Reality Check at the Bottom of the Pyramid

Wednesday, May 23, 2012

Most 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-the-pyramid 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 low-income consumers in India.

However, as an abundance of recent experience shows, the model has a fatal flaw: It inevitably requires an impractical penetration 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 profits 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 that the sachets would be sold only to humanitarian organizations at cost.

Source: Harvard Business Review (link opens in a new window)

Base of the Pyramid