Reading Material on MIP Fall 2011 Topic Marketing to the BOP

MARKETING TO THE BOTTOM OF THE PYRAMID

For multiple reasons ranging from lack of infrastructure, to illiteracy and corruption, most companies elected to leave the job of serving the low end consumers to local organizations or government agencies and instead stay focused on the low hanging fruit - the middle and the upper classes. However, writing off nearly five billion customers was short sightedness, for even though their individual incomes are tiny; their collective incomes represent an immense business opportunity. As the urban markets saturate, a number of enterprising organizations turn toward emerging market opportunities posed by the bottom of the pyramid customers, seeking expansion among the next billion customers earning less than $2 a day making up three-quarters of the worlds population. And its about time, says C.K. Prahalad, a consultant and economist at the University of Michigan, who says these aspirational poor could contribute an additional $13 trillion in annual sales to the global economy, if only companies would drill deep enough to reach them (Kay Johnson, 2005). This is essentially where the future growth and profitability of companies will come from. However, having been ignored until now, BOP customers are not as conditioned by mainstream global marketing. Their product choices and decision-making criteria are based on an entirely different set of values than those that influence the design of most consumer products today. A combination of factors such as local culture and history, as well as the daily experience of coping with a life of adversity, lead to a different mindset when it comes to purchasing patterns. Uncertainty and chaos are a given in the informal economy that supports the majority at the bottom of the pyramid. Most do not have a regular job with a predictable salary, but manage to earn money through a variety of sources like selling crops or vegetables, hawking cigarettes and cold drinks or menial labor on daily wages. Income is more often than not irregular and unpredictable, and life becomes a balancing act on the edge between survival and disaster. The first priority then is to meet the basic needs of food, clothing and shelter. If there is change to spare, an impulse buy could be a soft drink for a treat. Every decision to spend beyond the basics is considered an investment that requires careful planning and research. Hence, BOP customers behave more like cautious money managers than typical customers. Word of mouth is the most trusted medium, since it's someone else's real life experience--not simply a faceless marketing message splashed on a colorful billboard or blared on a radio. So a 'wait and see' attitude rather than 'try and buy' becomes the norm. The product or service must be seen to stand the test of time and performance. The BOP consumer cannot afford to experiment with the 'new and improved' over the 'tried and the true'. Brands that are chosen either have known benefits or are trusted in order to minimize risk. (Niti Bahn & Dave Tait, 2008)

Empowering the BOP customers For a poor consumer to participate in the marketplace requires having cash, which at the end of the day is all about having a job. So you could say that the drive to sell consumer products to the unemployed and underpaid may be putting the cart before the horse. More companies should be looking to leverage the productive capacity of the poor as an input to business. We have several great examples of that. Page 1 of 6

Reading Material on MIP Fall 2011 Topic Marketing to the BOP First of all, Nestl. Since World War II, Nestl's milk has by and large been produced by thousands of small farmers in developing countries. And their supply chain efforts have gone way beyond just sourcing. Nestl has provided the technology, training, and supply-chain investments to make it possible for the small farmer to produce good-quality milk, transport it, and sell it to the company. This makes sense for the company because it needs fresh, locally produced milk, and for the small farmer, an assured steady source of income. Unilever is another important example. In 2003, the company's Indian subsidiary refocused its efforts on the country's rural poor in the face of growing competition from new market entrants. By training and hiring low-income, community-based saleswomen, the company successfully expanded the reach of its products to an additional 60,000 rural villages. By relying exclusively on low-income women as their frontline sales force, it also provided a significant source of income to a traditionally marginalized group. (Sean Silverthorne, 2007)

Being successful in the BOP markets Marketers face a number of challenges posed by the environment in which they operate to serve the BOP customers. These challenges can be grouped under four heads as follows: 1. Availability The BOP markets constituting urban slums as well as the isolated and far flung rural areas or villages have fragmented to non-existent distribution channels. Pakistan consists of approximately 55,000 villages out of which only 17,000 18,000 remain accessible to companies with significant distribution muscle and that too after consistently trying to reach out to these villages in the last 5-6 years. The roads leading to most of these villages are little more than rutted dirt tracks and in the monsoon season these can be literally washed away. In the north, roads to isolated villages cut across snow-covered mountain passes that can be closed for weeks at a time. The time to cover even small distances under such conditions can be long, stretching supply chains and adding cost. With such a setting, the task of the marketer is then to come up with innovative ways of making his product or service available. Jazz Easy Load, is an example of innovative distribution of prepaid cards. Another example is that of Unilever Pakistan. A number of company brands are taken to the BOP customers in villages by the company distributors. Areas where the return on investment is not significant enough for a local distributor to take his van, the company runs a Rural Van Operation. The cost for running this operation is shared by different brands from the company.
2. Affordability

An aspiration to a new and different quality of life is the dream of everyone, including those at the BOP. Therefore, aspirational brands are critical for BOP consumers. However, BOP consumers are value buyers. They expect great quality at prices they can afford. The challenge to large firms is to make aspirational products affordable to BOP consumers. Page 2 of 6

