Federico Castor is hardly the sort of consumer who makes marketers rub their hands with glee. The 55-year-old lives in a precarious-looking concrete shack in the community of San Andres Bukid in Manila. He’s lived there since 1968, selling cigarettes — one stick at a time — and candy from a makeshift wooden stall.
Castor’s community is lively but poor. His street is narrow and lined with shabby huts and tiny businesses. Cockerels scour the gutters pecking at fruit husks and bottle caps. Young men play basketball in the alleyways while their mothers and aunties smoke cheroots and play cards on upturned crates. The air is thick with gossip and the pungent smell of simmering sardines.
But despite his poor circumstances, Castor and the rest of his community are becoming an ever more important part of many companies’ business plans. Take Manila Water, which supplies the eastern half of Manila with water and sewerage services. In 2004, Manila Water — a publicly listed company — invested precious shareholder money to upgrade its connection to Castor’s run down dwelling. “Before, I only had water between 12.00 am and 4.00 am. Today I have it 24 hours a day,” beams Castor. “And now the water is drinkable, too.”
Or consider Philippine Long Distance Telephone (PLDT), which owns the Smart mobile phone service. Again, PLDT is a publicly floated company run to make profits for shareholders, and yet Castor figures heavily in its plans. Not only does he subscribe to Smart’s mobile service, his stall is also one of 700,000 locations in the Philippines where customers of the Smart service can top up their mobile phones electronically — buying credit in chunks as small as 10 pesos (€0.15) at a time.
Castor’s experience hints at a broad shift taking place in many Asian markets. In the past, most companies concentrated solely on serving the affluent — but relatively small — top of the economic pyramid. They regarded the poorer — but much bigger — segments at the bottom of the pyramid as being commercially unviable and best left to charities and aid workers. Today, however, that thinking is starting to change. A growing number of companies now believe that the opportunities to make money by engaging Asia’s poor in business could be much bigger than previously thought.
Nowhere is that idea spelled out more clearly than in The Fortune at the Bottom of the Pyramid, a book written in 2004 by C.K. Prahalad, a U.S. academic. In it, Prahalad writes: “The dominant assumption is that the poor have no purchasing power and therefore do not represent a viable marketÂ. However, by virtue of their numbers, the poor represent a significant latent purchasing power.”
What’s more, argues Prahalad, the benefits of targeting the poor go beyond making money. Economic engagement, he stresses, helps to lift the poor out of their plight: “If we stop thinking of the poor as victims or as a burden and start recognizing them as resilient and creative entrepreneurs and value-conscious consumers, a whole new world of opportunity will open up.”
Roberto Mariano, dean of the school of economics at Singapore Management University, echoes Prahalad’s sentiment. “As a market, the bottom of the pyramid is extremely viable,” he says. “The margins may be small, but the number of people involved is huge. For businesses that can identify a product that clicks, the potential is enormous.”
In defining the bottom of the pyramid, Prahalad uses a per capita annual income of U.S.$1,500 (€1,200) and calculates that two-thirds of the world’s population earns less than that. In Asia, analysis from Marakon Associates, a strategy consultancy, takes a slightly different approach. Marakon uses household income as its benchmark, and looks at the proportion of households in Asia that earn less than $5,000 a year — a figure widely regarded as defining the boundary between spending on necessities and spending on discretionary items. According to this approach, 87 percent of Asia’s households can be thought of as at the bottom of the pyramid. (See tables below.)
For D. Sundaram, ignoring such a big percentage of the population is unacceptable, both commercially and morally. As finance director of India’s Hindustan Lever, a 111 billion rupee (€2 billion) producer of soaps, shampoos, and laundry detergents, Sundaram and his fellow managers have long championed the idea of serving the bottom of the pyramid — and doing so profitably.
The company, which is 51 percent owned by Unilever, an Anglo-Dutch fast-moving consumer goods firm, targets the poor by segmenting its products. First, the company segments its offering by price. For example, as well as selling full-size bottles of shampoo to wealthy consumers, Hindustan Lever sells mini bottles suitable for a week’s worth of hair-washing at a price of around 5 rupees. For the bottom of the economic pyramid, it sells single-serve sachets of shampoo for as little as 50 paise — half a rupee.
