Whitepaper

Bottom of the Pyramid Marketing: Reaching out to 110 million Indians

October 13, 2008

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Bottom of the Pyramid Marketing The phrase—bottom of the pyramid—has been defined and redefined over several decades. And the untapped opportunities lying at the bottom of the economic pyramid have caught the fancy of several companies across the globe. “Given the enormous attention the concept has attracted globally, it has the potential to impact 4 billion people living on less than USD 2 a day as well as managerial practices of multinational corporations,” said C.K. Prahalad, Professor, Strategy, Paul and Ruth McCracken Distinguished University and Stuart L. Hart, Professor, Management, Cornell University’s Johnson School of Management.

The BOP segment in India has emerged as a multi-trillion-dollar business opportunity for companies struggling to grow their business in traditional but saturating markets. While low disposable income, estimated at USD 2 a day, may have prompted companies to stay away from this segment, the sheer size of the market is likely to drive product innovation in the coming years.

According to NCAER convention, the Indian population can be divided into the following five broad segments based on household income:

Deprived: Annual disposable income below INR 90,000

Aspirers: Annual disposable income between INR 90,000 and INR 200,000

Seekers: Annual disposable income between INR 2,00,000 and INR 5,00,000

Strivers: Annual disposable income between INR 5,00,000 and INR 1,000,000

Globals: Annual disposable income of more than INR 1,000,000

The benefits of economic liberalisation initiated in 1991 have started to trickle down to the bottom of the economic pyramid. The percentage of population with an annual disposable income of less than INR 90,000 decreased from 93 percent in 1985 to 54 percent by 2005, reflecting that 103 million people moved from low poverty levels, not only in urban centres, but also in rural areas. In the Indian context, the BOP can be defined as a section of people who have moved above the poverty line and live in rural or semi-urban areas.1 About 110 million people inhabiting these rural and semi-urban areas can be defined as BOP consumers. Awareness, access, affordability and relevance are the four factors that influence BOP consumers’ buying preferences.2

The definition of BOP varies with industry experts. Table 1 depicts the pyramid defined by IMRB International.

1 Source: Booz and Co. 2 Source: MBA Universe

“The Bottom of the Pyramid highlights the way to commercial success and societal improvement–but only if the developed world re-conceives the way it delivers products and services to the developing world.” Christopher Rodrigues, CEO,

Visa International

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Figure 1: Division of economic classes – India

Division of economic classes

The percentage population at each level is as follows:

Upper:11 percent

Upper Middle: 17 percent

Middle: 19 percent

Lower: 24 percent

Lower Lower: 29 percent

At present, BOP consumers spend 42 percent of their income on food and beverage, tobacco, transportation and housing. However, by 2025, the spending on food, beverage and tobacco is estimated to decline to 25 percent as disposable income increases. Meanwhile, spending on transportation, healthcare, personal products and services, recreation and education are likely to increase steadily. The changing spending pattern has necessitated a change in marketing strategies to unlock the full potential of the Indian market.

Marketing Challenges at the Bottom The attractive yet virtually untapped rural market is plagued with low per capita disposable incomes, large number of daily wage earners, dependence on monsoon, seasonal consumption, poor roads, power problems and inaccessibility to conventional advertising media. These perennial issues have so far discouraged several companies to explore the BOP market. Further, lack of knowledge on consumer buying pattern and preferences in these markets have also played a pivotal role. The following is a brief overview of the issues that pose a major challenge for companies trying to the tap the BOP segment.

Availability India's 627,000 villages are spread over 3.2 million sq. km. Approximately 110 million Indians live in rural areas, and reaching them is not easy, especially given the poor road infrastructure. Hence, operations costs increase and sometimes it is even higher than that in urban markets. Therefore, companies are finding it increasingly difficult to protect their margins in the BOP market.

“India is one of the hotspots of the world...opening up to new ideas and investments and the people are increasingly getting interested in Western fashion.”

Patrice de Place, President, Artistic Committee, Mod'Art

International, Paris

Upp

Upper Middle

Middle

Lower

Lower Lower

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Affordability Given the low disposable income of BOP consumers, pricing is key to higher product penetration among rural consumers. Further, people in rural areas are not only price sensitive, but also quality conscious. Therefore, producing quality products at lower price points has posed a challenge for companies trying to protect their margins in the backdrop of monumental cost pressure.

Acceptability In the BOP market, product functionality is a key success parameter. Therefore, a product form that has worked well in traditional markets may not be acceptable to BOP consumers if the product functionality is not in line with their unmet needs.

