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Case 3-3 Marketing to the Bottom of the Pyramid.

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Question;CASE;3-3Marketing to the Bottom of the Pyramid;Professor;C. K. Prahalad?s seminal publication, The Fortune at the Bottom of;the Pyramid,suggests an enormous market at the ?bot-tom of the pyramid?;(BOP)?a group of some 4 billion people who subsist on less than $2 a day. By;some estimates, these ?as-pirational poor,? who make up three-fourths of the;world?s pop-ulation, represent $14 trillion in purchasing power, more than;Germany, the United Kingdom, Italy, France, and Japan put to-gether.;Demographically, it is young and growing at 6 percent a year or more.;Traditionally, the poor have not been;considered an important market segment. ?The poor can?t afford most products?;?they will not accept new technologies?, and ?except for the most basic;prod-ucts, they have little or no use for most products sold to higher income;market segments??these are some of the assumptions that have, until recently;caused most multinational firms to pay little or no attention to those at the bottom;of the pyramid. Typical market analysis is limited to urban areas, thereby;ignoring rural villages where, in markets like India, the majority of the;population lives. However, as major markets become more competitive and in some;cases saturated?with the resulting ever-thinning profit margins? marketing to;the bottom of the pyramid may have real potential and be worthy of exploration.;One researcher suggested that American and;European busi-nesses should go back and look at their own roots. Sears, Roebuck;was created to serve the lower-income, sparsely settled rural mar-ket. Singer;sewing machines fashioned a scheme to make consump-tion possible by allowing;customers to pay $5 a month instead of $100 at once. The world?s largest;company today, Walmart, was created to serve the lower-income market. Here are;a few examples of multinational company efforts to overcome the challenges in;marketing to the BOP.;Designing products for the BOP is not about;making cheap stuff but about making technologically advanced products;afford-able. For example, one company was inspired to invent the Free-play, a;windup self-power?generating radio, when it learned that isolated, impoverished;people in South Africa were not getting information about AIDS because they had;no electricity for radios and could not afford replacement batteries.;BOP MARKETING REQUIRES ADVANCED TECHNOLOGY;The;BOP market has a need for advanced technology, but to be usable, infrastructure;support must often accompany the technology. For example, ITC, a $2.6 billion a;year Indian con-glomerate, decided to create a network of PC kiosks in;villages. For years, ITC conducted its business with farmers through a maze of;intermediaries, from brokers to traders. The company wanted farmers to be able;to connect directly to information sources to check ITC?s offer price for;produce, as well as prices in the closest village market, in the state capital;and on the Chicago commodities exchange. With direct access to infor-mation;farmers got the best price for their product, hordes of;intermediaries;were bypassed, and ITC gained a direct contact with the farmers, thus improving;the efficiency of ITC?s soy-bean acquisition. To achieve this goal, it had to;do much more than just distribute PCs. It had to provide equipment for;man-aging power outages, solar panels for extra electricity, and a;satellite-based telephone hookup, and it had to train farmers to use the PCs.;Without these steps, the PCs would never have worked. The complex solution;serves ITC very well. Now more than 10,000 villages and more than 1 million;farmers are cov-ered by its system. ITC is able to pay more to farmers and at;the same time cut its costs because it has dramatically reduced the;inefficiencies in logistics.;The vast market for cell phones among those;at the BOP is not for phones costing $200 or even $100 but for phones cost-ing;less than $50. Such a phone cannot simply be a cut-down version of an existing;handset. It must be very reliable and have lots of battery capacity, as it will;be used by people who do not have reliable access to electricity. Motorola went;thorough four redesigns to develop a low-cost cell phone with battery life as;long as 500 hours for villagers without regular electricity and an extra-loud;volume for use in noisy markets. Motorola?s low-cost phone, a no-frills cell;phone priced at $40, has a standby time of two weeks and conforms to local;languages and customs. The cell-phone manufacturer says it expects to sell 6;million cell phones in six months in markets including China, India, and;Turkey.;BOP MARKETING REQUIRES CREATIVE FINANCING;There;is also demand for personal computers but again, at very low prices. To meet;the needs of this market, Advanced Micro Devices markets a $185 Personal;Internet communicator?a basic com-puter for developing countries?and a Taiwan;Company offers a similar device costing just $100.;For most products, demand is contingent on;the customer having sufficient purchasing power. Companies have to devise;creative ways to assist those at the BOP to finance larger pur-chases. For;example, Cemex, the world?s third-largest cement company, recognized an;opportunity for profit by enabling lower-income Mexicans to build their own;homes. The com-pany?s Patrimonio Hoy Programme, a combination builder?s;?club? and financing plan that targets homeowners who make less than $5 a day;markets building kits using its premium-grade cement. It