Tapping into the Fortune at the Bottom of the Pyramid If we view the world’s population as a pyramid ? with the richest people at the top, and poorest people at the broad base ? it may surprise you to realize that some of the best business opportunities await those who target the bottom of the pyramid.
But that’s precisely what C K. Prahalad and other astute strategists are starting to say. The size of this largely untapped market is staggering. Four billion people live on $1,500 per year or less. Today, consumers in the developed world are largely saturated with products that meet their basic needs. That’s why trends like “experience marketing” that appeal to the needs for affiliation, esteem, and self-actualization are so powerful. At the same time, the physical and safety needs of the four billion consumers at the bottom of the pyramid have gone largely unmet because there has previously been no way to meet those needs profitably.
But that’s in the process of changing. A wide range of emerging technologies and business models are converging to provide the means to dramatically improve the quality of life for people in the bottom third, while earning handsome long-term returns for those enterprises that grasp the opportunity.
To illustrate this trend, consider the potential of serving the consumer market for automobiles in India. The country has a population of over 1 billion people, and one of the lowest car ownership rates in the world. Drivers there share the road with 60 million other vehicles. But almost three quarters of them are scooters and motorcycles. There are fewer than 8 million cars, and most of them have several years of wear on them.
That’s easy to understand, with automobiles costing around $4,500, and scooters and motorcycles priced from $600 to $1,500. In other words, it’s easy to afford a scooter, and it’s not so easy to afford a car. The automobile, which combined with the telephone and broadcast media to define middle class life in the West, has never been affordable for the 300 million people in India’s emerging middle class, let alone the 800 million who make up “the masses” in India.
But that seems about to change. Three enormously powerful trends are at work in laying the groundwork for this potential economic revolution:
1. Globalization, which lifts wages and permits workers to aspire to consumer goods they thought were out of their reach.
2. New materials, technologies, and manufacturing techniques, which make lighter and cheaper cars a reality.
3. The expansion of credit that permits people more easily to amortize the costs over the life of the vehicle to match the flow of benefits to the flow of its costs.
As a result, India will soon be producing a super-cheap car. According to a report by Alam Srinivas in Business 2.0, Tata Motors, the second-largest automobile manufacturer in India, plans to introduce a four-passenger car that will retail for about $2,200. At that price, it will be well within reach of the nation’s fast-growing, urban middle class.
If the campaign is a success, some analysts reason, it could mean car sales will quickly double from this year’s figure of 900,000 units, when the cars start rolling out of the showrooms in four or five years.
Tata’s car, which has yet to be named, will have a 600cc engine and will combine many cost-cutting features, according to Business 2.0. It will likely use local materials and emerge from a central factory in kits, to be put together later in rural factories and dealerships. Plastics will replace many traditionally metal parts, and the assembly will use fewer bolts and more adhesives. The car will have few frills, but its main selling point is that it will be priced at a powerfully attractive level.
And, Tata isn’t alone. Toyota has expressed interest in turning India into a major manufacturing center for its automobiles. Akira Okabe, Toyota’s managing officer for the region, told Reuters, “One of my missions is to use Toyota’s know-how and culture of cost-cutting to turn India into our lowest-cost manufactured center in the world.”
Toyota recognizes India’s business advantages: political and economic stability, a trained labor force, and a well-developed parts manufacturing industry. Additionally, Okabe wants Toyota to have 10 percent of the Indian auto market by 2010, which equals 200,000 cars or more.
This comes at a time of tremendous growth in the purchasing power of India’s middle class. Financing, especially auto financing, is at particularly favorable rates. The rates are enhanced with discounts for people with good credit ratings, and sweetened further by the dealers’ practice of passing on a share of their finance commissions to their customers.
There is also a powerful pent-up consumer demand among India’s 300 million-member middle class. This class is expected to grow to 520 million by 2007 ? which will further expand demand. One sign of this trend is the tremendous growth in, and return from, the retail property market ? 13 to 16 percent a year.
Not so tangentially, the rise of India’s middle class ? and its subsequent rise in standard of living and desire for consumer goods ? is in no small measure due to the rise of multi-national corporations who choose to invest and do business there.
Writing in the Asian Wall Street Journal, George Melloan argues the case that the poorest of the world’s people should give thanks for the success of multi-nationals.
And he points out that global companies are no longer primarily based in the United States: “Whereas in 1962, almost 60 percent of the largest corporations in the world were U.S.-based, American multi-national companies are no longer dominant. Of the 500 largest, only 185 are headquartered in the U.S. The European Union has 126 and Japan 108. But more interestingly, multinational companies that have sprouted in developing countries are reaching out for a share of world business. Mexico’s Cemex, for example, is now one of the three largest cement companies in the world,” he continues.
But most importantly, for emerging economies around the world, including India’s, this globalization has spurred “a corresponding rise in direct investment, much of it flowing out of developed states and into the underdeveloped world where production costs are cheaper and larger markets beckon as more people move up from poverty to higher living standards,” Melloan concludes.