Reading Material on MIP Fall 2011 Topic Marketing to the BOP From the urban slums to the most remote rural areas, according to the Living Standard Measure, BOP customers essentially belong to the SEC D & E. BOP consumers have low disposable incomes and products may also need to match the cash-flows of customers who frequently receive their income on a daily rather than weekly or monthly basis. While income is low, a great portion of what is earned is spent on food. Very little is then left for acquiring soaps, shampoos, telecommunication services etc. In order to serve this segment of the society, marketers design special lower unit packs (LUPs) of popular brands in low price denominations - sachets. Multiple examples of brands can be given here; Sunsilk, Lifebuoy Shampoo, Lipton, Supreme, A1, Tapal, Surf Excel, Ariel, Fair & Lovely, Rin are all the brands that are available in LUPs with prices ranging from Rs. 3 Rs. 10. While attention is paid to keeping the specially designed packs low on the price ladder or the price piano, merchandising is also duly stressed. The sachets are sold from the local retailers where display is the name of the game. Strings consisting of 12 sachets (also referred to as lari in urdu) are displayed on a rod so that as soon as a customer comes to the POP, his attention is captured and opportunity is not wasted. Most of these retailers survive on the high turnover low value transactions. Another example of designing offers to match the pocket of an acutely price sensitive customer base is that of Mobilinks Jazz Load. Jazz Load now allows customers to recharge their Jazz account in variable denominations at major retail outlets nation-wide. All you have to do is pay the retailer cash equivalent for the credit you wish to transfer to your prepaid account. You will in turn receive an SMS confirming the credit transfer. This payment solution allows you to recharge your account in any denomination, ranging from Rs. 2,000 to as low as Rs. 20, without the hassle of buying scratch cards in fixed denominations. Much like the sachet packs from the FMCG sector. 3. Competition A third challenge faced by the BOP marketers is to gain acceptability for the products and services versus competition. Competing in the BOP market is a lot about winning the retailers loyalty. Retailers from the BOP markets are just as price sensitive as the customers. In better terms, they are highly sensitive to trade offers and promotions. They would go with whoever sets up their shops for them. In order to win the battle, marketers not only decorate the POPs but also try to lock the retailers cash with their products. This leaves retailers with very little to no money to buy competitive products. Such a strategy puts the retailers on the better end of the bargaining table and they tend to demand higher margins. So for example, while a typical marketer may be looking to give out a retailer margin of Rs. 1 on a string of 12 sachets, he may be forced to raise it to Rs. 3-4, only in order to block out competition. While merchandising helps decorate the POPs, they also help in creating awareness amongst the customers. Although the brands are picked by customers more when they get positive feedback from those who have used it, the retailers also play a substantial role in the selling process. 4. Counterfeits

Page 3 of 6

Reading Material on MIP Fall 2011 Topic Marketing to the BOP With no established rules of the game, mushroom players become very active in the BOP markets. It is very easy for small scale producers to tamper with the names of established products and cannibalize sales. All they have to do is change a few letters around in the principal brands name and retain the color, design and packaging as original. Since consumers are largely illiterate, they are hardly able to tell the difference between the original and the counterfeit. Being least loyal to brands and highly price sensitive further add fuel to the fire. As a result counterfeit products tend to perform well and the image of the principal brand suffers erosion.

Whether to market to the BOP segment or not? A number of arguments have been put forward against marketing brands to the Bottom of the Pyramid customers: Selling to the poor & serving the poor are two different things. Can the private sector, while pursuing its core business objectives deliver developmental benefits? BOP marketing encourages overspending by those who can least afford it. Companies have the power to create needs rather than respond to needs.

An example to substantiate the above arguments is from the telecommunication industry. Consumers at the BOP have mobile phones but incomplete knowledge of the terms of the service providers, hence they fall victim to the power of media..they end up paying more for ringtones and caller tunes.and have no clue how the payment works.. Prahalad, the visionary behind the idea has some counterarguments to offer: Poor are very value conscious (Kay Johnson 2005) If people have no sewerage or drinking water should we also deny them TVs and cell phones? (Kay Johnson 2005)

Consequently, it turns out that there are four things that are required from the BOP marketers: Forming alliances with the local NGOs and government institutions. ( Collaborating effectively with the agents close to the BOP markets is vital. If the goal is to alleviate poverty with market solutions then these strategic alliances have to be proactive and forward looking. Needs known to the government agencies and NGOs must be communicated to the manufacturers so that appropriate solutions may be designed well in time. (Dennis A. Pitta, Rodrigo Guesalaga and Pablo Marshall, 2008) A revision of the conventional business model. The recipe for success with the TOP cannot be replicated for the BOP. BOP market is very unique in its characteristics and the marketers would have to reinvent their formula for success. The segment requires persistent and long term involvement, because given the economies of BOP; the return on investment takes longer to Page 4 of 6

