Reality Check at the Bottom of the Pyramid

Topics: Cost, Marginal cost, Variable cost Pages: 16 (3431 words) Published: November 3, 2012
The Globe

Erik Simanis is the managing director of Market Creation
Strategies at the Center for Sustainable Enterprise at Cornell University’s Johnson School of Management.

To succeed in the world’s
poorest markets, aim for
much higher margins and
prices than you thought were
necessary—or possible.
by Erik Simanis

ABOVE MightyLight
customers in Barmer,
Rajasthan, India
120 Harvard Business Review June 2012


ost companies trying to do business with the 4 billion people who make up the world’s poor follow
a formula long touted by bottom-of-thepyramid experts: Offer products at extremely low prices and margins, and hope to generate decent profits by selling enormous quantities of them. This “low price, low margin, high volume” model has held

sway for more than a decade, largely on
the basis of Hindustan Unilever’s success
in selling Wheel brand detergent to lowincome consumers in India. However, as an abundance of recent experience shows, the model has a fatal aw: It inevitably requires an impractical pene-

tration rate of the target market—often 30%
or more of all consumers in an area.
Stories of well-meaning commercial
ventures that couldn’t make sustainable
pro ts are all too common in low-income
markets. Despite achieving healthy penetration rates of 5% to 10% in four test markets, for instance, Procter & Gamble
couldn’t generate a competitive return on
its Pur water-purification powder after
launching the product on a large scale in
2001. Although the price—equivalent to 10
U.S. cents a sachet—provided a margin of
about 50%, on par with that of the company’s products worldwide, P&G gave up on Pur as a business in 2005 and announced


Reality Check at the
Bottom of the Pyramid

that the sachets would be sold only to humanitarian organizations at cost. DuPont ran into similar problems with
a venture piloted from 2006 to 2008 in
Andhra Pradesh, India, by its subsidiary
Solae, a global manufacturer of soy protein
(disclosure: I was the venture’s initial field
lead and afterward stayed on as a consultant). Intended to alleviate malnutrition and open a new market for the company,
the venture aimed to get mothers in rural
areas and urban slums to cook with soy
protein as part of their daily routine. The
product mix consisted of small packets of
protein isolate, which provided about half
of woman’s average daily protein needs,
and a range of packaged, soy-fortified snack
foods all priced below 30 U.S. cents. The isolate’s margins were on a level with those of Solae’s core business-to-business products,
but sales proved to be inconsistent. Sales
were stronger for the snack foods, but the
margins were significantly lower—so low,
in fact, that the company would have had to
sell quantities much higher than could have
been absorbed by the communities within
reach of the business. Unable to see a path
to profitability, Solae closed the pilot.
As these and other ventures suggest,
cost structures in low-income markets are
daunting: Operational expenses, such as
distribution, are frequently much higher
than those that companies face in developed markets. In addition, customer acquisition and retention for new products often demand unusually intense—and costly—
levels of high-touch engagement. To cover
those high costs, much greater volumes are
needed for break-even.
However, selling to customers in rural
villages and in slums scattered across urban centers is difficult and inefficient. Each local business unit is forced to generate its
sales volumes from the consumer base living in a narrow geographical range—often just a small cluster of villages in rural areas,
or several neighborhoods in the case of
larger slums.
Any business that starts off needing a
30% or higher penetration rate is built on
a shaky foundation. At the bottom of the

pyramid, it’s a losing proposition. Instead,
companies seeking to...
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