A Grassroots Approach to Emerging-Market Consumers

Monday, December 11, 2006

When companies figure out how to serve low-income consumers in developing countries profitably, everyone wins: the disadvantaged gain access to products and services that the private sector is best positioned to deliver, while companies tap into vast new markets. On top of that, when core sectors of the economy?such as banking, electricity, telecommunications, and water?thrive, they transform consumers into producers and promote economic development.

Unfortunately, this happy dynamic is more the exception than the rule. Low-income consumers just can’t afford many products and services. A shaky infrastructure raises the costs of distribution. Incomplete information makes extending credit difficult, and collecting what’s owed poses enormous challenges. Some low-income consumers feel entitled to connect into water mains or electricity lines illegally. Low-income environments are also more susceptible to insurgent activities that raise security and infrastructure costs.

To complicate matters, the resolution of these issues sometimes calls for untangling a unique principal-agent problem. A company (the principal) is in a weaker position than the community (the agent) when it comes to gaining local information, shaping people’s views, and dealing with bad behavior?by defaulters, for example?that could disrupt service for customers and company alike.

A few companies are adopting creative community-based solutions to overcome many of the difficulties they face serving low-income consumers:

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Source: McKinsey Quarterly (link opens in a new window)