Book Review -- Serving the Poor Profitably

The Fortune at the Bottom of the Pyramid

By C.K. Prahalad

Wharton School Publishing

The Fortune at the Bottom of the Pyramid talks about reducing poverty at a time when rock stars and economists alike are calling for a mammoth increase in foreign aid. What’s the connection? Just that the folks crying about the stingy rich and the desperate poor are ignoring the force that has and will continue to bring about poverty reduction. Business.

University of Michigan professor C.K. Prahalad’s book uses b-school case studies to explore how corporations can profitably serve the planet’s four billion people living on less than $2 a day (the bottom of the economic pyramid, or BOP).

The prize is that often-painful business cliché – win-win. Companies profit while the BOP enjoys better products and services and the dignity of being catered to by a world that traditionally looks at them as charity cases. As the idea goes, poor consumers are empowered, their purchasing power increases, and the winnings get bigger. WIN-WIN, as it were.

Prahalad comes along at an important historical moment, because as Bono and Jeffrey Sachs sing in harmony for more money, the uncomfortable fact remains that anti-poverty programs as typically practiced are not effective. More bluntly, they don’t bring large numbers of people out of poverty. The countries with the most success in doing just that over the last 50 years (South Korea, China, India, etc) have put the development of strategic industries and a coherent development strategy well ahead of extending their hand for foreign aid.

While the book is at times poorly edited, overly focused on India, and lacking cohesion between case studies, it explores some brilliant business ideas that can turn the previously unreachable poor into empowered and paying customers.

Prahalad builds upon the provocative assertion of Hernando de Soto (the economist, not the explorer) that the world’s poor aren’t actually poor in the way that we think. His case studies show how an innovative approach to serving poor markets proves that the poor have money to spend and desperately want the goods and services that can improve their quality of life. They just can’t buy them with existing pricing or distribution systems.

Take CEMEX, a multi-billion dollar cement company that decided to profit on the observation that if you take a drive through most cities in Mexico, it seems like half of the houses are perpetually under construction. Even though Mexico’s poor already buy CEMEX cement, the company bet that it could serve them better by providing materials and advice on credit to small groups of homeowners.

CEMEX started a BOP-focused program called Patrimonio Hoy where three people from the same city form a group, make payments for 70 weeks, and have construction materials delivered to their houses along with architectural and building advice. The credit-savings scheme works such that after five weeks, materials worth the first ten weeks of payments are delivered (each member pays 120 pesos per week). This business model keeps customers honest (they are invested, lateness is punished, and they appreciate the trust), and CEMEX earns a 12.5% membership fee along with sales of its cement at a slight premium. After three years, customers seem happy. CEMEX has 36,000 of them across 23 cities in Mexico and is adding 1500 clients per month. And the default rate so far? Less than half of one percent. Unless the general manager is lying, that’s impressive.

The other case studies, for example Unilever’s distribution model in rural India using female entrepreneur sales reps in villages or Jaipur Foot providing high-quality prosthetic limbs at a profit for $50 show that poor people want your products and will pay for them too, on the right terms.

What is the right way to serve the poor profitably? Many of the tactics are not new – creative financing options, individual use packaging, and pyramid-style marketing programs just to name a few – but they allow scalability by tweaking the revenue and cost sides of the equation to suit the idiosyncrasies of emerging markets.

These tactics are important in serving the poor, but unfortunately, they often cannot reach the very bottom of the pyramid. CEMEX for instance targets people living on $5-15 a day, not less than $5. But it’s generally the case with development programs involving cost recovery that you won’t be reaching the poorest of the poor. The fact is an unfortunate one, but development work is full of harsh realities that are either heeded or foolishly ignored.

Prahalad’s thesis, that the world’s poor represents the biggest untapped growth opportunity in recent history can come off sounding a bit crass. But it’s not, because any profit-making scheme that exploits the poor is unlikely to be a lucrative long-term market for the company. Successful companies that push the boundaries of exploitation through high prices and oligopolies – the book gives Western Union as an example – can present opportunities to creative companies. CEMEX, for example, is outflanking money transfer firms by allowing Mexicans living in Los Angeles to wire money directly to cement distributors for their houses back in Mexico.

Environmental issues are brushed on lightly throughout the book, but most questions are left unanswered. For example, marketing to the poor with single servings of everything from coffee to shampoo is an effective strategy, but it can lead to streets filled with trash. However, in a developing country where the government has neither the budget nor even the interest in running a sanitation system, it hardly seems fair to blame corporations for giving customers small sachets of powdered laundry soap over a large bottle if that’s what they demand. Yet the environmental question is a big one, and perhaps another book is needed to address it in this context.

It must be said that Bono, Sachs and the rest of the MORE AID NOW chorus raise an important point – the rich world has ignored the poor world for too long, and it’s time for a change. But inviting the Fortune 500 to the table is the only way to bring about that other often-painful cliché – sustainable development. And it needs to go far beyond charitable giving or corporate responsibility programs. Prahalad and his b-school researchers are on the right track. It’s time for the business world to take their products to the poor.