The Fortune at the Top of the Pyramid:
Why the BoP should care about profiting from the ToP
Pantene shampoo
sachet, $0.06
Gucci embroidered
handbag, $2905
Aishwarya Lakshmi Ratan, Microsoft Research India
‘BoP in Practice’ workshop, IMTFI, June 1, 2009
Overview
1. The classic BoP approach (and its detractors)
2. Returning to the evidence: what enables ascent from
poverty?
3. Inverting the classic BoP paradigm
4. Pursuing BoP Producer  ToP Consumer linkages
5. Technology’s role in enabling ascent from poverty
(1) THE CLASSIC BOP APPROACH
(AND ITS DETRACTORS)
ToP Producers BoP Consumers
•
Sell
TOP
1 Billion People (> $5)
•
MOP
•
2 Billion People ($2-$5)
•
BOP
3.5 Billion People (<$2)
•
Huge collective purchasing power at the BoP
– 5-13 trillion $ (PPP)
Large and small companies can make
significant profits by selling to the BoP
Small margins, large volume business
models
Selling products & services to the poor can
enable poverty exit through improved
consumption
ToP corporations’ development impact is in
selling quality and needed products to the
BoP
But to what extent can lowering the cost of consumption
at $2 a day incomes eradicate poverty?
Figure source: Edelweiss Research
Prahalad 2004; Hammond 2007
Limitations
• Inaccurate measurement – much smaller mkt at
$1.2 trillion (PPP). Even smaller at real fx rates.
• Cost of and constraints in serving BoP very
high
• Cited examples either non-profit or serving MoP
• Significant poverty exit can only occur through
increasing the real incomes of the poor
• State must deliver key services to the poor and
protect from ‘bad’ consumption
• ToP corporations’ development impact is in
employing the BoP
Is the supply of labour and primary commodities the only way that the BoP can
participate in markets?
Karnani 2007, 2009
Photos: Indrani Medhi, Rikin Gandhi, Jonathan Donner, Aishwarya Ratan
(2) RETURNING TO THE EVIDENCE:
WHAT ENABLES ASCENT FROM POVERTY?
Stages of Progress studies
India (Rajasthan)
India (Gujarat)
India (Andhra
Pradesh)
Out of Poverty
Diversification of income sources
(importance of urban contacts), additional
small businesses, land improvement
(successful irrigation investment)
Diversification of income sources (informal
sector employment and additional small
businesses like dairying), obtaining a
private sector or government job
(importance of contacts), minor irrigation
facilities
Diversification of income sources, land
improvement
Into Poverty
Ill health/high healthcare costs, high-interest
private debt, social and customary expenses
(funerals and weddings), failed irrigation
investment
Ill health/health-related expenses, large
customary expenses (marriage and death
feasts), high-interest private consumption
debt (debt and debt bondage)
Ill health/high healthcare costs, social and
customary expenses, high-interest private
debt, drought
Krishna et al, 2003, 2004, 2005, 2006
Out of Poverty
Into Poverty
Kenya
Diversification of income by linking to urban
economy (mostly private jobs, few govt jobs),
establishing successful small businesses
Ill health/high healthcare costs, death of major
earner, heavy funeral expenses (slaughter of
family livestock),large family size, small landholdings, uneconomical subdivision of land
Uganda
Land improvement, Diversification of income
sources, Gain from Business (mainly commercial
crops), Jobs in private sector, education IF
person finds job after education
Ill health, healthcare expenses, death of income
earners, large family size, funeral/marriage
expenses, land division, crop disease, land
exhaustion
Peruvian Andes
Diversification of income (livestock, diversified
cropping strategies), Support of community
organizations, Improvements in physical
infrastructure
Ill health/high healthcare costs (including physical
disability), social and customary expenses (mostly
marriages, some funerals)
North Carolina
Employment (finding a job), multiple jobs, longer Ill health, healthcare ex penses, loss of job, lack of
hours, better budgeting
family support compounds effect
(1) Dominance of income-related improvements in ascending
households
(2) Diversification of income sources critical
“Diversification of income sources was mentioned as a principal reason in the
corroborated accounts recorded for 35 per cent of escaping households.
