Horses for courses: what works in the market

In an informal suburb of Guadalajara, Mexico, a growing family is struggling to expand its small house. Help arrives from a major industrial company called Construmex in the form of construction designs, credit and as-needed delivery of materials, enabling rapid completion of the project at less overall cost.

In rural Madhya Pradesh an Indian farmer gains access to soil-testing services, to market price trends that help him decide what to grow and when to sell, and to higher prices for his crop than he can obtain in the local auction market. The new system is the innovation of a large grain-buying corporation, which also benefits from cost saving and more direct market access.

Four billion people such as these form the base of the economic pyramid (BOP) Ñ those with incomes below $3,000 in local purchasing power. The BOP makes up 72 per cent of the 5.75 billion people recorded by available national household surveys worldwide, and an overwhelming majority of the population in the developing countries of Africa, Asia, Eastern Europe, Latin America and the Caribbean Ñ home to nearly all the BOP.

This large segment of humanity faces significant unmet needs and lives in relative poverty: in current US dollars, their incomes are less than $3.35 a day in Brazil, $2.11 in China, $1.89 in Ghana, and $1.56 in India. Yet together they have substantial purchasing power: the BOP constitutes a $5 trillion global consumer market.

The wealthier mid-market population segment, the 1.4 billion people with per capita incomes between $3,000 and $20,000, represents a $12.5 trillion market globally. This market is largely urban, already relatively well served, and extremely competitive.

BOP markets are by contrast often rural, especially in rapidly growing Asia. They are often very poorly served, dominated by the informal economy and as a result are relatively inefficient and uncompetitive.

Discussion of global business opportunity in the 21st century tends most often to be framed in terms of geographically defined ‘emerging markets.’ In contrast, the BOP markets that we describe in this paper are defined in terms of income.

In a world where high-margin profit opportunities in mature markets are increasingly costly to identify and to pursue, ascending BOP markets have particular characteristics that may make them more attractive now to business than ever before. Their size alone provides significant incentive for attention. More significantly, they are rich in opportunity to arbitrage what we call the ‘BOP Penalty’ Ñ higher prices, lower quality, and poor access.

These are the very signals of competitive opportunity that businesses seek every day for the markets they already serve. Of course, risk Ñ or the perception of risk Ñ is a major inhibition to many companies. In this regard, the lack of accurate and current data is a further deterrent.

The Next 4 Billion: Market Size and Business Strategy at the Base of the Pyramid, which we co-authored in 2007, draws on data from national household surveys in 110 countries and an additional standardised set of surveys from 36 countries. Using these data on incomes, expenditures, and access to services, it characterises BOP markets regionally and nationally, in urban and rural areas, and by sector and income level.

The report suggests significant opportunities for more inclusive, market-based approaches that can better meet the needs of those in the BOP, increase their productivity and incomes, and empower their entry into the formal economy.

Household surveys, while limited from a market research standpoint, provide direct information on the BOP as consumers that is not available from other sources of economic data. The result is the first systematic empirical characterisation of BOP markets. The Next 4 Billion shows emphatically the rich differences among those in the BOP and that the entire market must be analysed and addressed for private sector strategies to be effective. Of course, there are segments of the BOP for whom market-based solutions are not available or not sufficient.

Without hard data, it is easy to think about the BOP as a single, undifferentiated mass Ñ ‘them’, certainly not ‘us.’ We know a good bit about us, the rich citizens of advanced industrial countries. But neither businesses nor governments have gone to much trouble to understand the BOP as consumers, as producers, or as rational economic actors.

It is not surprising that the data reveal great differences among and within BOP populations. We see economic choices in expenditures and variations in expenditure patterns across income segments, across sectors and between countries. The numbers reveal the choices of the BOP, many of necessity. Logically, food dominates BOP household budgets.

Food and other sector expenditures are not static, however. As incomes rise the share spent on food declines while the share for housing remains relatively constant Ñ and the share for transportation and telecommunications grows rapidly. These changes in spending preference have real implications for business and for government policy if they are to encourage competitive and equitable business engagement with low-income communities.

Four billion is a big number and it will take the efforts of millions of entrepreneurs, hundreds of thousands of enterprises, large and small, and the collective efforts of bilateral and multilateral aid agencies and non-governmental organisations to make headway in alleviating poverty.

The tools employed in the initial effort described here are not purpose-built, and both market research firms and private sector companies can and should carry out new market research. National household surveys can and should be amended to improve data collection that will better inform our understanding of the ‘BOP penalty.’

All this knowledge will in turn catalyse further private sector activity which benefits the majority of the world’s population: the base of its economic pyramid.