“The poor often earn their income on a daily or weekly basis. They aren’t in a position to put a large sum of cash on the counter,” explains Sundaram. The model has been highly successful. Single-serve sachets now account for more than 60 percent of the value of the Indian shampoo market, and more than 97 percent of the number of units sold.
Hindustan Lever also segments its business by brand. Take laundry powder: the firm’s Surf Excel brand is pitched at wealthy consumers, the Rin brand is for the middle market, while Wheel is aimed at the lower-income market.
“Just because somebody is poor, doesn’t mean you can sell them low-quality products,” notes Sundaram. “Consumers at the bottom of the pyramid are just as brand-conscious as anyone else and just as interested in value.”
A third axis along which Hindustan Lever segments its business is distribution channels. For example, one distinct channel managed by a dedicated team is the urban kiosk — the thousands upon thousands of small wooden shacks that serve India’s urban communities.
The latest channel under development is designed to reach the very poorest rural consumers. Known as Shakti, which means “strength,” the Hindustan Lever project was started in 2001 and centers on training legions of rural women to be self-employed door-to-door salespeople in their local communities. The women are provided with finance to buy supplies of soap and detergent and taught how to explain the benefits of hygiene to the residents of their villages.
So far, 80,000 of India’s estimated 600,000 rural settlements are covered by the scheme, and last year the women — or Shakti ammas as they are called — generated sales of $23m. “Our plan is to scale up this project considerably,” enthuses Sundaram.
Talk Is Cheap
Hindustan Lever’s so-called “sachet marketing” approach has been around for many years in India. But the idea of offering products and services in small amounts at low prices is starting to spread to other industries, too. The telecommunications business is a good example, particularly what is known as the “micro pre-paid” model.
In the Philippines, PLDT’s Smart mobile phone service has been growing at a break-neck pace in recent years. In 2002, Smart had 8.6m subscribers; by the end of 2005, that figure had risen to 20.4m — an annual average growth rate of 33 percent. The secret of its success is simple: with per capita GDP of just $1,000 for the 80m citizens of the Philippines, Smart designed its business model specifically for the poor.
To that end, says Christopher Young, CFO of 126 billion pesos (€1.9 billion) PLDT, Smart has concentrated on building a pre-paid rather than a post-paid business. “With a post-paid service, you have to extend credit to a lot of people and that can be very difficult,” explains Young. “And then you have the complexities of printing bills, mailing them and collecting them, which is complicated and expensive and ultimately paid for by the consumer anyway.” As such, 99 percent of Smart’s business is organized on a pre-paid basis.
However, even with a pre-paid model, a mobile subscription was still an expensive proposition for many Filipino customers. That’s because the pre-paid “subscriber identity module,” or SIM card, that carries the phone credit could only be produced with a minimum denomination of 300 pesos. Any less, and the cost of manufacturing the SIM card and distributing it made the card unprofitable.
To overcome this problem, PLDT came up with a solution that has since been copied by telcos all over the developing world. In 2003, engineers at Smart developed a way of topping up a pre-paid card “over the air.” Rather than having to buy a new pre-paid SIM card when their credit runs out, subscribers to Smart’s service can now simply pay to have extra credit delivered electronically to their existing card.
And so it became possible for users to buy phone credit, or “load” as it’s called locally, in denominations as low as 10 pesos — a figure much more suited to the daily cash flow of the average Filipino. Needless to say, subscribers have been joining up in droves ever since.
So, too, have suppliers of the Smart E-loading service, particularly small-scale businesses run by the likes of Federico Castor in Manila’s San Andres Bukid community. All it takes is a special “retail SIM” placed in a regular mobile phone and Castor is able to sell electronic load to anyone who visits his stall. “The arrival of our E-loading service made a big difference,” acknowledge Young. “Not only did it let us offer much lower denominations, but it also broadened our distribution enormously.”
Indeed, Smart’s distribution network for electronic load has blossomed from 50,000 outlets at the end of 2003 to 700,000 by the end of 2005. Another benefit was that the cost of physically distributing pre-paid cards, as well as insuring them against theft, was also drastically reduced.