Reading Material on MIP Fall 2011 Topic Marketing to the BOP come. The Marketing Mix may have to be redefined and all the conventional practices questioned. P&G's PUR water sachet, an innovative product that provides safe drinking water by simply mixing it with a bucket of contaminated water, was a commercial failure during pilot tests in Guatemala, Pakistan and Morocco. Although it met a clearly-observed need, the poor just weren't buying it. Margaret Hansen, Associate Professor at European business school, INSEAD, writes: "Simple in theory, but finding the right formula is often more difficult. Local barriers to entry are often tricky to overcome in 'bottom of the pyramid' markets. Certainly, P&G discovered that traditional marketing methods did not work; consumers were suspicious of new products that required them to change the way they managed their lives." (Niti Bahn & Dave Tait, 2008) Strengthening bottom-up market intelligencefinding novel ways to integrate the preferences, constraints, and habits of the poor into business development is very important. Simply changing the packaging size to make brands more economically viable may not always work or may not work for long. It is important to understand the ground realities of the BOP segments the need and demand patterns of the BOP customers from the urban slums are very different from those in the remote villages. There is a need to intimately know each sub-segment within the BOP market in order to appropriately design market solutions for them. Motorola went through 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. Commitment to educate customers. A number of MNCs have taken up the task of helping customers understand how the use of various products would be beneficial for them. Pampers is a case in point here. Launched in Pakistan in Aug 2000 by P&G at a time when 81% of the market was using cloth nappies and diaper as a product was non-existent. With 3m births every year, a significant 85% is outside hospitals in the country. This means that the health standards are significantly low and the early education of new mothers on child care is rarely given. Given the P&G ambition of improving lives of consumers wherever they operate, Pampers brand team decided to take up the challenge of educating mothers. The biggest challenge was to explain that there is a need to bring about a habit change moving away from using cloth nappies to disposable diapers. And the habit change required an outlay of cash for a financially struggling class. Pampers team launched their Mobile Clinic Service and covered 60% of the urban-rurals of Pakistan. With the objective of creating awareness amongst mothers with newly born babies, customers were approached at their homes and serviced free of cost. The mothers along with their babies were escorted from their doorstep to a closely parked mobile clinic under an umbrella. Once inside, a qualified child specialist attended to the baby giving him a complete physical check-up. In this interaction, the mother was educated about the benefits of using a diaper versus a cloth nappy. A diaper essentially keeps the baby dry and enables him to sleep longer. Research proves that babies grow best while sleeping, hence for complete mental and physical development, it is imperative that a baby sleeps undisturbed for longer hours. On completion of this meeting between the doctor and the mother, she was given a Pampers vaccination card and a free two pack sample.

Page 5 of 6

Reading Material on MIP Fall 2011 Topic Marketing to the BOP Sell only what is of value. Not all products fit the context of BOP consumption. Marketers need to hash out the right products that are truly needed and market those in the right price denominations. No matter how aspirational they may be, selling an Armani bag or a look alike to the BOP customers does not make sense.

References: Niti Bhan and Dave Tait (2008), Design for the Next Billion Customers, available at http://www.core77.com/blog/featured_items/design_for_the_next_billion_customers_by_niti_ bhan_and_dave_tait_9368.asp Saroja Subrahmanyan and J. Tomas Gomez-Arias (2008), Integrated approach to understanding consumer behavior at bottom of pyramid, Journal of Consumer Marketing, Vol. 25 No. 7, pp. 402-412. Dennis A. Pitta, Rodrigo Guesalaga and Pablo Marshall (2008), The quest for the fortune at the bottom of the pyramid: potential and challenges, Journal of Consumer Marketing, Vol. 25 No. 7, pp 393-401 Rodrigo Guesalaga and Pablo Marshall (2008), Purchasing power at the bottom of the pyramid: differences across geographic regions and income tiers Journal of Consumer Marketing, Vol. 25 No. 7, pp. 413418. Van R. Wood, Dennis A. Pitta and Frank J. Franzak (2008), Successful marketing by multinational firms to the bottom of the pyramid: connecting share of heart, global umbrella brands, and responsible marketing, Journal of Consumer Marketing, Vol. 25 No. 7, pp 419 429. Renee Kuriyan, Isha Ray and Kentaro Toyama (2008), Information and Communication Technologies for Development: The Bottom of the Pyramid Model in Practice, The Information Society, Vol. 24 No.2, pp93 104, available at http://dx.doi.org/10.1080/01972240701883948, accessed on Nov 01, 2009 Jamie Anderson and Niels Billou (2007), Serving the worlds poor: innovation at the base of the economic pyramid, Journal of Business Strategy, Vol. 28 No. 2, pp. 14-21. Sean Silverthorne (2007), Business and the Global Poor, Harvard Business School Working Knowledge Kay Johnson (2005), Selling to the Poor, available at http://www.time.com/time/magazine/article/0,9171,1066877,00.html Marketers Must Seek Their Fortune at the Bottom of the Pyramid Published: March 10, 2004 in Knowledge@Wharton

Page 6 of 6