Aneel Karnani: A ’Poor’ Market

Wednesday, July 4, 2007

In PPP terms, the market at the bottom of the pyramid is $1.42 trillion, a far cry from the $13 trillion estimated by others.

A movement that emphasises free markets to reduce poverty has grown strong in recent years, and has caught the attention of executives, academics and public officials. C K Prahalad argues in his popular book, The Fortune at the Bottom of the Pyramid, that selling to the poor people at the ’bottom of the pyramid’ (BOP) can simultaneously be profitable and help eradicate poverty.

Many multinational companies (such as Unilever and SC Johnson) have undertaken BOP initiatives; several business schools (such as University of Michigan and University of North Carolina) have set up BOP centres.

The world’s top CEOs have discussed this topic at recent sessions of the World Economic Forum. The think-tank World Resource Institute (WRI) advocates ’development through enterprise’ and emphasises business models driven by a profit motive that meet the needs of the underserved communities in emerging economies.

The growing appeal of the BOP proposition has been fuelled by the argument that the poor represent a large and lucrative market. Prahalad in his book argues that the poor, defined as people living on less than $2 per day, at purchasing power parity (PPP) rates, represent a market size of PPP$13 trillion.

An article in the International Herald Tribune on July 7, 2006 quotes Allen Hammond, vice president of WRI and a leading advocate of the BOP proposition: ’The buying power of these poorer markets weighs in at a staggering $15 trillion a year.’ Given such large estimates, it is not surprising that the BOP proposition has become so popular.

Are the world’s poor such a fantastic market? In an article last year (’Mirage at the bottom of the pyramid’, Business Standard, September 22, 2006), I argued that this is hype, and that such market estimates are gross exaggerations.

Using rough calculations from then existing World Bank data, I estimated the BOP market to be $1.2 trillion at PPP, and $0.3 trillion at exchange rates, in 2002. In response to my article, Prahalad insisted, in an interview published in Fast Company in March 2007 (available at that he had not overestimated the size of the BOP market.

We now have new data to resolve this debate. The report, The Next 4 Billion, recently released by the International Finance Corporation (the private sector arm of the World Bank group) and WRI, estimates the size of the BOP market based on unique (and previously unreleased) access to the household surveys of 146 developing and transition countries. The report offers a new perspective on the global BOP market size by country and by sector.

Continue reading “A `poor` market”

Source: Business Standard (link opens in a new window)