Profits, A Penny At a Time

I haven't read C. K. Prahalad's "path breaking book" that David Ignatius describes in his Washington Post column, but it sounds impressive in its theme and contents. There are so much tears (real or fake) abound about the plight of poor and dismal poverty, serious thoughts on how to reduce poverty are emerging, especially a few recent books including C. K. Prahalad's might be worth spending time on.


Profits, A Penny At a Time

By David Ignatius
Wednesday, July 6, 2005; A17

At the Group of Eight summit this week in Gleneagles, Scotland, the leaders of rich countries will be talking about how they can aid poor countries. That's a noble mission, but a remarkable new book argues that it misses the point. Treating the poor as wards of the global economy ignores the fact that they are a vast market -- and that companies can profit right now by serving their needs.

"If we stop thinking of the poor as victims or as a burden and start recognizing them as resilient and creative entrepreneurs and value-conscious consumers, a whole new world of opportunity will open up," writes C.K. Prahalad, a professor at the University of Michigan Business School, in his new study, "The Fortune at the Bottom of the Pyramid: Eradicating Poverty Through Profits."

Prahalad turns the usual view of the global economy upside down. He argues that the 4 billion people who live on less than $2 a day make up a huge, underserved market. Companies that learn how to make and distribute good products cheaply for these consumers can be very successful. They may earn their money a penny or a fraction of a penny at a time, but when you have 4 billion potential consumers, those pennies can add up.

"Four billion poor can be the engine of the next round of global trade and prosperity," Prahalad argues. He calculates that the purchasing power of nine big developing countries -- China, India, Brazil, Mexico, Russia, Indonesia, Turkey, South Africa and Thailand -- is equivalent to $12.5 trillion. "This is not a market to be ignored."

What makes Prahalad's book a revelation is that he includes case studies of companies that are serving this "Bottom of the Pyramid" market. These success stories begin with a recognition that poor people are like everyone else -- they just have less money. They're brand-conscious, for example, and when they want shampoo, they are just as eager as anyone else to buy a high-end product such as Procter & Gamble's Pantene. The problem is, they can't afford to buy a whole bottle. But P&G learned it could make good money selling shampoo in India in single-serve sachets.

Prahalad argues that "a single-serve revolution" is sweeping poor countries, as companies learn to sell small packets of shampoo, ketchup, tea, coffee or aspirin. In India, a single serving of shampoo or tea might cost the equivalent of a penny; a serving of ketchup or fruit juice might cost two cents; detergent or cookies might cost four cents. The margins might be low for each unit, but we're talking volume here, on an unprecedented scale.

One of Prahalad's case studies involves marketing of hand soap in India by Hindustan Lever Ltd., a unit of the global giant Unilever. The company realized it couldn't sell to the bottom of the pyramid unless it found cheap ways to distribute its products. So it created a network of hundreds of thousands of shakti amma ("empowered mothers") who sell Lifebuoy soap and other products in their villages through an Indian version of Tupperware parties.

Another case study is a Brazilian company called Casas Bahia, which sells high-quality appliances to poor people. Through innovative financing and credit-rating strategies, the company has achieved a very low default rate -- just 8.5 percent compared with 15 percent for its competitors, according to Prahalad. Poor Brazilian consumers are intensely loyal to Casas Bahia because they feel the company cares about them.

Some of Prahalad's most startling examples involve innovations in health care. An Indian company called Jaipur Foot makes artificial limbs for poor villagers. Such prosthetic devices can cost $8,000 each in the United States; Jaipur Foot manages to create them for $30 each. A company called Aravind Eye Care System has used specialization and mass marketing to cut the cost of state-of-the-art cataract surgery to $25, compared with the $3,000 often charged in the United States.

Prahalad's book is mind-blowing because it makes you think about markets in a different way. It's a developing-world version of Chris Anderson's much-discussed article "The Long Tail" in Wired magazine last year about e-commerce, in which he argued that there's more money to be made in millions of niche markets than from a few mega-hits at the high end.

The top of the global pyramid is a mature market, saturated with competing companies and products. I suspect Prahalad is right that the big money will be made in serving the bottom of pyramid with its billions of eager consumers. If the G-8 summiteers have any spare time for reading this week, they might take a look at Prahalad's path-breaking book.