000 a year. Many companies still assume that those with little income only allocate their spending to basic needs, thus making it impossible to do business protably in BoP regions. What engenders this myopia? We suggest that many companies suffer from three prejudices:

The poor have no money This supposition sounds obvious but is supercial and confusing. Although each member of a family may earn very little, the joint purchasing power of poor families and communities is large. Spending by the poor is restricted to basic needs On the contrary, the poor usually buy luxury items, such as a television or gas stove. Since buying a car or a house is not a realistic option, rather than saving, the poor spend their money on things they can afford that will improve their quality of life. The poor only buy cheap things Since they cannot obtain bulk discounts, poor consumers usually pay much higher prices than middle-class consumers do for the same goods; consequently, large companies with economies of scale and efcient supply chains have a real opportunity to offer quality goods at affordable prices and with attractive margins.
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The critical question yet to be answered is whether BoP businesses are sustainable: can such businesses endure up-and-down business cycles over an extended period of time?

Search for good business

The company that is searching for new markets and business opportunities may nd a means of commercial revitalization and ethical commitment by concentrating on the most disadvantaged. Without doing anything out of the ordinary, it can look after its traditional customers those at the top of the income pyramid while at the same time concentrating on those at the bottom. Obviously it

2007 The Author | Journal compilation 2007 London Business School

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Serving this new market segment requires a combination of factors of small-unit packaging, lowunit margins and huge volume of sales. To actually begin doing business with the bottom of the pyramid, three basic questions need to be resolved: how to bring the nance system to the segment (credit services as well as savings and investments), how to make technological advances accessible to enable process efciency and how to adapt the products and brands to its buying and consumer habits. Interestingly, addressing these questions by marketing to poor customers can actually generate ideas that can be exported to other environments and circumstances.

Access by adapting
As with any new market, companies need to account for the uniqueness of doing business with BoP customers. Some of the issues involved include analysing customers ability to pay and thus to put forth a reasonable pricing strategy, educating the customer in the use of the product and adapting to rapid changes that often occur in the BoP. As in most other markets, adequate distribution has an impact on creating increased capacity for consumption; for these customers, we often stress the triple A factors: affordability, access, availability making an offer that the consumer can buy, that solves a real need (is attractive) and that can be found in the place and time needed. In essence, companies searching for new business can nd it in BoP territories if they will adopt a mindset like that used to move business beyond their home borders, with two special caveats: managers must stop thinking of poverty as a problem and they must be willing to learn how

compete with greater strength, we can be sure of its sustainability and that its potential to create value has been exploited. The key to keeping a business going in the BoP market segment relies on, as always, solid business performance. Whenever a company commits to accessing a new marketplace that is populated by the poor, it is in essence resting its future on two tracks. The rst track is the need to augment solid business results achieved in traditional market segments with additional solid revenues generated in the BoP market segment. Thus, we would argue that doing business at the bottom of the social pyramid is not akin to charity; it should be considered one more item in the set of business activities that make corporate prots possible, a wider organizational vision, as it were. Doing business with the poor must be seen as doing business in a new marketplace, one with growing potential not as a complex and tortuous route to obtain one more sliver of prot by donating corporate resources. It must be seen as a way to augment the primary business activity of the rm. Yet, there is a second track, one tied to social action. Once the soundness of a decision to access business by working with the poor has been accepted as adding weight and stability to the corporate vision, a company can begin to redene its own potential by acknowledging its openness to caring about society in a pronounced, public way. Caring about society, for those who have created a solid business operation in BoP countries, will stir new and different corporate realities, because its impossible to engage in BoP business without developing or discovering new sources for strengthening corporate processes and abilities. The