Awareness India is home to people speaking several languages and dialects. Further, the cultural heterogeneity makes it difficult for marketers to create awareness among BOP consumers. In addition, low literacy rates, coupled limited reach of the electronic media, are likely to act as a barrier to promotional efforts. It has been identified that the best places to promote products or services are local haats and melas or promotional campaigns during local festivals. However, organising such affairs is not easy because of the high costs involved.

Others Apart from the 4 As, companies also face the following challenges:

Aggressive pricing by local brands

Distribution costs and route to market challenges

Small retailers struggle to maintain inventory in absence of sufficient credit support from companies

Rural-urban divide in terms of social and cultural lifestyle

Lack of skilled workforce

Unlocking the Potential... In his book Fortune at the Bottom of the Pyramid, C.K. Prahalad mentioned, “If we stop thinking of the poor as victims or as a burden and start recognizing them as resilient and creative entrepreneurs and value-conscious consumers, a whole new world of opportunity will open up.” However, marketers are divided over indentifying a suitable marketing strategy for the BOP segment. The relationship between the four Ps of marketing—product, price, place and promotion—and the four marketing challenges—awareness, availability, accessibility and affordability—provides a broad marketing framework. The size of the BOP market is expected to expand at a faster rate than that of the top of the pyramid. The BOP strategy needs to focus not only on lowering price points for existing products and services, but also on creating and offering customised products to address the unmet needs of BOP consumers.

“When we look at markets in India, the growth prospects over the near, medium, and longer term is excellent and there are going to be great opportunities as a result. With regard to the opportunities that we see in India, our global capabilities match very well with the business here.”

Brady W Dougan, CEO, Credit Suisse Group

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Figure 2: Link between 4 Ps and 4 As to provide a broader marketing framework

link: 4 Ps of marketing with 4 as (Marketing Challenges)

Source: Evalueserve Analysis

The companies should target the ‘creamy layer’ first. Building awareness and providing economic benefits that extend beyond core products and services are often key elements of an effective community strategy. Further, the approach to the markets assumes tremendous significance given that overemphasis on cost and pricing have not worked well in the past. The marketing strategies that have worked well in urban and affluent markets are unlikely to produce identical results. Pricing undoubtedly will continue to play a pivotal role in expanding product penetration among BOP consumers, but cannot be perceived as the sole growth driver. Innovation is key. In addition, companies should take a long-term view on this segment and focus on developing a sustainable business model.

The companies should focus on the following strategies to understand their customers better and bring about radical change in their attitudes:

Focus on affording access rather than ownership

Monetise hidden capital

Scale out rather than scale in

4 As and 4 Ps Acceptability

Availability

Affordability

Awareness

Promotion

Product Price

Place

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Figure 3: Change of mindset

Change of mindset

Source: C.K. Prahalad

Innovation The market is not only a powerful driver of innovation, but also an important source of sustainability. Several companies in the past have experienced that the market route is far more efficient than the humanitarian route in addressing the BOP segment. Product innovation is a function of various smaller variables that work in sync to devise innovative marketing strategies to target BOP consumers. The following is a brief description of such variables and how product innovations can create a breakthrough in the market.

Product Customisation In BOP markets, product functionality and price play a far more important role than product form in capturing the market. The FMCG industry has brought back the sachet culture for existing products to target this segment. Further, this packaging strategy—smaller packs at lower price points—is a success across other income segments as well. HLL, a subsidiary of Unilever, initiated 'Operation Bharat' to tap rural markets. It came out with low-priced sample packets of its toothpaste, fairness cream, Clinic Plus shampoo and Ponds cream, targeting 20 million households. Thus, companies should focus on developing customised products—a creative blend of advanced technology and deep local insights—to tap the BOP segment.

Cross-functional Coordination Coordination among different functions in an organisation is key to formulating effective BOP marketing strategies. Further, companies should also focus on efficiency. For example, HLL, through its Project Shakti launched in 2000, encouraged rural women to spread awareness about HLL personal care products. The project was test-marketed in Andhra Pradesh and was aimed at creating “income-generating capabilities for underprivileged rural women by providing a small-scale enterprise opportunity, and improving rural living standards through health and hygiene awareness”. The project, besides being an initiative to help rural women, helped enhance the company’s distribution network at a low cost. It exemplified the significance of close coordination between marketing and supply chain/distribution functions of HLL in creating awareness about HLL products, thereby increasing brand visibility and ensuring easy access to HLL products.3

3 Source: Financial Express

The poor of India is an intractable

problem

The poor of India is a potential market

The poor of India can be a source of innovation

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Pricing Pricing plays a key role; however, it is not the key to higher product penetration. Further, product functionalities assume a far more important role than form. Cavin Care introduced INR 0.50 sachet packs of Chik shampoo at a time when penetration of hair care products in rural India was quite low. The strategy was highly successful and Chik shampoo’s market share grew from 5.61 percent in 1999 to 23 percent in 2003. The sachet strategy creates “artificial price differential’ and drives volume sales.