A New Approach
The examples of PLDT and Hindustan Lever show that addressing the needs of the poor often requires companies to overhaul their business models. It’s no use simply supplying the poor with goods and services developed and priced in wealthy markets. Even just slashing prices isn’t enough. At the bottom of the pyramid, firms have to rethink not only what they offer but how they offer it too.
Consider that many of Asia’s poor have limited access to credit, telephones, television, transport, and refrigerators. Equally, many of them live in noisy, dusty, unsanitary conditions, with poor infrastructure and intermittent electricity. Incomes are low and irregular and literacy can be patchy.
Kunal Sinha, an executive director of Ogilvy & Mather, an advertising and marketing agency, is currently based in China but has spent the past few years helping companies to understand and reach the poor in India. “Even if companies have the right product in that it’s affordable, simple, and relevant to low-income consumers, it still requires a huge effort of education and communication to help people see the value in your offering,” he says. “Usually that means educating them about the benefits of the whole category, like detergents, not just your own brand.”
But that’s more easily said than done in a country like India where as much as 40 percent of the rural population is “media dark,” with little or no access to television and radio. What’s more, given India’s cultural and linguistic diversity, a mass marketing campaign stands little chance of success even in “media live” districts. The solution, says Sinha, is to get out into the communities and talk to them face to face, much as Hindustan Lever is doing with its hordes of Shakti ammas.
A Watertight Strategy
The 5.8 billion–peso utility Manila Water, which has a 25-year concession to supply water and sewerage services to east Manila, also sees the need to build a strong personal relationship with its poorest customers.
When Manila Water won its concession in 1997, the network it inherited was in poor shape: for every 100 liters of water pumped into the system, 63 were lost through leaks and theft. It was clear that, in many cases, the poor were to blame.
Historically, many of Manila’s lowest-income citizens lived in illegal squatter settlements. They held no claim over their land and so were unable to secure legal water connections. Instead, they punched holes into the city’s water pipes, siphoning what they wanted illegally, and causing major leaks and contamination in the process. Even those who owned their land frequently chose to tamper with their water meters and install illegal connections. To solve the issue of so-called “non-revenue water,” the company needed to target the poor.
There were other compelling reasons to focus on the bottom of the pyramid. Enshrined in Manila Water’s concession agreement was an obligation to increase the percentage of Manila’s citizens connected to mainline water. By focusing on the poor, it was felt, these targets could be met most quickly and easily given the high density of their communities.
What’s more, every five years, Manila Water undergoes a “rate rebasing” exercise, whereby the government regulator reviews the prices that Manila Water can charge its customers, over and above an annual inflation adjustment. In the concession agreement, the company is entitled to recoup all of its capital expenditure and all of its operating expenditure, as well as recover its cost of capital using a market-based hurdle rate. Water prices are set accordingly. So, in order to increase its infrastructure investment, Manila Water needs a favorable hearing at the price review sessions. By reaching out to the poor and by improving the service to these communities, the company reckoned it would win grass-roots support for any future price rises.
With this in mind, Manila Water launched a number of projects aimed squarely at its poorest customers. For example, it devised a way of giving legal water connections to illegal squatters. First, it worked with local government units to ensure that they had no immediate plans to disperse the squatters. Then it asked the squatters to sign a document acknowledging that the water connection in no way gave them any extra claim over the land they inhabited.
Another initiative was the idea of collective metering. The cost of installing a water connection, complete with meter, runs to 7,000 pesos, which is a lot of money for many households. Hence Manila Water developed a system whereby two or more households can opt for a shared connection and a shared meter. The installation costs and the monthly water bills are shared out and paid equally by the households, with collection duties handled by the most senior individual among the families.
Perhaps most important, Manila Water launched a huge program of community relations. Staff spend long hours in the city’s poor neighborhoods working with community leaders to explain the investment that the company is making in improving service levels and water quality and educating them on the dangers of illegal tampering with the network. These local leaders then galvanize their communities in the battle to protect the company’s water pipes.
Manila Water also runs counseling services for late-payers, helping them to organize their finances. And more recently, it started a program of micro-financing for the poor, making loans to families of around $100 to help them start small businesses. The idea is to further cement the company’s standing in the community.
