I will share a few insights from my experiences working with enterprises in small communities in Africa and India, as well as the Capitalism Next Seminar held at Berkeley on Monday. Regardless of whether it is the public or the private sector who is providing services, it is important to distinguish which segment of the population we are truly targeting. The term “Base of the Pyramid” has gained popularity for both private and public sector funds. World Resources Institute identifies the BOP as those households making $3,000 or less per year. (about $8/day) Although in India the average household size is 5 people, not all of those are income generators. The United Nations has always considered the very poor as those making less than $2 per day (in PPP). I often find BOP ventures to draw a fuzzy line around who they are truly targeting.
When we target customers are we targeting the BOP, or rather mislabeling those who are indeed lower-middle class? If it is the latter, what then happens to the true BOP? Are they marginalized even further?
For the true BOP, once the most basic needs are covered, such as food, water, fuel for stoves, and cooking basic health needs, it is very difficult to generate substantial savings. Most of India’s BOP population lives in rural areas – 500 million people – where income is heavily dependent on farming. Farming incomes are highly cyclical, making the steady payback periods required for long-term financing very difficult. Given income cyclicality, it is rare to find microfinance institutions, the only institutions providing financing to the BOP, providing loans that are longer than a few months, and over 90% of all micro loans go for business needs that are quickly paid back through sales.
Two types of products in BOP markets perform well outside of the most basic categories such as food and fuel: 1) products that increased earning potential and 2) aspirational products. The first category is straightforward: if a product can increase the productivity or income potential of a BOP consumer, such as farming equipment or goods for a small shop, it has a natural and accepting market. The second category is more controversial, but important. Some companies, such as Proctor & Gamble and Coca-Cola, sell products in very small quantities that are considered luxury items for BOP consumers. However, a very small packet of detergent that may be used to clean clothes is not as controversial as selling an unhealthy product that may displace more important nutritional purchases. While permanent shelter structures can be both income generating – such as mixed use business/home structure – and aspirational, it is still very difficult to scale down a permanent building structure to a cost level where it makes sense to invest for business or purely pleasurable reasons.
Government subsidy or slum improvement programs could alleviate the gap in the market between cost and disposable income, but government projects are problematic for multiple reasons:
- Government money/subsidies are typically available on a project-by-project basis;
- Government money/subsidies are not consistent;
- Various governing bodies require that construction dollars are allocated to the lowest bidder, regardless of quality;
- The building industry is characterized by high levels of corruption, particularly around government project schemes.