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The key to keeping a business going in the BoP market segment relies on, as always, solid business performance.
to do business with the poor (as opposed to getting business from the poor). Such adaptation is not only required, it could also be the best vaccine against the paternalism that sometimes impregnates what are often called Business Social Action (BSA) initiatives, business plans built on making a positive difference in society as well as making a prot. In order for a social action to be recognized as such, it must help to create economic wealth. Likewise, economic progress has to consider generating an asset for society beyond the generation of prots. The usual playing eld for free enterprise is that of competition. Insofar as BSA can be used to acquire new abilities and skills, making organizations more efcient and able to
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two tracks, as we dene them, create a forwardmoving momentum for the company, one that enhances the concept of doing business (making a prot) with doing good (making a difference). Michael Porter is famous for, among other contributions, dening and diagramming a value chain, a concept that challenges every company to examine its activities to see if they are adding value or if they are merely running the corporate engine. Weve adapted his value chain illustration to quickly diagram our concept of a two-track future for companies. Porter, in Competitive Advantage: Creating and Sustaining Superior Performance (Free Press, 2004), offers a much more detailed graphic that approximates that found in gure 1. The key point

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Social Action Activities Firm Infrastructure Support Activities Human Resource Management Technology Development Procurement

Inbound Logistics

Operations

Outbound Logistics

Marketing and Sales

Service

Primary Activities
Figure 1. Adapted from Porters value chain

of his chart is the same as our adaptation: it is critical for all the various components for creating value to integrate, and it is likewise critical to add activities that mesh with the companys direction. To our mind, the social action represented by adding a corporate commitment to BoP opportunities must also add to the value chain of a business. If it does, it not only gives each component in the system the possibility of nding new sources of efciency but also strengthens their interrelationship, increasing the possibility that yet new synergies may emerge.

Occurs in a voluntary way, triggered by the attractiveness of the business opportunity and not constrained in terms of how that business may grow in the future Integrates with business strategy and aligns with the reinforcement of key skills in the organization in order to guarantee its sustainability Commits funds and resources fully and consistently liberally, supporting business that is stable, protable, and synchronous with the long-term vision of the company Operates in the open, unobscured, so that all members of the business know what the company is doing, and with whom, so that they can, if desired, establish open and responsible relationships with existing customers or others in the same marketplace Extends opportunity by conveying the lessons learned and by becoming capable of replicating BoP practices in other environments and circumstances

Ma rgi n

Add VALUE
If the company and its stakeholders want to create all the wealth possible and increase the possibilities of using it to strengthen their own institution, then its social action agenda (as represented by its BoP activities) must meet some prior requirements: it has to be free, not prompted by legal obligation; it must be aligned with the organizations objectives and integrated into its strategy; it must be constant and generous liberal; it must be transparent and visible; and it must be capable of being extended and replicated. These factors are not always taken into account, yet true Business Social Action accepts these as conditions for operating a sustainable business; and there are some extraordinary examples of companies doing business with BoP populations that illustrate how such commerce works to the benet of all. And this is what makes such business sustainable. One way to summarize our research in this eld is to offer a simple model for the management of BSA (see Figure 2). Sustainable Business Social Action occurs only when it:

BSA in action
A good example of BSA is the initiative that Codensa, the Colombian energy company, has carried out through its Divisin Hogar [Domestic Division]. Codensa is the biggest distributor of electricity in Colombia, providing service to the city of Bogot and 96 towns in other districts, with a total of 1.97 million customers. Current Colombian legislation encourages open competition and sets market concentration limits of 25 per cent on companies, both in distribution as well as in marketing. Codensa has 22.9 per cent of the distribution market and 17.1 per cent of the energy market. This strong situation is nevertheless a weakness, because it limits the companys growth. Codensa
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n rgi Ma

V A L U E

oluntary, unrestricted ligned with strategy iberal, magnanimous, constant nobscured, transparent xtendable to other environments

Figure 2.

started to look for new related business enabling a more optimum and protable use of its cash surpluses, while at the same time generating part of the working capital needed to operate its distribution and marketing businesses. During this search, the company discovered it had great possibilities for growth in the informal market. This conclusion was the beginning of a new

goods on credit was beyond the reach of the lowincome segment, since they lacked the amounts needed and the opportunity to acquire them. Combining the potential to increase consumption with access to products that were traditionally unattainable for the BoP customer was a superb idea, but a long list of questions arose in the minds of management. Would they have to become a

