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The bottom of pyramid - a mixed opportunity - Views on News from Equitymaster
 
 
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  • Jun 5, 2009

    The bottom of pyramid - a mixed opportunity

    India's demographic profile has offered Indian companies several options to cater to diverse profile of customers. However, the segment that has excited the maximum interest in the recent past has been the bottom of pyramid (BOP). First used in 1932 by U.S. president Franklin D. Roosevelt and later highlighted by Professors C.K. Prahalad and Stuart L. Hart in 1998, Bottom of Pyramid (BOP) has caught the eye of many. It represents a latent market providing a new growth opportunity. It also opens the doors of innovation for the companies. In this series of articles on BOP we rationalize whether companies should tap this opportunity.

    What is BOP?
    As per Wikipedia, in economics, the bottom of the pyramid is the largest, but poorest socio-economic group. In global terms, there are 4 bn people across the world that live on less than US$ 2 per day, mostly in developing countries. This forms nearly two-thirds of the world's population and is estimated to touch 6 bn people within 40 years. Further, the developed economies are now saturated markets. The multinational companies are therefore increasing their presence to developing markets. Also the bulk of the world's population growth is occurring among the poor strata of the society in these developing economies.

    For eg: India has 357 m people earning less than US$ 1 per day and around 750 m people surviving with less than US$ 2 a day. This segment accounts for 30% of national income and 33% of consumption. Even if we were to exclude the population earning less than US$ 1 a day, 393 m people still form 34% of India’s population and more than the entire US population. Just to give the big picture, if these 393 m people spend Re 1 per day every day, it amounts to Rs 143 bn in all, nearly equivalent to HUL's annual sales.

    *based on purchasing parity in US$    Source: U.N. World Development Report

    Though these people spend a minuscule amount of their income on discretionary items, the total combined income makes for a very large opportunity. As can be seen in case of Indian FMCG companies, sachets and small packs (generally targeting the poorer sections) are said to account now for more than half of sales of several FMCG products. HUL and P&G sell nearly half their premium detergents in tiny packs.

    The BOP can provide opportunities for developing new goods and service. It opens up doors to new ideas as these consumers have to be served differently. Further, while the margins per unit may be low, it is a volume story. Eg: More than 40% of FMCG market is at prices upto Rs 10. Mr Prahalad has rightly said "the bottom of the economic pyramid is a sandbox for innovation. It can push companies to discover creative ways to configure their products, finances, and supply chains to enhance productivity".

    The successful strategies can also be implemented higher up in the pyramid. For eg: The sachet strategy has been so successful that, 70% of total shampoo sales in rural India are by sachets. The purpose was to initiate rural consumers to use shampoo in the place of traditional substitutes and in the process increase sales volumes and make shampoo affordable for the masses. After seeing the success, urban consumers too responded in a positive way. Recently SBI launched Chota SIP (investments in mutual funds at small ticket size) to target the lower income group. The consumers in this segment are brand-conscious and value conscious. Also once established, the company can introduce more products to leverage the existing brand. HUL through project Shakti covers 1,35000 villages in 15 states. This micro-enterprise has helped HUL to push growth rates in several categories such as personal wash, fabric wash, shampoos, oral care and skin care. Brands like Annapurna, Lux, Lifebuoy, Breeze, Wheel, Fair & Lovely, Lakme, Ponds, Clinic Plus and Pepsodent have sold good numbers in smaller markets. The parent company seeing the success in India is betting on Project Shakti to reach to the bottom of the pyramid in Asian, African and Latin American markets.

    In the next article we highlight the drawbacks of this segment

     

     

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    1 Responses to "The bottom of pyramid - a mixed opportunity"

    praveen

    Jun 5, 2009

    same example can be extended to telecom services. chotta recharges i beleive make up lot of the pre-paid business.

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    Equitymaster requests your view! Post a comment on "The bottom of pyramid - a mixed opportunity". Click here!
     

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