Selling to The Poor: There is a surprisingly lucrative market in targeting low-income consumers
Monday, April 25, 2005
The floodplains of Soc Trang Province in Vietnam’s Mekong Delta are a maze of rivers and canals dotted with villages so impoverished that local farmers earn less than $ 1 a day. It is not an obvious place to seek a fortune, but capitalism finds a way. Steering his ramshackle boat along the Ke Sat River, Nguyen Van Hon operates a floating sundries distributorship.
The wooden hold of his boat is heavy with boxes containing small bars of Lifebuoy soap and single-use sachets of Sunsilk shampoo and Omo laundry detergent, which he sells to riverside shopkeepers for as little as 2.5[cents] each. Hon’s first stop of the day is Xa Nhon village, where he ties up and makes deliveries to half a dozen small shops. The local farmers may be poor, but they have the same needs and desires as middle-class urbanites, and Hon’s business is growing. He sells hundreds of thousands of soap and shampoo packets a month, enough to earn about $ 125–five times his previous monthly salary as a junior Communist Party official. “It’s still a hard life, but it’s getting better,” Hon says. “Now I have enough to pay my daughter’s school fees. Soon I’ll have saved enough to buy a bigger boat, so I can sell to more villages.”
Hon’s customers may not know it, but they and billions of their counterparts in the world’s shantytowns and slums represent the next big marketing opportunity for multinational companies. With sales growth harder to come by in a competitive world, enterprising companies are seeking expansion among the long-ignored lower classes. And it’s about time, says C.K. Prahalad, well-known consultant and economist at the University of Michigan, who says these “aspirational poor”–people earning less than $ 2 a day who make up three-fourths of the world’s population–could contribute an additional $ 13 trillion in annual sales to the global economy, if only companies would drill deep enough to reach them. “Nearly 4 billion people have been under the radar screens of large companies up until now,” says Prahalad, author of the book The Fortune at the Bottom of the Pyramid. “The moment you create the opportunity for them to consume, you create the world’s largest markets.”
That’s a message that until recently only a few companies had received. The Anglo-Dutch firm Unilever, for example, has been successfully selling household products in developing countries for more than a decade. Unilever’s Vietnam subsidiary alone saw sales rise 23% last year to more than $ 300 million because of aggressive efforts to reach remote parts of the country through an extensive network of more than 100,000 independent sales representatives such as Hon. “People want to look good, whether they’re rich or poor,” explains Arijit Ghose, marketing manager for Unilever Vietnam. “I’ve been to tiny villages where there is no electricity and no running water indoors, and yet there’s Sunsilk and Omo.”
When rising Third World incomes meet the shrinking cost of technology, multinationals are betting that markets will bloom. In October Silicon Valley’s Advanced Micro Devices introduced a $ 185 Personal Internet Communicator–a basic computer–for developing countries, while Taiwan-based VIA Technologies plans to launch a similar device costing just $ 100. Motorola last month unveiled a no-frills cell phone priced at $ 40; the cell-phone manufacturer says it expects to sell 6 million cell phones in six months in markets including China, India and Turkey. “You’ve got nearly 2 billion people who will be buying a phone–need a phone–over the next five to 10 years,” says Allen Burnes, Motorola vice president of high-growth markets. “This is the huge growth opportunity.”
High-tech companies are pushing into previously unexplored–and unappealing–markets because most people who can easily afford computers and cell phones already own them; growth rates and profit margins in traditional markets are suffering as too many sellers chase too few buyers. The same situation exists in many businesses, says Prahalad. “The biggest problem facing global companies is the capacity for organic growth,” he says. “At the same time, there are 4 billion people in the world saying, ’We would like to be part of globalization too.’”
Prahalad argues that squeezing profits from people with little disposable income–and often not enough to eat–isn’t capitalist exploitation. In fact, tapping the spending power of the poor can reduce poverty, he maintains. Expansion by multinationals into new markets creates new jobs–product-distribution networks and shops, for example–and income earned from those jobs ripples through local economies, creating more new jobs, a phenomenon that economists call the multiplier effect. “This creates a large pool of individual entrepreneurs who are participating in an expanded economy,” says Prahalad. “The company makes more profit, and the people’s lifestyle changes.” The poor also benefit because they have access to services such as banking and insurance that once were denied them, he says.
Marketing to the poor is challenging. Just stripping an existing product of features or packaging it in smaller quantities may not be enough to gain customers in this high-volume, low-margin enterprise. “It’s not as simple as finding a low price point,” says Richard Brown, marketing vice president for VIA Technologies. Company executives need to understand not only what poor consumers can afford but also what they want and can use. Motorola’s Burnes says the company went through four redesigns to develop a low-cost cell phone with battery life as long as 500 hours (for villagers without regular electricity) and an extra-loud volume for use in noisy markets.
The poor need innovative models of financing too. When cement supplier Cemex, based in Monterrey, Mexico, was looking to kick-start sales after Mexico’s mid-1990s financial crisis, it founded Patrimonio Hoy, a combination builder’s “club” and financing plan that targets homeowners who make less than $ 5 a day. It recruited 510 promoters to persuade new customers to commit to building additions to their homes. The customers paid Cemex $ 11.50 a week and received building materials every 10 weeks until the room was finished (about 70 weeks–customers were on their own for the actual building). Patrimonio Hoy attracted 42,000 new customers and is expected to turn a $ 1.5 million profit this year. Cemex plans to expand the program into Colombia, Venezuela, Egypt and the Philippines. Diega Chavero, 38, of Zapopan, Mexico, thought the scheme was a scam when she first heard of it, but after eight years of being unable to save enough to expand the one-room home where her family of six lived, she was willing to try anything. Four years later, she has five bedrooms. “Now I have a palace,” she says. “This has changed our life.”
Three years ago, officials at India’s second largest bank, ICICI Bank, met with microfinance-aid groups working with the poor and decided to give them the capital to start making small loans to the poor–at rates that run from 10% to 30%. That sounds outrageous, but it’s lower than the 10% daily rate that some Indian loan sharks charge. ICICI’s money has helped 1 million households get loans that average $ 120 to $ 140. The bank’s executive director, Nachiket Mor, says the venture has been “very profitable.”
Not everyone agrees with Prahalad’s theory that the lower classes will benefit from being part of mainstream global trade. “To suggest this is a panacea for poverty reduction is really not justified,” says Ashvin Dayal, East Asia director for the antipoverty group Oxfam UK. “Selling to the poor and serving the poor are not exactly the same thing.” Oxfam is wary that aggressive corporate marketing might displace existing local products or encourage overspending by those who can least afford it. He cites potential for harm, for example, in unhealthy but heavily marketed candy and sodas replacing juice and fruits as children’s snacks. “Companies have power to create needs rather than respond to needs,” Dayal says.
Prahalad calls those arguments patronizing. “The poor are very value conscious. They have to be,” he says. “If people have no sewerage and drinking water, should we also deny them television and cell phones?” And if companies bolster the bottom line in the process, so much the better. “It’s absolutely possible to do very well while doing good,” he says.
People earning about $ 2 a day could trigger $ 13 trillion in annual sales