recruited 510;promoters to persuade new customers to commit to building additions to their;homes. The customers paid Cemex $11.50 a week and received building materials;every 10 weeks until the room was finished (about 70 weeks?customers were on;their own for the actual build-ing). Although poor, 99.6 percent of the 150,000;Patrimonio Hoyparticipants have paid their bills in full.;Patrimonio Hoyattracted 42,000 new customers and is expected to turn a;$1.5 million profit next year.;cat29974_case3_01-019.indd 10 12/10/12 12:40 PM;Cases 3 Assessing Global Market Opportunities;One customer, Diega Chavero, thought the;scheme was a scam when she first heard of it, but after eight years of being;unable to save enough to expand the one-room home where her family of six;lived, she was willing to try anything. Four years later, she has five;bedrooms. ?Now I have a palace.?;Another deterrent to the development of small;enterprises at the BOP is available sources of adequate financing for;microdis-tributors and budding entrepreneurs. For years, those at the bot-tom;of the pyramid needing loans in India had to depend on local moneylenders, at;interest rates up to 500 percent a year. ICICI Bank, the second-largest banking;institution in India, saw these people as a potential market and critical to;its future. To convert them into customers in a cost-effective way, ICICI;turned to village self-help groups.;ICICI Bank met with microfinance-aid groups;working with the poor and decided to give them capital to start making small;loans to the poor?at rates that run from 10 percent to 30 percent. This sounds;usurious, but it is lower than the 10 percent daily rate that some Indian loan;sharks charge. Each group was composed of 20 women who were taught about;saving, borrowing, investing, and so on. Each woman contributes to a joint;savings account with the other members, and based on the self-help group?s;track re-cord of savings, the bank then lends money to the group, which in turn;lends money to its individual members. ICICI has developed 10,000 of these;groups reaching 200,000 women. ICICI?s money has helped 1 million households;get loans that average $120 to $140. The bank?s executive directory says the;venture has been ?very profitable.? ICICI is working with local communities and;NGOs to enlarge its reach.;BOP MARKETING REQUIRES EFFECTIVE DISTRIBUTION;When;Unilever saw that dozens of agencies were lending micro-credit loans to poor;women all over India, it thought that these would-be microentrepreneurs needed;businesses to run. Unilever realized it could not sell to the bottom of the;pyramid unless it found low-cost ways to distribute its product, so it created;a net-work of hundreds of thousands of Shakti Amma (?empowered mothers?);who sell Lever?s products in their villages through an Indian version of;Tupperware parties. Start-up loans enabled the women to buy stocks of goods to;sell to local villagers. In one case, a woman who received a small loan was;able to repay her start-up loan and has not needed to take another one. She now;sells regu-larly to about 50 homes and even serves as a miniwholesaler;stock-ing tiny shops in outlying villages a short bus ride from her own. She;sells about 10,000 rupees ($230) of goods each month, keeps about $26 profit;and ploughs the rest back into new stock. While the $26 a month she earns is;less than the average $40 monthly income in the area, she now has income;whereas before she had nothing.;Today;about 1,300 poor women are selling Unilever?s prod-ucts in 50,000 villages in;12 states in India and account for about 15 percent of the company?s rural;sales in those states. Overall, rural markets account for about 30 percent of;the company?s revenue.;In another example, Nguyen Van Hon operates a;floating sundries distributorship along the Ke Sat River in Vietnam?s Me-kong;Delta?a maze of rivers and canals dotted with villages. His boat is filled with;boxes containing small bars of Lifebuoy soap;and;single-use sachets of Sunsilk shampoo and Omo laundry detergent, which he sells;to riverside shopkeepers for as little as 2.5 cents each. At his first stop he;makes deliveries to a half dozen small shops. He sells hundred of thousands of;soap and shampoo packets a month, enough to earn about $125?five times his;pre-vious monthly salary as a junior Communist party official. ?It?s a hard;life, but its getting better.? Now, he ?has enough to pay his daughter?s;schools fees and soon... will have saved enough to buy a bigger boat, so I;can sell to more villages.? Because of aggressive efforts to reach remote parts;of the country through an extensive network of more than 100,000 independent;sales representatives such as Hon, the Vietnam subsidiary of Unile-ver realized;a 23 percent increase in sales last year to more than $300 million.;BOP MARKETING REQUIRES AFFORDABLE PACKAGING;As;one observer noted, ?the poor cannot be Walmartized.? Con-sumers in rich;nations use money to stockpile convenience. We go to Sam?s Club, Costco, Kmart;and so on, to get bargain prices and the convenience of buying shampoos and;paper towels by the case. Selling to the poor requires just the opposite;approach. They do not have the cash to stockpile convenience, and they do not;mind frequent trips to the village store. Products have to be made avail-able;locally and in affordable units, fully 60 percent of the value of all shampoo;sold in India is in single-serve packets.;Nestl? is targeting China with a blitz of 29;new ice cream brands, many selling for as little as 12 cents with take-home and;multipack products ranging from 72 cents to $2.30. It