The only way to make money selling things to the very poor is with miniscule prices, microscopic margins and massive volume—right?
Wrong, wrong, wrong, says Cornell scholar Erik Simanis. Most products designed for the bottom of the global wealth pyramid usually require higher margins than average, he argued in the Harvard Business Review last month. Except in exceptional circumstances, Simanis figures, the cost of making a sale to a poor person is far higher.
Here's a thumbnail sketch of Simanis' two reasons for this dilemma, drawn from a wealth of real-world examples:
1) Poor people tend to live in small groups and remote places. Disintegrating roads drive up transportation costs. If margins are low, poor villages promise too few consumers to make the trip worthwhile.
2) Poor people aren't experienced shoppers. "Consumers at the bottom of the pyramid … aren't accustomed to using and experimenting with products. … Consequently, sales and marketing efforts involve deploying a substantial number of people with sales skills and deep product knowledge.
And the four solutions Simanis proposes:
1) Localize processing. In some cases, it's possible to cut transportation costs by moving key steps in the assembly process to the point of purchase: for example, by giving customers an incentive to save and reuse the containers in which a bulk product like soy powder is stored.
2) Sell in bundles. Include a cell phone charger in the solar lamp; sell small bottles of toothpaste and shampoo as a "personal hygiene" package, rather than large bottles of shampoo. Revenue per transaction rises; transportation costs may fall.
3) Sell "enabling services." Cement isn't valuable if people don't know how to make a home out of it. One company was able to charge more for cement by hiring people to show customers how to use it, and then selling both cement and education as a $14-a-week package.
4) Nurture customer peer groups. Simanis' model is Grameen bank, which sells loans specifically to self-formed clubs of women, who give their club a name and meet regularly. This makes loan applications more difficult and lowers Grameen's sales volume—but increases its lendees' success rate.
It's a provocative case. Wal-Martism seems to be good at serving mass markets in the post-industrial West, but it may not be right for the far-flung 4 billion who make up the world's truly poor.
Read an excerpt of the Harvard Business Review article, "Reality Check at the Bottom of the Pyramid," or purchase the full piece, here.