10 lessons for doing business with base of the pyramid markets
In a recent online discussion experts shared their views on how businesses could best serve the lowest income populations - from business model adaption to the risk of exploitation
A recent online chat asked how business can best operate in base of the pyramid markets and what could be learnt from the success and failures of those businessesalready serving the lowest income communities. Here are 10 key findings:
1. Make it about core business
One of the biggest errors companies can make is to treat base of the pyramid (BoP) projects differently from their core business, according to Cornell's Eric Simanis. Operating in very low income populations presents enormous challenges from high operating costs and poor economies of scale to sceptical consumers, "so if these projects aren't being driven as rigorously and as laser-focused on meeting the numbers as companies would with "traditional markets", they simply won't have a shot at profitability."
A focus purely on social impact won't work, companies need to see social impact as a byproduct of doing good business. In many cases the impact will come through the product itself, Simanis added, this means a focus on good quality products. "I think a lot of the pulling back by companies from the BOP space happened because projects were being run like CSR ventures but were expected to perform on the profits/revenue side."
Business Call to Action's Tatiana Bessarabova agreed that using core business was key. "Whereas CSR typically takes place in the community investment sphere ... 'pro-poor' business stems from the core of the business, where the company's expertise lie". She gave the example of Santander Brazil which aims to encourage financial literacy and growth in small business through loaning to micro enterprises that traditionally find it hard to secure funding.
Hystra's Oliver Kayser agreed but did point out the benefits of setting up an internal joint venture between the CSR team and the buisiness lines. He gave the example of Total's solar lantern Awango project which was initially set up in this way.
2. Scaling up a business model is challenging
Simanis pointed to a difference between scalable and replicable. Every business model is replicable, he said, given time and money. Scalable, however, means it must hit a target return on investment within a certain time frame. "So a break-even business isn't scalable; a single business unit that is profitable may not even be scalable ... the profits have to be high enough and fast enough at the business unit level for a project to be scalable." This is not an easy task and businesses need a huge amount of patience and the willingness to look beyond traditional short term metrics.
3. It's vital to understand the needs, demands and constraints of the target market
Understanding what BoP customers need and want requires a significant time investment. Bessarabova advised working closely with communities, adjusting the business model to the local context and understanding the financial needs of customers. Introducing the idea of paying for a product that prospective BoP customers may not be familiar with means a lot of work on tailoring a companies' marketing, distribution and financial approaches.
Havard's Jane Nelson agreed that companies trying to serve the BoP market must take a comprehensive approach to understanding the range of constraints that low-income producers or consumers face. Companies should also think about partnering with others to strengthen their understanding of systems within which low-income producers and consumers are operating.
4. Work should be grounded in country offices
The major challenge BoP units face is where they are based. Projects should be grounded in country, said Eric Simanis. "You can't run a business in Kenya out of the Paris office and have a standalone cell in the field (one of the greatest values of being inside a corporation are the economies of scale of leveraging operations). But if you run projects that are aiming to make less than the target return or are diluting margins, the country office will have no interest in it."
Construction company Lafarge and brewing and beverage company SABMiller were given as good examples of companies working within country offices to drive business which fits with their overall objectives. Kayser praised the Lafarge "toolkit" which has allowed country offices to design an approach appropriate to the local context while leveraging global best practice and experience.
5. There is a significant role for the public and development sector >>>