also features products;specially designed for local tastes and prefer-ences of Chinese consumers, such;as Nestl? Snow Moji, a rice pastry filled with vanilla ice cream that resembles;dim sum, and other ice cream flavors like red bean and green tea. The ice cream;products are distributed through a group of small independent saleswomen, which;the company aims to expand to 4,000 women by next year. The project is expected;to account for as much as 24 percent of the company?s total rural sales within;the next few years.;BOP;MARKETING CREATES;HEALTH;BENEFITS;Albeit;a promotion to sell products, marketing to BOP does help improve personal;hygiene. The World Health Organization (WHO) estimates that diarrhea-related;diseases kill 1.8 million people a year and noted that better hand-washing;habits?using soap?is one way to prevent their spread. In response to WHO;urging, Hindustan Lever Company introduced a campaign called ?Swasthya Chetna?;or ?Glowing Health,? which argues that even clean-looking hands may carry;dangerous germs, so use more soap. It began a concentrated effort to take this;message into the tens of thousands of villages where the rural poor reside;often with little access to media.;?Lifebuoy teams visit each village several;times,? using a ?Glo Germ? kit to show schoolchildren that soap-washed hands;are cleaner. This program has reached ?around 80 million rural folk,? and sales;of Lifebuoy in small affordable sizes have risen sharply. The small bar has;become the brand?s top seller.;cat29974_case3_01-019.indd 11 12/10/12 12:40 PM;Part 6 Supplementary Material;QUESTIONS;1. As;a junior member of your company?s committee to explore new markets, you have;received a memo from the chairper-son telling you to be prepared at the next;meeting to discuss key questions that need to be addressed if the company;decides to look further into the possibility of marketing to the BOP segment.;The ultimate goal of this meeting will be to establish a set of general;guidelines to use in developing a market strategy for any one of the company?s;products to be marketed to the ?aspirational poor.? These guidelines need not;be company or product specific at this time. In fact, think of the final;guideline as a checklist?a series of questions that a company could use as a;start in evaluating the potential of a specific BOP market segment for one of;its products.;2. Marketing;to the BOP raises a number of issues revolving around the social responsibility;of marketing efforts. Write a position paper either pro or con on one of the;following;a. Is;it exploitation for a company to profit from selling soaps, shampoo, personal;computers, and ice cream, and so on, to people with little disposable income?;b. Can;making loans to customers whose income is less than $100 monthly at interest;rates of 20 percent to pur-chase TVs, cell phones, and other consumer durables;be justified?;c. One;authority argues that squeezing profits from people with little disposable;income?and often not enough to eat?is not capitalist exploitation but rather;that it stimu-lates economic growth.;Sources;C. K. Prahalad, The Fortune at the Bottom of the Pyramid (Philadelphia;Wharton School Publishing, 2004), Stefan Stern, ?How Serving the Poorest Can;Bring Rich Rewards,? Management Today, August 2004, Kay Johnson and Xa;Nhon, ?Selling to the Poor: There Is a Surprisingly Lucrative Market in;Targeting Low-Income Consumers,? Time, April 25, 2005, Cris Prystay;?India?s Small Loans Yield Big Markets,? Asian Wall Street Journal,May;25, 2005, C. K. Prahalad, ?Why Selling to the Poor Makes for GoodBusiness,?;Fortune, November 15, 2004, Alison Maitland, ?A New Frontier in;Responsibility,? Financial Times, November 29, 2004, Normandy Madden;?Nestl? Hits Mainland with Cheap Ice Cream,? Advertising Age, March 7;2005, Ritesh Gupta, ?Rural Consumers Get Closer to Established World Brands,? Ad;Age Global, June 2002, Alison Overholt, ?A New Path to Profit,? Fast;Company, January 1, 2005, Patrick Whitney, ?Designing for the Base of the;Pyramid,? Design Management Review, Fall 2004, C. K. Prahalad and Stuart;Hart, ?Fortune at the Bottom of the Pyramid,? Strategy & Business 26;(2002), C. K. Prahalad and Aline Hammond, ?Serving the World?s Poor;Profitably,? Harvard Busi-ness Review,September 2002, ?The Invisible;Market,? Across the Board, September/October 2004, Anuradha Mittal and;Lori Wallach, ?Selling Out the Poor,? Foreign Policy,September/October;2004, G. Pascal Zachary, ?Poor Idea,? New Republic, March 7, 2005;?Calling an End to Poverty,? The Economist, July 9, 2005, Susanna;Howard, ?P&G, Unilever Court the World?s Poor,? The Wall Street Journal;June 1, 2005, Rajiv Banerjee and N. Shatrujeet, ?Shoot to the Heart,? Economic;Times, July 6, 2005, David Ignatius, ?Pennies from the Poor Add Up to;Fortune,? Korea Herald, July 7, 2005, Rebecca Buckman, ?Cell Phone Game;Rings in New Niche: Ultra Cheap,? The Wall Street Journal, August 18;2005, p. B4, ?It?s Good Business, but a Strategy that Saves Lives as Well,? The;Boston Globe, June 10, 2007, ?Global Executive: See the Poor as;Entrepreneurs, Con-sumers,? Star Tribune (Minneapolis, MN, July 30;2007, ?The Right Package, It Started With Shampoo but Now Sachets Have;Overtaken Shop Shelves,? India Today, December 31, 2007, ?The Fortune at;the Bottom of the Pyramid: Eradicating Poverty Through Profits,? South Asian;Journal of Management, April 1, 2007, ?The Legacy that Got Left on the;Shelf?Unilever and Emerging Markets,? The Economist, February 2, 2008.;cat29974_case3_01-019.indd 12 12/10/12 12:40 PM

 

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