Karnani CMR prepdf su07
The Mirage of Marketing
to the Bottom of the
Pyramid:
HOW THE PRIVATE SECTOR
CAN HELP ALLEVIATE POVERTY
CALIFORNIA MANAGEMENT REVIEW VOL. 49, NO. 4 SUMMER 200790
Aneel Karnani
W idespread poverty is an economic, social, political, and moralproblem. Eradicating, or at least alleviating, poverty is anurgent challenge. For many decades, various institutionshave tried to address this challenge: local governments,
developed country governments, international organizations (such as the World
Bank and the United Nations), aid foundations, and non-governmental organi-
zations. So far, the intellectual discourse has been largely in the fields of public
policy and development economics.
More recently, management experts and business schools have entered
this arena. C.K. Prahalad has been one of the pioneers of this movement, and he
is certainly the most visible and prolific writer in this field. This article focuses on
his 2004 book, Fortune at the Bottom of the Pyramid: Eradicating Poverty through Prof-
its, as the most visible work incorporating the ideas about “the bottom of the
pyramid” (BOP).1 The BOP proposition can be summarized as follows:
▪ There is much untapped purchasing power at the bottom of the pyramid.
Private companies can make significant profits by selling to the poor.
▪ By selling to the poor, private companies can
ing prosperity to the poor,
and thus can help eradicate poverty.
▪ Large multinational companies (MNCs) should play the leading role in
this process of selling to the poor.
I thank my friends Gautam Ahuja, Gunter Dufey, Pie
e Dussauge, Sendil Ethiraj, Rob Kazanjian, Linda
Lim, my wife, Felicia Karnani, and two anonymous reviewers for their constructive comments that
improved the logic and smoothed the rough edges of earlier versions of the article, and I absolve
them of any responsibility for the views presented here.
Prahalad argues that selling to the poor can simultaneously be profitable and
eradicate poverty. This is, of course, a very appealing proposition and has drawn
much attention from senior managers, large companies, and business schools.
The BOP proposition is indeed too good to be true. It is seductively
appealing, but it is riddled with fallacies. There is little glory or fortune at the
ottom of the pyramid—unfortunately, it is (almost) all a mirage. This article
argues that the BOP proposition is both logically flawed and inconsistent with
the evidence. This analysis has serious implications for both company strategies
and public policy. This article proposes an alternative perspective on how the
private sector can help alleviate poverty. Rather than viewing the poor primarily
as consumers, an alternative approach is to focus on the poor as producers and
to emphasize buying from the poor. The only way to alleviate poverty is to raise
the real income of the poor.
Target Market
Poverty is a matter of degrees and involves subjective judgments. Praha-
lad uses the criterion of $2 per day at purchasing power parity (PPP) rates in
1990 prices (equivalent to $3.10 in 2006 prices).2 At this level of poverty, the
asic needs of survival are met, but just barely. I use the same definition of
poverty in this article.3
Prahalad states that there are more than 4 billion people with per capita
income below $2 per day at PPP rates.4 The World Bank estimates the number
at 2.7 billion in 2001. Many researchers contend that the World Bank already
over-estimates the number of poor people,5 with some researchers estimating
the poor at 600 million.6 Surprisingly, Prahalad even claims that “the poor as a
market are 5 billion strong.”7
Prahalad also claims that the BOP potential market is $13 trillion at PPP.
This grossly over-estimates the BOP market size. The average consumption of
poor people is $1.25 per day.8 Assuming there are 2.7 billion poor people, this
implies a BOP market size of $1.2 trillion, at
PPP in XXXXXXXXXXEven this is an overestimate.
From the perspective of a multi-national com-
pany from a developed country, profits will be
epatriated at the financial market exchange
ates, not at PPP rates. In that case, the global BOP market is less than $0.3 tril-
lion, compared to the $11 trillion economy in the USA alone, making the BOP
a difficult place to look for a fortune.10
No Fortune
Not only is the BOP market quite small, it is unlikely to be very profitable,
especially for a large company. The costs of serving the markets at the bottom
of the pyramid can be very high. The poor are often geographically dispersed
(except for the u
an poor concentrated into slums) and culturally heteroge-
neous. This dispersion of the rural poor increases distribution and marketing
The Mirage of Marketing to the Bottom of the Pyramid
CALIFORNIA MANAGEMENT REVIEW VOL. 49, NO. 4 SUMMER XXXXXXXXXX
Aneel Karnani is an Associate Professor of
Strategy at the Ross School of Business at the
University of Michigan. < XXXXXXXXXX
costs and makes it difficult to exploit economies of scale. Weak infrastructure
(transportation, communication, media, and legal) further increases the cost
of doing business. Another factor leading to high costs is the small size of each
transaction.
Poor people are, of course, price sensitive. “Companies assume that poo
people spend only on basic needs like food and shelter.” Prahalad and Hammond
disagree, stating that “such assumptions reflect a na
ow and largely outdated
view of the developing world XXXXXXXXXXIn fact, the poor often do buy ‘luxury’
items.”11 The poor spend about 80% of their meager income on food, clothing,
and fuel alone.12 This clearly does not leave much room for luxuries.
