Monday
February 7
2011

Martin Herrndorf

Understanding Competition at the Base of the Pyramid (Part 1)

Editor’s Note: This is part one of a two-part post defining and exploring ways to think about and manage competition at the Base of the Pyramid. The second post, Five Ways to React to Competitors at the BoP (Part 2), is here.

The un-served and the poverty penalty

One argument by BoP advocates approaching business has traditionally been that competition is absent in BoP markets – or at least not as tough as in upper-income markets. While this is true to a certain extent, it masks the presence and extent of competition at the BoP.

Two related arguments have been put forward. First, the poor are “un-served” – or, on a sector level, “unbanked”, “uninsured”, “without access” to water, sanitation, energy, etc. The argument merits detail. While the poor often don’t have access to certain products, they might still have found some ways of working around the problem: Without insurance, they still manage risks, without a bank account, they still make payments. Second, many may have access to a certain product, but might opt not to purchase it.

A more sophisticated version of the “no-access” argument classifies the access, for example as in “access to affordable, sustainable and safe/healthy energy.” While more accurate than generalized claims of “no access”, the poor might weigh these factors very differently. While an energy source might be affordable (otherwise it wouldn’t be used), it might not be sustainable and safe.

The second argument similarly states that the poor are served, but at significantly higher prices and at lower quality. The so-called “poverty penalty” clearly exists. But it is not evident from the outset how relevant the poverty penalty is in reality. One key problem is which price and which combination of product and service should be the basis of comparison. A product (say, rice) might be more expensive on a per unit basis in a poor area than in a rich one. But the higher price could justified when you factor in other aspects valued by poor households – low transportation cost, the convenience of shopping small quantities close to home, flexibility, etc.

In both cases, “un-served” or served at a poverty penalty, the underlying reason for the phenomenon observed could be market conditions. Take the well-known (and right now widely criticized) issue of interest rates in micro-credit. They are certainly higher in low-income than in high-income markets. Still, this “poverty penalty” reflects differences in market conditions, and not a failure in business models. By now, best-practice micro-credit organizations are probably much better organised and run than most banks in developing countries. Still, to overcome long distances in rural areas and a host of other factors, they need to charge higher interest rates (AKA: prices).

Some examples for competition

The existence of a poverty penalty might thus not directly point to a business opportunity, or to a lack of competition among providers serving these customers. Examples are easy to find once one focuses on competitors in BoP markets (and sector practitioners will often already be highly aware of these issues).

To highlight some key examples for competition in core sectors for the BoP:

  • Savings: Formal saving accounts compete against informal saving mechanisms (as described in the brilliant Portfolios of the Poor). These might offer higher rates of returns (for example, when lending money on at “loan-shark” rates) and higher flexibility in making payments and withdrawals. In South Africa, the Stokvels saving clubs and the related parties offer an additional benefit of entertainment, belonging and political empowerment.
  • Insurance: Poor households manage risks by informal insurance mechanisms like burial societies. While often being more expensive than formal insurance products, they are more flexible, for example in covering informal family and friendship networks. But the poor apply other, less visible mechanisms, as well: The Syngenta Foundation discovered in their crop insurance project that people manage drought risks by planting several varieties, a level of risk mitigation that has to be matched by a formal insurance offer in price and flexibility.
  • Energy: The obvious and widely stated problems associated with kerosene lamps might deflect from the reasons why consumers opt for them in the first place: Easy maintenance, low up-front costs, flexible refilling, etc.
  • Water: Excluding the poorest and marginalized (say, recently arrived refugees in a refugee camp), people have access to water – even if the water quality might be low, unstable supply, etc. Companies that try to provide “better” water have experienced the need for awareness raising on water quality (a costly undertaking, see the PuR experience ) or have failed to gain a large market share as quickly as hoped.

Many more examples can be found, both in these and other sectors. Many of these may not look like “classical” competitors business experience in well-developed markets – formal, private-sector businesses quite similar to the business itself.

To better understand the nature of these competitors, part two of this post will detail the nature of competitors, and five key ways to respond to them.

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