Another perspective on the opportunities at the BoP

Just came across these series of posts from Statastic where the putative opportunities at the bottom of the pyramid are analyzed quite insightfully. All of the posts linked below are worth the read, I’m just going to pull out an interesting snippet or two from each.

The first question considered – "Is there a market at the bottom of the pyramid?"

Karnani points out one inexcusable fallacy in Prahalad’s work: market definition.
Prahalad used the World Bank’s estimates for the number of people living on an income of $2 a day or less (poverty), and  $1 a day or less (extreme poverty).

Both poverty measures are at purchasing power parity (PPP).
Why is PPP important? Because no matter where in the world you spend $1 PPP it buys the exact same goods, regardless of local price. So that $1 PPP that the extreme poor earn in a day will buy you one loaf of bread in the U.S. Actual prices are much lower in developing countries, so that same loaf of bread might only cost $.10. The market at the bottom of the pyramid will not pay MNCs in PPP dollars; it will pay
them in local currency,[…]

Another problem is that the poor spend about 80% of their income on food, clothing and fuel. Suddenly the $300 billion market at the bottom of the pyramid shrinks to $60 billion of disposable income at current
exchange rates. Spread amongst 2.7 billion people, that’s about a nickel a day for disposable  income.

The next post looks at "Can innovation save the bottom of the pyramid?"

As WRI writes in response to Karnani’s critique:

The pertinent development question is whether the BOP is
well served by the present (often informal) markets, and whether there
are unmet needs that could be better served by more competitive markets
and broader participation by the legitimate private sector.

I believe that private sector innovation help can drive prices
lower, maintain or increase quality, and help deliver goods that result
in better livelihoods for those at the bottom of the pyramid. But what
if multinationals start marketing products that the poor don’t need?
Are BOP consumers rational economic actors? Or is Karnani correct when
he says that, “The problem is that the poor often make choices that are
not in their own self interest.”

and finally, "Paternalism and the bottom of the pyramid"

Karnani also finds harm in Prahalad’s example of Casas Bahia. This
Brazilian superstore facilitates the purchase of high-quality
appliances by offering credit to poor consumers who have unpredictable
income streams.

Karnani argues that:

“The BOP proposition again falls prey to a fallacy:
providing credit does not change the affordability of a product. The
finance term for Casas Bahia ranges from four months to one year, with
an average of six months. All that the financing scheme does is provide
instant gratification at a price. For the privilege of this instant
gratification, he pays an interest rate of over 4% per month. People
with ‘low and unpredictable income’ would be well advised to save and
pay in cash; this will enable them to do a better job of comparison
shopping too. It is not surprising that many of Casas Bahia’s customers
do not understand well how to unbundle the purchase price and the
interest cost and instead focus on the monthly installment payment.”

Using credit in a developing nation is rarely about instant
gratification. Village groups in West Africa without access to
micro-credit schemes organized themselves and made small loans to group
members for the monthly interest rate of about 10%. These loans helped
fund medicine for sick children or seeds for cash crops. Poverty tends
to produce desperately pragmatic people. Would Mr. Karnani advocate
saving money throughout the rainy season only to buy seeds for a cash
crop to be planted the next year? Doesn’t it depend on the rate of
return? And who is best able to judge when to extend credit?

If a poor Brazilian consumer buys an appliance on credit, isn’t it
possible that this person might become more productive as a result?
Washing machines liberate people from having to spend the day washing
by hand. Gas stoves are more efficient that searching for firewood.

Each of these posts have much in them worth thinking about, the essence of which I’d touched upon a year ago, which is that we should really be looking at private enterprise developing programs that not only "sell" to the BoP customer, but either a) provide them with effective means of improving their sources of income or b) make them more productive in their daily efforts.

 

Also of note: CK Prahalad’s rebuttal to Aneel Karnani as posted on nextbillion.net

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