Abby Callard, Beyond Profit
This is the first post in a three week long series from Beyond Profit and Triple Pundit that will explore innovative business models aimed at tapping the bottom of the pyramid (BoP) market.
More than 3 billion people worldwide live on less than US$2.50 a day—less than a morning coffee at Starbuck’s for some. Traditionally, reaching out to these populations involved aid and charity. Recently, however, this has begun to change, and private, for-profit ventures are thriving. These are often known as social business—a term coined by Nobel Prize winner Muhammad Yunus.
Not only does the social business model allow companies to achieve financial viability while providing much needed services and products to the poor, it also treats poor people as customers and participants in the market rather than mere recipients.
While many businesses have entered and been successful at helping the world’s poor, the poorest of the poor, often dubbed the Bottom of the Pyramid (BoP), present unique challenges to businesses hoping to carve out a niche. Entering—and staying viable within—this market isn’t easy. Often, it involves completely reinventing the wheel.
In a presentation to the Indian Philanthropy Forum earlier this month, Ashish Karamchandani of Monitor, a consulting firm, made the valid point that if a successful business plan for the BoP market existed, large corporations would be exploiting it already. The key is inventing a new business model.
Monitor’s report “Emerging Markets, Emerging Models” tells the story of an Indian company Servals that introduced a kerosene burner that used 30% less kerosene, was safer, cleaner and lasted twice as long as traditional models. On these merits alone, the burner should have sold well. But the company failed to take into account the special challenges of the market—lack of initial capital for larger purchases, rural distribution problems and lack of education about beneficial products. It flopped. The company later relaunched the product, keeping these challenges in mind, and it’s now one of the most successful burners if its kind in India.
One of the main challenges facing the BoP market is the often insurmountable upfront cost—one of the issues with the burner as well as solar lanterns and other beneficial technologies. Cosmetic companies in BoP markets discovered that even the initial cost of a bottle of shampoo was too much for some customers. So, the companies started marketing small sachets that costs mere cents a piece. Unilever has had success using this models in Brazil.
One of the best business models successfully reaching the BoP market is microfinance. Started in the 1970s, microfinance institutions (MFIs) loan small amounts of money, often less than $100, to poor women to support small businesses. The sector has grown exponentially in the past few years—the first Indian MFI went public earlier this year and earned some investors millions.
While microfinance is currently used as the benchmark for businesses in the BoP space, Karamchandani said that the business model itself had more than 30 years to mature before becoming the booming sector it is today. Above all, he said, entering the market takes patience and persistence.
Throughout this series, we will look at different business models that are working—or have the potential to work—to improve the lives of some of the world’s poorest people.