MNCs in India are credited for frugal innovation—low-cost products and services for the bottom of the pyramid customers
The concept ‘Bottom of the Pyramid’ was first used by US President Franklin D Roosevelt in 1932, while talking about the poor people who are often forgotten because they live at the bottom of the economic pyramid. Bottom of the pyramid, also called the base of the pyramid, is a phrase in economics that refers to the poorest two-thirds of the economic human pyramid. Management scholar CK Prahalad popularised the idea of this demographic segment as a profitable consumer base in his 2004 book ‘The Fortune at the Bottom of the Pyramid’ co-authored by Stuart Hart. Prahalad has some useful insights about consumer needs in poor societies and opportunities for the private sector to serve important public purposes while enhancing its own bottom line.
Four consumer tiers: At the top of the pyramid are 75-100 million affluent consumers. These are cosmopolitan groups composed of middle- and upper-income people in developed countries, and rich elites from the developing world (they are tier one). At the middle of the pyramid, in tiers two and three, are poor customers in developed nations and the rising middle classes in developing countries—they have been and are the target market for MNCs for whom strategies are made. At the bottom of the pyramid, tier four consists of 4 billion people earning $2 or less per day.
The extreme inequity of wealth distribution is a paradox; it has reinforced a view that the poor cannot participate in global market economy, even though they constitute the majority. Tier four represents a multi-trillion dollar market. According to World Bank’s projections, the population at the bottom of the pyramid could swell to more than 6 billion people over the next 40 years, because the bulk of the world’s population growth occurs there.
Their strengths: At the bottom of the pyramid, the market is full of opportunities. The tier four market is wide open for technological innovation. The challenge is to recognise and accept the uniqueness of these markets and develop strategies to fulfil their needs. One comes to the conclusion that pragmatic strategies need be devised in tune with the aspirations of the consumer. In the bottom of the pyramid market, many companies are adopting their own models in serving these segments. In India, two-thirds of the billion-plus people represents rural population. And the following figures are factual:
* 45% of all soft drinks are sold in the rural market;
* 50% of all motorcycles are sold in rural areas;
* 60% of all cigarettes are consumed by rural consumers;
* 55% of FMCG products are sold in the rural market (pencils, pens, notebooks);
* 50% of the national income is from rural areas;
* 41 million Kisan Credit Cards have been issued as against 22 million credit-cum-debit cards in urban areas.
Also, 50% of LIC policies are sold to rural consumers and, interestingly, 60% Rediffmail users are from smaller towns.
Few marketers are cynical about the poor class of consumers by ignoring their potential of buying power. For these poor consumers, buying luxury products such as a house or installing running water is a luxury. But it doesn’t mean they can’t buy anything. They buy comfort items like TV, gas stoves, domestic electrical appliances. These are no more considered luxury.
Margin versus volume: Traditional business in developed countries is mostly based on high gross margins. The low buying power of the bottom of the pyramid consumers makes this approach inappropriate. Companies need to develop a tight and effective lean management to optimise supply chain. Cost-savings management becomes a key to performance and success in these huge low-cost markets.
Some MNCs have explored opportunities at the bottom of the pyramid. Perhaps HUL has understood it better than others. Their marketing strategy is smart—offering brands with multiple price and packaging options has worked wonders. The maker of Axe, Dove, Knorr and Lipton believes in selling small packs of its products in markets such as Spain, Greece and the US. In Spain, for instance, Unilever sells Surf detergent in packs offering five washes, and offers mashed potatoes and mayonnaise in small packages in Greece. It has also launched a low-cost brand of tea and olive oil for the European markets.
In India, the bottom of the pyramid customers go for low-price sachets of shampoos, toothpastes, fairness creams and hair oil. Much of what Unilever is replicating in the developed world has been initiated in India. HUL sells power brands such as Close-Up, Pepsodent, Sunsilk, Pond’s, Vaseline, Brooke Bond Taj Mahal and Bru to increase product penetration at the bottom of the pyramid. Lifebuoy soap in rural markets is referred to as the ‘laal sabun’ since it’s red in colour, and ‘Colgate kiya kya’ is synonymous to brushing teeth.
A relatively small player, CavinKare from south India, is credited and has a huge role to play in ushering the sachet revolution as a strategy for low-end buyers. Other companies like Parle, PepsiCo and Dabur started selling products in smaller packs and hence proving the saying “big things come in small packages.” Smaller SKUs (stock keeping units) contribute to over 40% of sales in the fast moving consumer goods category. Thus, MNCs in India are credited for frugal innovation—low-cost products and services.
By Vidya Hattangadi, Management thinker and blogger email@example.com