Distribution Organised distribution systems in India reach out to only small towns of 5,000 or more. It is estimated that at least 20 percent of the population is not effectively linked to the national and regional distribution systems of the organised sector. Strong distribution and communication systems are critical to any effective bottom of the pyramid strategy. A company alone, especially an MNC, cannot create the commercial infrastructure at the bottom of the pyramid. Viable partnerships with local people and community agents who have the social capital to bring people together and build incentives should be emphasised. India’s telecom revolution has improved connectivity across the country and mobile phone penetration in this segment is increasing. However, poor infrastructure in low-income markets increases operations cost. Thus, the involvement of local population in the distribution not only improves product distribution, but also fuels entrepreneurial aspirations, thereby creating more job opportunities.

Promotion Since only 16 percent of people in rural India have access to a newspaper or other forms of print media, companies need to be very careful in choosing the vehicle to be used for communication. Audio visuals are thus a very popular way to convey the message. The rich, traditional media forms such as folk dance and puppetry can also be used for high-impact product campaigns. The message conveyed through local languages leaves a powerful impact.

Co-creation to Serve BOP Consumers Co-creation is a technique where the companies can tie up with the local vendors in the unorganised market to sell or market their offerings to BOP consumers. The local vendor has a wider access to the market and has a deeper understanding of consumers’ needs. Hence, a promotional strategy by a local vendor/seller is expected to be more successful than a direct effort of the company.

Professor Prahalad talks about co-creation as a solution towards economic development and social transformation. Following are the entities involved:

Private enterprises

Development and aid agencies

Bottom of the pyramid consumers

Bottom of the pyramid entrepreneurs

Civil society organisations and local government

“The opportunities at the bottom of the pyramid cannot be unlocked if large and small firms, governments, civil society, organizations, development agencies, and the poor themselves do not work together with a shared agenda. Entrepreneurship on a massive scale is the key. This approach will challenge the prejudice about the ‘role of value added’ of each group and its role in the economic development of the bottom of the pyramid.”

C.K Prahalad

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Figure 4: Relationship among entities involved in co-creation

Relationship among entities involved in co-creation

Advertising Each region in India has a distinct language, culture and rituals. Further, low literacy levels, coupled with absence of traditional advertising media, have posed a challenge for markets. To overcome these challenges, marketers are increasingly organising promotional activities in local haats and mandis, as well as places of worship, frequented by a majority of BOP consumers. For instance, advertising agency O&M promoted Lifebuoy soap by conveying the message of safe health through Gurudwaras. Similarly, Nokia and LG run vans through villages demonstrating and selling their products. However, ‘Word-of-mouth’ is the best form of advertising. In rural areas, there are some select opinion leaders who hold regular meetings with the community. These meetings are a common platform for all to discuss everyday issues.

Need to Build Sustainable Models Companies should focus more on improving the purchasing power of the BOP segment by ensuring access to cheaper institutional credit. However, access to credit in absence of an income generation potential will not create a sustainable market opportunity. In fact, it has been noticed that when it comes to addressing the needs of the BOP segment, the market route has an advantage over the humanitarian route.

Some Success Stories Several companies have taken various initiatives to target the BOP segment. These initiatives are, however, sometimes inadvertently interpreted as corporate social responsibility. The following is a list of select case studies.

“In the real sense, managers who commit their companies to strategies for the bottom of the pyramid are creating sustainable development.”

C.K. Prahalad

Private Enterprise

Civil Society Organisations

and Local Government

Economic Development and

Social Transformation

Development and Ad

Agencies

BOP Consumers

BOP Entrepreneurs

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Healthcare Aravind Eye Care System4 Aravind Eye Care System is the world’s largest provider of cataract surgery. The hospital treats more than 60 percent of patients free and is still operating profitably. It performed 240,000 surgeries in 2004 and treated 1.6 million outpatients. The return on capital employed for Aravind Eye Care was 16.2 percent and gross margin was 54 percent in 2004–05.