Accounted for in equal part by irregular, informal sector employment and by
ancillary activities, especially dairying, such diversification of income sources is
a very significant reason for escaping poverty in these villages, and it is almost
as important in more industrialised Vadodara district as in less industrialised
Sabarkantha district” (Krishna, 2005:19)
(3) INVERTING THE CLASSIC BOP PARADIGM
Status quo
•Every participant in a market economic system is both a producer and a consumer
•Those who produce primary goods and supply wage labour are numerous, the valuation of their
offerings in the market is low, and they are only able to consume that which is cheap, i.e. primary
goods and labour-intensive services.
•Those who produce processed goods with value-added components and supply specialized services
are few, the valuation of their offerings in the market is higher, and so they are able to consume higherpriced processed goods and services
A BoP Consumer Focus
•Encourage ToP producers to reach out to BoP consumers (Prahalad and Hart, 2000, 2006).
•The size disparity between these two segments is vast, with the BoP constituting two-thirds of the
world’s population.
•ToP innovation in making and selling processed products and services to the BoP can lead to a new
source of revenue for them through thin-margin, large-volume sales.
•The poor would like to consume more. Why not sell them what they want to consume in affordable
packets.
Inverting the paradigm:
A BoP Producer Focus
•Encourage BoP producers to reach out to ToP consumers
•BoP producers have a comparative advantage in their low costs of labour and production
•Small scattered producers find efficient ways of aggregating what they produce, adding value in
ways that will specifically please ToP consumers who can assure demand, and
marketing/distributing these products and services to those at the top of the income distribution
(4) PURSUING BOP PRODUCER  TOP CONSUMER
LINKAGES
Why should the poor care about the rich?
In India, the top 20% of the population is responsible for 45% of
aggregate consumption.
BoP as Consumers
ToP as Consumers
• Income streams of the poor highly
• Income streams of the rich steady and
unreliable
well-insured against numerous shocks
• Poor consumer seeks standard
• Rich actively seek differentiation from
products that have the lowest ticket
peers -drive consumption of luxury,
price
custom-made goods
• Poor consumer may face welfare trade- • Rich consumer has sufficient surplus to
offs between consuming in the present
consume in the present and invest in
vs. the future
the future
BoP Producers  ToP Consumers
Company
Products
Annual turnover
(US $)
Producers
Masuta Silk Producer
Company (Jharkand)
Largest producer of Tasar
silk yarn in India
1.5M
2500
SEWA Trade Facilitation
Centre (Kutch)
Traditional textile,
embroidery, and craft
products
0.5M
3500
Gujarat Cooperative Milk Largest food products
Marketing Federation
company in India (milk
(Gujarat)
powder, baby food, milk
drinks, etc.)
1.3B
2.6M
Calypso Foods (Tamil
Nadu)
6M
5000
Specialty fruits and
vegetables (gherkins)
(A) Institutions for Aggregation and Processing
CONTRACTUAL PRODUCTION
• Third party assures producers of demand and sets price
• Risk is borne by the external aggregating agency
• Earnings gain is only through sales, and does not include any stake in
any further value addition or the final product
• Producers still retain individual ownership of assets
(A) Institutions for Aggregation and Processing
PRODUCER COMPANIES
• Aggregate the production of the poor in a manner that allows greater
bargaining power in the market around both sales as well as
procurement of inputs
• Use the ‘Producer Company’ structure to allow member-ownership
structure (one member-one vote)
• Hire management to target new markets
• Allow thousands of producers to pool their output, and invest in some
amount of processing and value-addition
• Producer-members have a stake in the final returns generated by the
company
– Distributed dividends alone ~4% of annual household income (Masuta)
(B) Sustaining demand:
Meeting the Aspirations of the Rich
•‘Hansiba’ production styles, designs, colour combinations and marketing incrementally
enhanced to match the palate of external high-end customers
•Brand ambassador at the recent opening of a third ‘Hansiba’ outlet in Mumbai was Leah
Martin, an American singer and model
Sustaining demand:
Meeting the Aspirations of the Rich
•The Amul Moppet was initially targeted at urban upper class homemakers
•Sensibilities and tone of the campaign are mostly urban
•The gimmicky one-liners used, called “topicals”, are in English and are drawn from national
and international news
(C) Mobilising Capital
• Providing finance for production becomes a
less risky proposition for most banks when
the supply-side is streamlined, efficiency
gains from aggregation and specialisation
are realized, and a collective of producers
shares the risk of production
• In a Producer Company, internal
management of working capital is moulded
to suit production timings, input purchase,
and the consumption needs of the
producers. Innovations in financial
management allow convenient cash flows
for the producers throughout the production
cycle.