Companies following the BOP proposition often fail because they over-
estimate the purchasing power of poor people and set prices too high. Virtually
none of the examples cited by BOP proponents support the recommendation
that companies can make a fortune by selling to the poor (see Table 1 for an
assessment of the nine case studies presented by Prahalad). Several of the
examples that apparently support the BOP proposition involve companies that
are profitable by selling to people well above the $2/day poverty line, although
even these consumers seem poor to a Western researcher.
Casas Bahia
The case of Casas Bahia has been cited as an illustration supporting the
BOP concept.13 The firm has become a large retailer in Brazil by “converting the
BOP into consumers XXXXXXXXXXCasas Bahia ca
ies and sells top-quality
ands: Sony,
Toshiba, JVC, and Brastemp (Whirlpool). There is a misconception that because
customers are poor they do not desire quality products.”14 Now, it is undeniably
true that poor people desire quality products; the problem is that they cannot
afford such products. As mentioned earlier, Prahalad defines the BOP to be
income below $2 per day. However, he also states that the Casas Bahia custom-
ers have an “average monthly income twice the minimum wage (R$400),” that
is, equivalent to income of $800 per month at PPP.15 Even assuming only one
earner per household and four people in a household, this implies per capita
income of $6.66 per day, well above the $2 per day poverty line.16 The company
is a big, profitable retailer but it has little to do with the BOP proposition if the
poverty line is defined as Prahalad does.
Iodized Salt
Iodized salt is an effective and inexpensive way to prevent iodine defi-
ciency, especially in developing countries. Iodine deficiency is a leading cause
of mental disorders; it also adversely affects the entire body, and causes growth
etardation. A problem is that some of the iodine in salt is lost in the process of
storage, transportation, and cooking. Hindustan Lever Limited (HLL), the Indian
subsidiary of Unilever, has developed a proprietary micro-encapsulation technol-
ogy to stabilize the iodine content in salt. Prahalad cites the case of Annapurna
salt marketed to the bottom of the pyramid by HLL.
The Mirage of Marketing to the Bottom of the Pyramid
UNIVERSITY OF CALIFORNIA, BERKELEY VOL. 49, NO. 4 SUMMER 200792
The Mirage of Marketing to the Bottom of the Pyramid
CALIFORNIA MANAGEMENT REVIEW VOL. 49, NO. 4 SUMMER XXXXXXXXXX
TABLE 1. Assessment of Case Studies Presented in Prahalad’s Fortune at the Bottom of
the Pyramid
Case
Study
Product
Service
Target
Market Profitability
Organization
Type
Casas Bahia Retailer of
electronics,
appliances, and
furniture. Provides
financial credit to
customers.
Above $6/day, and
maybe even above
$16/day, at PPP.
Very profitable. Large Brazilian
company.
Cemex
Patrimonio
Hoy
Cement. Patrimonio
Hoy program
provides credit to
customers.
Above US$5/day
(equivalent to $7/day
at PPP).
“Not as high as fo
Cemex corporate.”
“Too early to use
profits as measure
of success.”.
Large MNC.
Annapurna
Salt
Iodized salt. Above BOP. Sells at
a price premium of
275%.
No data. Probably
profitable.
Large MNC.
HLL & Soap
Market
Soap. BOP. No data on HLL’s
profits from this
project. Government
and civil society
scaling back thei
involvement.
MNC partnering
with government
and civil society.
Jaipur Foot Prosthetic foot. BOP. Not profitable by
design.
Not-for-profit.
Aravind Eye
Care System
Eye care and surgery. BOP and more
affluent people.
Financially self-
supporting. More
affluent customers
cross-subsidize the
BOP customers.
Not-for-profit.
ICICI and
Microfinance
Microfinance. BOP. But it is
debatable whethe
microcredit
significantly helps
alleviate poverty.
No data on ICICI’s
microfinance
usiness. Most
microfinance
organizations are
not profitable.
Large Indian com-
pany partnering
with NGOs.
e-Choupal Procurement of
soybeans.
BOP. No data in Prahalad.
Not yet profitable,
according to CEO
of parent company.
Division of a large
Indian company.
Voxiva Surveillance of
emerging public
health crisis.
Clients are
government and
large public health
organizations in
oth rich and poo
countries.
No data. Probably
profitable.
Small private
company; capital
aised about $10
million.
However, the fact is that the penetration of Annapurna salt among
the poor is miniscule.17 Annapurna salt is priced at Rs. 7.5/kg (equivalent to
$0.85/kg at PPP), the same as the market leader Tata salt; whereas numerous
small regional producers sell iodized salt at Rs. 2/kg.18 At a price premium of
275%, not too many poor people see it as a bargain. Annapurna may be a prof-
itable business based on a good product embodying a valuable technology, but
it is not an example supporting the BOP proposition.
Coca-Cola
Balakrishna and Sidharth applauded Coca-Cola in India for launching
in 2003 its low-price, affordability strategy, which hinged on raising the overall
consumer base by offering ca
onated soft drinks in smaller pack sizes of 200
ml at Rs. 5, which is equivalent to $0.57 (at PPP).19 People living on less than
$2/day do not find this to be