Sunday, February 29, 2004
Prahalad on the Bottom of the Pyramid
C.K.Prahalad's bottom of the pyramid strategy is one that we keep in mind while implementing the RISC project. In fact, we have refined it to some degree in that we are now clear that our target market is the top 10% of the bottom of the pyramid -- the layer sophisticated enough to readily use the services we aim to provide. Prahalad, in the meanwhile, has compiled his thoughts on the subject in a new book called The Fortune at the Bottom of the Pyramid:Eradicating Poverty Through Profits, published by the Wharton School press. Given the quality of his papers on the subject, the book is probably a must-read. For those who came in late to the BOP concept, KAW has a decent review of the book and the concept. Examples used include Hindustan Lever's soap and salt strategy in rural India and CEMEX's Patrimonio Hoy program.
At the core of Prahalad’s argument for targeting the world’s poorest as a potential market is the sheer size of that market – an estimated 4 billion people constituting two-thirds of the world’s population. More importantly, the market will grow to an estimated 6 billion people within 40 years because the bulk of the world’s population growth is occurring among the poor.
Despite the fact that these people subsist on annual per capita incomes of less than $1,500, this “bottom of the pyramid” represents a multi-trillion-dollar market. Taken together, nine developing nations – China, India, Brazil, Mexico, Russia, Indonesia, Turkey, South Africa and Thailand – have a combined GDP that is larger, in purchasing power parity, than the combined GDPs of Japan, Germany, France, the UK and Italy. The bottom of the pyramid, Prahalad says, is “the biggest potential market opportunity in the history of commerce.”
One of the biggest reasons that multinationals have avoided the bottom of the pyramid is that marketing to the poorest isn’t easy. They usually lack regular cash flow, have little access to credit and live in rural villages or urban slums that make traditional methods of advertising and distribution difficult, if not impossible. Most of the people at the bottom of the pyramid are part of an informal economy in which they do not hold legal title or deed to their assets. Thus, effective strategies for reaching these people will require remarkably different approaches, several of which are described in case studies in the book.
At the core of Prahalad’s argument for targeting the world’s poorest as a potential market is the sheer size of that market – an estimated 4 billion people constituting two-thirds of the world’s population. More importantly, the market will grow to an estimated 6 billion people within 40 years because the bulk of the world’s population growth is occurring among the poor.
Despite the fact that these people subsist on annual per capita incomes of less than $1,500, this “bottom of the pyramid” represents a multi-trillion-dollar market. Taken together, nine developing nations – China, India, Brazil, Mexico, Russia, Indonesia, Turkey, South Africa and Thailand – have a combined GDP that is larger, in purchasing power parity, than the combined GDPs of Japan, Germany, France, the UK and Italy. The bottom of the pyramid, Prahalad says, is “the biggest potential market opportunity in the history of commerce.”
One of the biggest reasons that multinationals have avoided the bottom of the pyramid is that marketing to the poorest isn’t easy. They usually lack regular cash flow, have little access to credit and live in rural villages or urban slums that make traditional methods of advertising and distribution difficult, if not impossible. Most of the people at the bottom of the pyramid are part of an informal economy in which they do not hold legal title or deed to their assets. Thus, effective strategies for reaching these people will require remarkably different approaches, several of which are described in case studies in the book.
