Aneel Karnani: Mirage at the bottom of the pyramid

We need to view the poor primarily as producers, not as consumers, and emphasise buying from them, not selling to them.

What role should private companies play in addressing the global challenge of eradicating poverty? CK Prahalad and other management experts have argued that private companies, particularly MNCs, can make significant profits by selling to the poor""people at the "bottom of the pyramid" (BoP)""and simultaneously bring prosperity to the poor, and thus can help eradicate poverty. There is both glory and fortune at the bottom of the pyramid. The BoP argument is seductively appealing, but it is both logically flawed and inconsistent with the empirical evidence. There is neither glory nor fortune at the bottom of the pyramid""it is all a mirage at best, and may even be potentially dangerous.

No fortune Prahalad asserts that the BoP potential market is $13 trillion at purchasing power parity (PPP) rates. The World Bank estimates there are 2.7 billion people living on less than $2 per day, whose average consumption is $1.25 per day. This implies a BoP market size of only $1.2 trillion, compared to the world's gross national income of $48.5 trillion at PPP in 2002. Even that is an overestimate. From the perspective of a multinational company from a rich country, profits will be repatriated at the financial exchange rates, not at PPP rates. In that case, the global BoP market is less than $0.3 trillion. Not only is the BoP market quite small, it is unlikely to be very profitable, especially for large companies. The costs of serving these markets are very high. The poor are often geographically dispersed (except for the poor concentrated into urban slums) and culturally heterogeneous. This increases distribution and marketing costs and makes it difficult to exploit economies of scale. Weak infrastructure (transportation, communication, media, and legal) further increases the cost of doing business. Another factor leading to high costs is the small size of each transaction. The poor are, of course, very price-sensitive; they spend over 80 per cent or their meagre resources on food, clothing and fuel. Contrary to the BoP argument, this does not leave much room for spending on "luxury" items.

Several examples that apparently support the BoP proposition involve companies that are profitable by selling to people well above the poverty line, but who seem poor only in relative terms, especially to a Western researcher. Companies following the BoP proposition often fail because they overestimate the purchasing power of the poor people and try to market products/services at too high a price point. Profit opportunities in marketing to the poor are modest and we suggest a cautious approach. Large companies that require scale economies should be even more hesitant.

The best opportunities exist when the firm reduces price significantly by innovatively changing the price-quality trade-off in a manner acceptable to the poor. A good example of this is Nirma, a detergent manufacturer. The quality of Nirma is clearly inferior to that of Surf, the product marketed by Hindustan Lever, but, it sells at about one-third the price. Nirma contains no whitener, perfume, or softener, and is even harsh on the skin. In spite of this Nirma has become a runaway success. Contrary to the BoP proposition, the poor do like inexpensive low-quality products! This is not because they cannot appreciate good quality. They simply have a different price-quality trade-off.

Poor as producers Not only is there no fortune, there is not even glory at the BoP. Convincing the poor to consume more will not solve their problem. Their real problem is that they cannot afford to consume more. The BoP proposition focuses on the poor as consumers. To help alleviate poverty, we need to view the poor primarily as producers, not as consumers. Rather than emphasise selling to the poor, we should emphasise buying from the poor. The only way to help the poor and alleviate poverty is to raise their real income. There are only two ways to do this: 1) lower the prices of goods that the poor purchase, and 2) raise the income that the poor earn by improving their productivity.

Exploitation of the poor The BoP proposition is not just a harmless illusion, but a potentially dangerous delusion. Focusing on the poor primarily as consumers, the BoP proposition argues that the poor have the right to determine how they spend their limited income and are value-conscious consumers; the poor themselves are the best judge of how to maximise their utility. The poor in fact are vulnerable by virtue of lack of education (often they are illiterate), lack of information, and economic, cultural and social deprivations.

Even in rich capitalist countries, governments impose restriction on free markets to protect consumers, such as regulations related to labelling disclosure, truth in advertising, and marketing to minors. Consumer movements are active in areas where there are no legal restrictions. Such consumer protection, both legal and social, is inadequate in the developing countries, especially in the context of selling to the poor.

For example, Prahalad cites the example of a poor sweeper woman using Fair & Lovely, a skin whitening cream marketed by Unilever. "She has choice and feels empowered." Women's groups in India, Malaysia and other countries obviously do not agree, and have campaigned against such products and their advertisements finding them to be racist and sexist in nature. The way to truly empower this woman is to make her less poor, financially independent, and better educated; we need social and cultural changes that eliminate the prejudices that are the cause of her deprivations.

Role of government Amartya Sen, the Nobel Prize-winning economist, has argued that to truly solve the problem of poverty, we need to go beyond increasing the income of the poor; we need to improve their capabilities and freedoms along social, cultural, and political dimensions as well. The role of the government is critical on many of these dimensions. This is the second dangerous aspect of the BoP proposition. By emphatically focusing on the private sector, the BoP proposition detracts from the imperative to correct the failure of the government to fulfil its traditional and accepted functions such as public safety, basic education, public health, and infrastructure, all of which increase the productivity and employability of the poor, and thus their income and well-being.

The author teaches at the Ross School of Business, University of Michigan.