The results have been staggering. Since 1997, Manila Water has dramatically increased the number of water connections to the city’s poorest communities, adding 850,000 people from low-income neighborhoods. Even better, the percentage of non-revenue water has dropped from 63 percent to 35.5 percent, and the company’s financial performance has soared. In the past three years, turnover has more than doubled while net income has quadrupled.
Perhaps most satisfying of all, says Sherisa Nuesa, the firm’s CFO, at the last rate rebasing in 2003 the poor supported Manila Water’s request for a price rise wholeheartedly. “The poor were championing our cause. It was very touching,” says Nuesa. “They had seen the benefit we’d brought to their communities and they knew that a price rise meant more investment and even better service.”
Making Money at the Margin
Of course, the economics of serving the bottom of the pyramid differ from those of other segments. In the case of Manila Water, a business with high operational leverage, Nuesa stresses the importance of marginal pricing. “If your business has a high proportion of fixed costs, by branching into low-income segments, you can price your service at just a little over your marginal cost and still be contributing to the bottom line,” she says.
At Hindustan Lever, a business with much more variable costs, Sundaram highlights the need to focus on capital management. “The bottom of the pyramid has lower margins than other segments, so you need to keep extra tight control on capital efficiency to make sure your returns on capital are not diluted too far,” he says. To that end, Hindustan Lever operates with negative working capital, and has done so for some time.
But despite the new business models and the prospect of reaching billions of new consumers, not everyone is convinced that the bottom of the pyramid is as exciting as it sounds.
Vishrut Jain, a senior manager at Marakon Associates, points out that, while the poor make up 87 percent of the population in Asia, they account for just 46 percent of the region’s household income. What’s more, he notes, most companies in Asia still have plenty of opportunity to grow their existing business in the wealthy segments of society without needing to look elsewhere. “The real question is not how attractive the bottom of the pyramid is, but how attractive this opportunity looks when rigorously prioritized against other opportunities,” says Jain.
Clarence Koo, managing director of the Asia practice at Mercer Oliver Wyman, a financial services consultancy, agrees with Jain. Financial services, especially the provision of micro-loans to the poor, is often cited as a sector with lots of potential for serving the less well-heeled. However, says Koo, most banks in Asia still have “plenty to sink their teeth into” rolling out their services to the middle classes and above. Targeting the poor simply isn’t a priority.
That’s not to say that it can’t be done. In Bangladesh, Grameen Bank was started back in 1976 to provide micro-financing to poor women. Since then it has grown spectacularly. Today it has 5.7m borrowers and a network of some 1,700 branches across the country. Its annual revenue is $79m, and net profit $7.2m.
Nonetheless, says Koo, even though Grameen and other banks like it are privately funded, they still have a quasi-charity character to them. “These institutions generate enough cash flow to cover their costs and earn a small return, but their principal aim isn’t to maximize profits, it’s to help the poor,” observes Koo. Grameen Bank, for example, earns a return on equity of around 9 percent. In comparison, Citigroup, the U.S. banking giant with $1.5 trillion in assets under management, earns a return on equity closer to 20 percent.
Easy Does It
For his part, Jain sees many companies in Asia “pushing down the pyramid” rather than focusing on the bottom itself. In China and India, for example, investment has largely centered on the “first tier” cities like Shanghai, Beijing, Mumbai, and Delhi. Now companies are starting to look at second- and third-tier cities.
Similarly, many firms are now looking at the consumer segments immediately below those they already focus on rather than rushing to serve the very poorest. Take Tata Sons of India, a $17.8 billion diversified conglomerate. A look at some of Tata’s constituent companies shows a clear strategy of pushing down the pyramid, but only so far.
At Titan, a $249m watch and jewelry maker, the cheapest watch on offer in India had long been priced at 1,000 rupees. Today it’s down to 300 rupees. At Voltas, a $314m engineering group, a range of air-conditioning units with less than half the power of traditional machines — and a price to match — are now on the market. And at Indian Hotels Company, a $190m hospitality group, the firm’s traditional chain of five-star properties is being supplemented with a string of budget hotels called indiOne whose rooms start at 1,000 rupees a night.
For Federico Castor, and the billions of poor like him in Asia, such developments can only be good news.