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Huge 'bottom of the pyramid' market? Bah!
July 05, 2007
A movement that emphasises free markets to reduce poverty has grown strong in recent years, and has caught the attention of executives, academics and public officials. C K Prahalad argues in his popular book, The Fortune at the Bottom of the Pyramid, that selling to the poor people at the 'bottom of the pyramid' (BOP) can simultaneously be profitable and help eradicate poverty.
Many multinational companies (such as Unilever and SC Johnson) have undertaken BOP initiatives; several business schools (such as University of Michigan and University of North Carolina) have set up BOP centres.
The world's top CEOs have discussed this topic at recent sessions of the World Economic Forum. The think-tank World Resource Institute (WRI) advocates 'development through enterprise' and emphasises business models driven by a profit motive that meet the needs of the underserved communities in emerging economies.
The growing appeal of the BOP proposition has been fuelled by the argument that the poor represent a large and lucrative market. Prahalad in his book argues that the poor, defined as people living on less than $2 per day, at purchasing power parity (PPP) rates, represent a market size of PPP$13 trillion.
An article in the International Herald Tribune on July 7, 2006 quotes Allen Hammond, vice president of WRI and a leading advocate of the BOP proposition: "The buying power of these poorer markets weighs in at a staggering $15 trillion a year." Given such large estimates, it is not surprising that the BOP proposition has become so popular.
Are the world's poor such a fantastic market? In an article last year, I argued that this is hype, and that such market estimates are gross exaggerations.
Using rough calculations from then existing World Bank data, I estimated the BOP market to be $1.2 trillion at PPP, and $0.3 trillion at exchange rates, in 2002. In response to my article, Prahalad insisted, in an interview published in Fast Company in March 2007 (available at http://www.fastcompany.com/magazine/113/open_fast50-qa-prahalad.html) that he had not overestimated the size of the BOP market.
We now have new data to resolve this debate. The report, The Next 4 Billion, recently released by the International Finance Corporation (the private sector arm of the World Bank group) and WRI, estimates the size of the BOP market based on unique (and previously unreleased) access to the household surveys of 146 developing and transition countries. The report offers a new perspective on the global BOP market size by country and by sector.
The headline of The Next 4 Billion is "New Analysis Reveals $5 Trillion Market at Base of the Pyramid". Although significantly smaller than the previous estimates by BOP proponents, this continues to be an over-estimatation of the poor as a market. The first issue is how to define poverty.
The common standard of $2/day converted at PPP in 1990 prices is used by Prahalad in his book and in my earlier article. This corresponds roughly to $1,000 PPP, adjusting for inflation to 2002 prices. The Next 4 Billion uses $3,000 PPP.
This will, of course, lead to a larger market size. But the report does not justify the $3,000 cutoff level, which is much higher than any commonly used poverty line. According to this report, 98.6 per cent of the population in India is in the 'bottom of the pyramid'!
From the perspective of a multinational organisation, the market size should be measured in US dollar terms converted at exchange rates, not at PPP. The multinational organisation necessarily converts local currencies into its home currency at exchange rates. From the perspective of a local firm, it is appropriate to measure the market size in PPP$. (The Next 4 Billion agrees with this logic.)
I have calculated the BOP market in 2002 using data from The Next 4 Billion for a poverty line of $1,000 at PPP. In that case, the global BOP market size is $1.42 trillion at PPP, and $0.36 trillion at exchange rates. This is remarkably close to the estimates I had in my earlier article without access to the new data.
Based on data from The Next 4 Billion, there are 368 million people in India below the poverty line of $1,000 at PPP, in 2002 prices. The BOP market in India is $297 billion at PPP, and only $54 billion at exchange rates.
The alleged large and lucrative market at the bottom of the pyramid is a fantasy. Opportunities for profit by selling to the poor are not nearly as pervasive as the BOP proposition argues. If a private company is motivated not by economic profits, but by social responsibility, then of course there are many opportunities for marketing to the poor.
Fuelled by rapid economic growth, the shape of the economic pyramid is changing in many developing countries leading to a rapid emergence of the middle class. Companies seeking new profitable opportunities are much better off targeting this vast new pool of consumers -- the fast growing middle class -- in the emerging economies, especially China and India.
The author is with the Ross School of Business, University of Michigan.
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