They do this by paying over $1.5 trillion in wages, producing 25 percent of the gross world product and contributing $1.2 trillion in taxes to countries around the world.
India’s rapidly expanding middle class is only part of this story. The real market opportunity, as C.K. Prahalad and Stuart L. Hart point out in their essay, “The Fortune at the Bottom of the Pyramid” in Strategy + Business, is “the billions of aspiring poor who are joining the market economy for the first time.” Those who are well below the middle class, but whose children may one day be part of it.
The authors argue that the 4 billion people at the bottom of the economic pyramid amount to “the biggest potential market in the history of commerce.”
In the way Henry Ford made cars affordable for average Americans and changed the face of American culture and business by doing so, multi-national companies may be able to reach out to the bottom of the pyramid to address their needs and change their circumstances.
Looking ahead, we forecast the following five developments:
First, the super-cheap car in India will succeed. It will tap a huge market by responding to an unfulfilled and formerly “unfulfillable” need, which will tap the economic power of India’s lower middle class. Inspired by its success, other companies will try to attract the burgeoning Indian middle class, as well as those in the strata below it. They will try to entice this huge market with durable goods and consumer goods that will have low margins but high volume sales. As with the super-cheap car, the challenge is to push the envelope of product and process technologies in order to reach previously unattainable unit costs at very high production volumes. In many cases, achieving this will require cutting features and performance standards to a level that would be unacceptable in developed economies.
Second, credit terms will remain affordable, and lending institutions will try to expand their products downward into the market and will find a viable method of micro-lending that will further lift the Indian economy. In developed economies like the EU and U.S., access to consumer credit was a major tool in creating the huge middle class. The same will prove true for many developing economies like India. The political situation will remain relatively stabile and, barring any unforeseen flare-ups with Pakistan, India is poised for continued economic growth.
Third, like China, India is also hungry for luxury goods. As the per capita consumption of the poor rises, so will the wealth of the nation, and the wealthiest and most well-educated participants will benefit most. Companies that cater to the top 1 percent of the market will do very well ? not only in India’s largest cities, but also in the next level of population centers. Branded goods will also flourish in India, but marketers will have to learn to tailor their products to India’s idiosyncratic buying habits. For example, Indians prefer to buy consumables in small sizes.
Fourth, throughout the developing world, lucrative opportunities lie ahead for those who are bold enough to dig deeper down into the economic pyramid. To be sure, the goods and services that are consumed by the upper tier of the economic pyramid are different than those at the bottom. But commerce there will not be restricted to merely addressing minimal physical needs, such as food, clothing, and housing. Products that were introduced as luxuries in the West like cell phones, TVs, PCs, and DVD players will find a ready market as the most basic functional embodiments are redesigned to target consumers who want entertainment and communications, but have little money to spend.
Fifth, developers of emerging disruptive technologies may find that the most profitable markets for those technologies are at the bottom of the pyramid. Examples include fuel cells, photovoltaics, satellite-based communications, biotechnology, thin-film microelectronics, and nanotechnology. Why? As Clayton Christensen explained in The Innovator’s Dilemma, disruptive technologies almost always take hold first in secondary markets for which they are “good enough.” They only enter mainstream markets once they have been refined to meet mainstream needs. Typically these secondary markets aren’t even on the radar of the industry leaders. The super-cheap durables produced for the base of the pyramid are likely to be too crude for affluent consumers, but advanced technologies will enable them to be “good enough” and yet cost only a small fraction of the alternatives marketed in the U.S. or EU. We already see this pattern emerging in the specifications for Tata’s $2,200 automobile. Consequently, we expect that countries like India will become a testing ground for a wide range of disruptive technologies, as companies will try to introduce new ways of connecting people to markets without building a capital-intensive infrastructure.
References List :
1. Business 2.0, April 2004, "Driving Toward the $2,200 Car," by Alam Srinivas. ⓒ Copyright 2004 by Time Warner, Inc. All rights reserved.2. ibid.3. Reuters, March 20, 2004. "Toyota Plans Exporting Cars from India." ⓒ Copyright 2004 by Reuters. All rights reserved.4. The Wall Street Journal, January 6, 2004, "Feeling the Muscles of the Multinationals," by George Melloan. ⓒ Copyright 2004 by Dow Jones & Company. All rights reserved.5. Strategy + Business, 1st Quarter 2002, "The Fortune at the Bottom of the Pyramid," by C.K. Prahalad and Stuart L. Hart. ⓒ Copyright 2002 by Booz-Allen Hamilton, Inc. All rights reserved.
o The complete article is available from Strategy + Business. Ask for reprint #02106.6. The Innovator’s Dilemma by Clayton Christensen is published by Harvard Business School Press. Copyright 1997 by the President and Fellows of Harvard College. All rights reserved.
