Understanding Risk, Then Adapting : How to overcome the fear of working with the base of the pyramid?
One of the reasons why companies and financial institutions fear entering the low-income market segment (the so called base of the pyramid, or BoP) is the risk that this entails. The lack of knowledge about the preferences and tastes of this population, as well as their variable income stream are some of the factors that discourage the entry in BoP markets and that contribute to its stigmatization as an unattractive segment.
Facing risk takes an entrepreneurial spirit as well as managerial willingness to innovate. Innovating is equivalent to making mistakes; accessing BoP markets demands risk tolerance, and a trial and error dynamic.
The question then is how to manage risk? In 2003, in the middle of the microcredit boom in Brazil, Tenda Atacado, a São Paulo-based wholesale company, faced what seemed to be a very risky endeavor. The company decided to offer microcredit to its clients — most of them micro entrepreneurs with monthly incomes below $855 — as part of a credit program to enable customers to grow their small business at the same time Tenda increased its sales and client loyalty. How could Tenda start serving the BoP when its core business was so far removed from finance and microcredit?
In a very entrepreneurial and creative way Tenda outsourced the risk — just as it was suggested by C.K. Prahalad in 2002 — delegating the set up and administration of the credit program to three Brazilian experts in microfinance and micro entrepreneurs. This lead to the 2005 launch of VoxCred, a new, independent company that would administer cartão Tenda (Tenda’s private credit cards). Two years later, Tenda made a strategic move to absorb VoxCred and transform the credit program. This new business line represented revenues of R$56 million in 2008. Currently, almost 190,000 micro entrepreneurs of the BoP have access to credit through Tenda for working capital and the purchase of materials.
While Tenda’s competitors, Makro and Assai, respectively partnered with large banks including Bradesco and Itaú-Unibanco in order to offer credit to clients, Tenda went further. The company offered a product that’s adapted to the informality of the low-income micro entrepreneur. Notwithstanding the difficulties and learning from mistakes, Tenda now has several advantages over its competitors such as the access to its clients’ spending information, which helps them to better interpret their customers’ needs and preferences. (Full disclosure: Tenda is a loan recipient from the Inter-American Development Bank’s Opportunities for the Majority Initiative).
Working in BoP markets is not easy, and is without simple recipes. Tenda managers identified an opportunity in the credit boom and its existing client pool, which enabled them access to the low-income segment. With due diligence, the company outsourced the risk to people with the necessary experience, helping incubate what in a short period of time became an important source of revenue for the company and an incredible support for low-income micro entrepreneurs.
Opportunities like these abound and the positive trend will continue. The BoP market in Latin America and the Caribbean (LAC) is $509 billion every year, more than Argentina’s GDP. The opportunity in health is $24 billion. In sectors such as energy and housing, the market potential is $30.5 and $56.7 billion respectively. A recent World Bank study shows that in the last 10 years 70 million people in the region have seen an increase in their purchasing power, a clear reduction of poverty, coupled with the sustained growth of LAC, strongly suggests that the demand of the BoP for basic goods and quality services will grow in the coming years.
Like Tenda, there are many companies that have managed to serve the BoP facing the risk in a creative and strategic manner. By seizing opportunities, and recognizing how to manage risk, they have achieved commercial viability and positively impacted the lives of those in the BoP.
Lina M. Salazar Ortegón is a research fellow at the Inter-American Development Bank’s (IDB) Opportunities for the Majority Initiative (OMJ).