Money to be made at the bottom of the pyramid
Those 50 ml sachets of shampoos make an excellent business model, as Indian consumer goods companies would readily attest to. Prahalad argues how a low-cost high-volume business model allows capitalism to solve the problem of global poverty.
He is a fierce critic of traditional top-down thinking on aid, by governments and non-governmental organisations alike. They tend to see the poor as victims to be helped, he says, not as people who can be part of the solution—and so their help often creates dependency. Nor does he pin much hope on the “corporate social responsibility†(CSR) programmes of many large companies. If you want serious commitment from a firm, he says, its involvement with the poor “can’t be based on philanthropy or CSRâ€. The involvement of big business is crucial to eradicating poverty, he believes, but BOP markets must “become integral to the success of the firm in order to command senior management attention and sustained resource allocation.â€Mr Prahalad reckons that there are huge potential profits to be made from serving the 4 billion-5 billion people on under $2 a day—an economic opportunity he values globally at $13 trillion a year. The win for the poor of being served by big business includes, he says, being empowered by choice and being freed from having to pay the currently widespread “poverty penaltyâ€. In shanty towns near Mumbai, for example, the poor pay a premium on everything from rice to credit—often five to 25 times what the rich pay for the same services. Driving down these premiums can make serving the BOP more profitable than serving the top, he argues, and points to a growing number of leading firms—from Unilever in India to Cemex in Mexico and Casas Bahia in Brazil—that are profiting by doing precisely that…
Another challenge will be to persuade development experts to support a profit-driven strategy. Mr Prahalad worries that firms may be deterred from BOP strategies by fear of attracting criticism from activists. If a large international bank were to start lending to the poor at interest rates, reflecting higher risks and start-up costs, of say 20% (compared with around 10% in rich countries), “the whole anti-globalisation lobby would probably be against it. Yet the alternative is for the poor to borrow at 500% from a money lender. Whose side are the activists on?†If you are on the side of the poor, he says, “surely you need to help get rates down from 500% to 20%. After that, you can work on getting them from 20% to 10% like in the rich world.†[The Economist]
In the forex spreads between buy and sell have narrowed as the volumes have gone up. There is still large profits being earned by the players. Similarly on very small margins per product a company is able to tap the indian mass market then the huge volumes generated will give the company a very handsome profit.
The question is who will take the first leap?
I am not so sure if the 50ml sachets are actually a good thing. For one, it isnt as good for the consumer as it is made out to be. There’s enormous wastage which happens (%age of volume of shampoo wasted when the packet is opened etc.) and that means not enough shampoo for the buck – the bottles [however small they are] are far more efficient in terms of product wastage.
Next, this week’s [or was it last week’s?] Business Today has a feature on an AC Nielsen survey which indicates that sachet shampoo making FMCGs arent having a great time either. Here’s the link, but its a subscription link – http://www.business-today.com/btoday/20040829/features5.html. I suggest you get hold of the mag instead 🙂
That looks like a very nice way to convince consumers to buy bigger quantities. Clever.