Insofar as BSA can be used to acquire new abilities and skills, making organizations more efcient and able to compete with greater strength, we can be sure of its sustainability and that its potential to create value has been exploited.
business model offering products and services to the bottom of the pyramid. Codensa Hogar aims to be the leader in the innovation, development and marketing of products and services that improve their customers lives, creating value in the market and for company shareholders. The axes on which they have based their strategy are:

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Energy customer loyalty: developing long-term relationships by improving the energy product value proposal Creating value for the shareholder: developing protable businesses that are an important source of income for the core business

Codensa had to move from being an efcient and competitive provider of energy services to being an integral provider of products and services for the home, enabling payment for them through a customers electricity bill. The company detected that improving customers quality of life through acquisition and use of electrical goods and appliances could be an opportunity for strengthening ties with customers and expanding their business. Up until that time, buying electrical
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nance company? Would they have to diversify and produce electrical appliances? Would it be possible to deal with suppliers and manufacturers of such goods? Would they have to distribute the products? Since it was difcult to collect payment for energy used in these homes, how would they collect payment for the purchase of electrical goods on credit? Codensa started with an easy credit card that would enable their electricity customers to obtain credit to buy large appliances, with repayment to be made through the electricity bill. The company made alliances with electrical goods suppliers and strategic partners responsible for distribution. It became a coordinator of businesses that provided electrical service and the capability for mass consumption to the low social strata that up to then had been ignored. They not only improved their customers quality of life but also their own corporate reputation and brand image. As a source of differentiation, Condensa Hogar used:

Innovation: by developing new products and services

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Integration: by developing systems, operations and logistics that enabled alliances with new partners Promotion: by improving product offers and prices in different channels and with various business partners Penetration: by developing access to low social strata with more than 60 points of sale that made it possible to supply and meet the needs of 80 per cent of potential customers in Bogot Variation: by offering terms of payment through the electricity bill, with the backing of an extensive collection network

Juan Luis Martinez (JLMartinez@ie.edu) is Professor of Marketing at Instituto de Empresa Business School in Madrid. Mara Carbonell (mcarbonell@compromisoempresarial.com) is Research Manager at Compromiso Empresarial Press in Madrid. The authors are grateful to the Fundacin Rafael del Pino for its nancial support of this research.

London Business School Regents Park London NW1 4SA United Kingdom Tel +44 (0)20 7000 7000 Fax +44 (0)20 7000 7001 www.london.edu A Graduate School of the University of London

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Codensa Hogar provided service to 450,000 customers in 2005, with 35 per cent penetration in new low-strata customers and 24 per cent of regular customers, resulting in a growth in sales of 194 per cent over 2004 (80.4 million euros). Codensa has not had to wait for its reward: it has increased its prot margins by 96 per cent in the sale of electrical goods and appliances compared with 2004, and it has instilled a payment mentality that will be of positive advantage in repayment of consumer credit and in its invoicing for electricity consumption. Nine per cent of the companys prot margins will come from the Domestic Division in 2006, and it anticipates 12 per cent in 2007. These results, both nancial as well as social,

have led the company to consider an ambitious strategy to diversify services to the poor, ranging from home insurance and funeral arrangements to direct debit sale of magazines. No other company had previously done anything similar for, and on behalf of, the low-income segment. The poor pay, and they pay well. They repay credit under terms and conditions with ratios that would be the envy of many nance entities. They buy products following the same guidelines and demands as the high-income consumer; they make cross-purchases; and once they have grown in strength as people, becoming fully integrated into the formal system of the market with the same rights and obligations as the rest, they respond by giving their loyalty. As the Codensa business case shows, one can operate at the bottom of the pyramid successfully and that business can be sustained because it is both good for the company and good for society.

Resources
C.K. Prahalad, The Fortune at the Bottom of the Pyramid: Eradicating Poverty Through Prots, Wharton School Publishing, 2006. Hernando De Soto, The Mystery of Capital, Black Swan, 2001. Stuart Rutherford, The Poor and Their Money, OUP India, 2000.