Fortis HealthWorld5 Fortis HealthWorld, in collaboration with Hariyali Kisaan Bazaar, provides quality pharmacy and allied services to the BOP segment through its 70 outlets across the country. The group plans to expand its reach by opening 200 more outlets. Fortis has a referral model in place, which involves low infrastructure cost and helps them generate profit.

Lifebuoy ‘Swasthya Chetna’6 HLL launched the Swasthya Chetna campaign to educate rural customers in 15,000 villages about basic health and hygiene issues. The Swasthya Chetna teams visited villages and schools to teach children about the harmful effects of germs and how those germs can be eliminated by washing hands with Lifebuoy soap. The company launched the 18-gram bar of Lifebuoy soap to make it affordable to target customers. The campaign was successful and Lifebuoy sales increased by 20 percent in 2003–04.

HLL’s Salt Story6 Iodine deficiency disorder has impeded growth and mental development of 70 million people in India. As almost 50 percent of iodine in iodised salt is lost during cooking, storage and transportation, HLL developed stable iodine for salt, which is available even in remote areas and at affordable price.

Jaipur Foot6 Jaipur Foot, a non-profit organisation, has created a low-cost prosthesis with its innovative designs and use of materials. It helps 16,000 patients annually return to their professions without loss of income or productivity.

Agriculture EID Parry (India) Ltd7 EID Parry has created a web portal for farmers and local entrepreneurs. The portal provides access to crop disease diagnosis, fertilisers and tools, education and a direct market for rice and sugarcane crops.

Telecom Sector and Education Nokia and Motorola Nokia launched Nokia 1100 and 2600 models, while Motorola introduced MOTOFLIP and C139 models to target BOP consumers.

4 Source: Rural India 5 Source: INR News 6 Source: Michigan Ross School of Business 7 Source: EID Parry

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TARAhaat8 TARAhaat is a social enterprise operating in a profitable set-up. It delivers education, information and services to rural areas through the Internet. It is an initiative of Development Alternatives Group, a New Delhi-based non-profit organisation. TARAhaat uses a franchise model wherein services are delivered to rural consumers at TARAkendras through the TARAhaat.com portal. TARAhaat mostly utilises India's existing telecom infrastructure, such as telephone lines. TARAgyan products offer customised computer education to rural areas; information is also offered in a few local languages. The revenues come from fees and support charges, advertisement and sponsorships, fees to suppliers/vendors of enterprises set-up, consultancy fees to TARAguru (entrepreneur mentor), user charges for Web-based support services, revenue share from entrepreneur’s product/service marketed through the network of TARAhaat’s kiosks.

Ericsson India9 Ericsson India, which connects 18 villages and 15 small towns in Tamil Nadu through the Gramjyoti Rural Broadband Project, has entered into tie-ups with various domain experts to offer services and information relevant to its target audience. Ericsson has tied up with Apollo Hospitals to offer telemedicine and mobile healthcare services. It has also tied up with Bangalore-based Edurite Technologies to offer E-learning services, while E-governance will be offered to Gramjyoti villages and towns through a tie-up with the local government. Ericsson is also collaborating with Turner Broadcasting Systems (a division of Time Warner which includes CNN and Cartoon Network) to provide infotainment services. New Delhi-based One97 Communications provides the technology infrastructure for this project. Further, Ericsson has collaborated with Hand in Hand, an NGO that runs citizen centres across Tamil Nadu, to use the NGO’s centres for providing Gramjyoti services.

N-Logue10 n-Logue has set up a profitable network of wireless Internet kiosks in villages across India. The kiosk owners purchase computer equipment from n-Logue. n-logue provides training, support and technical assistance to kiosk owners. N-Logue is also exploring the e-education segment. With rural school children finding English and Mathematics difficult to learn, leading to high dropout rates, video recorded lectures will be put on the intranet so that students can select a particular topic and learn.

Microfinance ICICI Bank11 ICICI Bank has partnered with many institutions to set up ATMs and Internet kiosks. The bank rolled out SmartCard technology to provide secure, low-cost transactions and loan management. ICICI Bank has created a network of 8,000 Self Help Groups (SHGs) to support micro-financing.

Muthoot Group Muthoot Group, a leading non-banking finance group in South India, launched 1 gm gold, targeting low-income consumers. Banks such as Axis Bank, Syndicate Bank and ICICI Bank have also entered this market.

8 Source: Social Edge

9 Source: Social Edge 10 Source: Domain-B 11 Source: NextBillion.Net

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Copyright © 2008 Evalueserve. All rights reserved.

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