Photo: PRADAN, Masuta
(C) Mobilising Capital
Surviving shocks:
• PRADAN’s poultry cooperatives grew by 50%
in 2005-2006
• But the bird flu scare caused the market price
of chicken to plummet to half the cost of
production
• Heavy losses of Rs. 5 to Rs. 20 lakhs per
coop that year
• Yet, the size of the organisation allowed the
producers to use reserve funds, collectively
mobilise more working capital, wait out the
downturn
• They subsequently rode the boom in 2006-07
to more than double their revenues the next
year
Photo: PRADAN
(5) TECHNOLOGY’S ROLE IN ENABLING
ASCENT FROM POVERTY
The role of technology
• “Technology, it is already apparent, can be as powerful a tool for
addressing barriers and inefficiencies at the bottom of the pyramid as
in more established markets.” (Prahalad and Hammond)
• Yet, the effects that investments in technologies have on enabling the
poor to move out of poverty vary greatly, and in many cases are hard
to establish.
• Technology primarily works as an amplification tool. The impact of
technology in enabling poverty alleviation is then only as good as the
task it seeks to enable.
Enabling Consumption of the Poor
• M-PESA: a mobile money
transfer/payments service with outreach
to ~6M in Kenya
• Used predominantly for smalldenomination (<$80) domestic P2P
remittance transfers between family
members and friends
• Weakest case: Urban migrant paid $1
more per transaction using M-PESA once
every 2-3 months
• Strongest case: Urban migrant saved
~8% of monthly income by using M-PESA
Photo: Indrani Medhi
Enabling Exchange with the Poor
• “ITC's empowerment plan for the
farmer centres around providing
Internet kiosks in villages”
• ITC’s e-choupal is primarily used to
facilitate the distribution of coupons for
procurement of crops like soybean by
ITC - less for accessing information for
negotiation or arbitrage by the farmers
• The disintermediation leads to an
average net upgrade of ~6% of annual
income per farmer
Photo: PC Quest
Enabling Production by the Poor
• The Masuta Producer Company
coordinates and aggregates the production
of Tasar silk yarn. The fabric produced goes
on to be part of FabIndia textile products,
• A combination of TV, DVD players and
videocameras (through Digital Green)
enables training in productivity-enhancing
opportunities and assists with the ongoing
promotion and sharing of best practice
• The average producer’s income has
involved an increment of 30-40% of
household income
Photo: Rikin Gandhi
WRAP-UP
Summary
• Some market-based mechanisms to assist poor households to rise out
of poverty are more effective than others
• The most powerful mechanisms have to do with substantially
improving incomes of the poor
• Strong earnings gains have been realised by aggregating production
of the poor, collective risk-sharing, specialization, value-addition
through selective processing, and direct sales and marketing to rich
clients
• Pursuing BoP Producer-ToP Consumer linkages through Producer
Companies and enabling these with appropriate technologies can
indeed make significant progress towards “eradicating poverty through
profits”
Additional considerations
• Role of Government in Producer Companies must be
limited to infrastructure provision and prudent industry
regulation
• Social and psychological effects of technology
adoption/consumption are critical to well-being as well, but
often do not themselves drive ascent from poverty
• In an economic downturn, overall demand falls. Yet, the rich
have greater buffers to sustain consumption than the poor.
Last word…
Mumbai’s dabbawallas
•“The century-old supply chain of dabbawallahs is operated by 5,000 semi-literate men and women
who pick and deliver 200,000 tiffin boxes to office goers per day.”
•The average turnover of the dabbawallah industry is ~$8.5 million per annum.
•'The method we adopt is simple and easy. For us, customer satisfaction matters a lot and we are
here to deliver services to them.’
Source: Rediff , Pawan Agrawal, Sanjay Sawant
Hansiba embroidered
handbag, $2905?
Thanks!
?aratan@microsoft.com