Bottom of the pyramid

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An Industrial Workers of the World poster (1911).

In economics, the bottom of the pyramid is the largest, but poorest socio-economic group. In global
terms, this is the 2.5 billion people who live on less than $2.50 per day [1]. The phrase “bottom of the
pyramid” is used in particular by people developing new models of doing business that deliberately target
that demographic, often using new technology. This field is also often referred to as the "Base of the
Pyramid" or just the "BoP".

Several books and journal articles have been written on the potential market by members of business
schools offering consultancy on the burgeoning market. They include The Fortune at the Bottom of the
Pyramid by C.K. Prahalad of theUniversity of Michigan, Capitalism at the Crossroads by Stuart L.
Hart of Cornell University and the first empirical article,Reinventing strategies for emerging markets:
Beyond the transnational model, by Ted London of the University of Michigan and Hart. London has also
developed a working paper, commissioned by the United Nations Development Programme, that explores
the contributions of the BoP literature to the poverty alleviation domain.

Contents
 [hide]

1 History

2 Examples
 o 2.1 Micro-credit

o 2.2 Agriculture

o 2.3 Market-specific products

o 2.4 Venture capital

o 2.5 Business and community

partnerships

o 2.6 BoP conferences

3 Footnotes

4 References

5 Further reading

6 External links

[edit]History

The phrase “bottom of the pyramid” was used by U.S. president Franklin D. Roosevelt in his April 7, 1932
radio address, The Forgotten Man, in which he said “These unhappy times call for the building of plans that
rest upon the forgotten, the unorganized but the indispensable units of economic power...that build from the
bottom up and not from the top down, that put their faith once more in the forgotten man at the bottom of
the economic pyramid.”

The more current usage refers to the billions people living on less than $2 per day, as first defined in 1998
by Professors C.K. Prahalad and Stuart L. Hart. It was subsequently expanded upon by both in their
books: The Fortune at the Bottom of the Pyramid by Prahalad in 2004[2] and Capitalism at the
Crossroads by Hart in 2005[3].

Prahalad proposes that businesses, governments, and donor agencies stop thinking of the poor as victims
and instead start seeing them as resilient and creative entrepreneurs as well as value-demanding
consumers. He proposes that there are tremendous benefits to multi-national companies who choose to
serve these markets in ways responsive to their needs. After all the poor of today are the middle-class of
tomorrow. There are also poverty reducing benefits if multi-nationals work with civil society organizations
and local governments to create new local business models.

However, there is some debate over Prahalad's proposition. Aneel Karnani, also of the Ross School at the
University of Michigan, argued in a 2007 paper that there is no fortune at the bottom of the pyramid and
that for most multinational companies the market is actually very small. Karnani also suggests that the only
way to alleviate poverty is to focus on the poor as producers, rather than as a market of consumers.
Prahalad later provided a multi-page response to Karnani's article. Additional critiques of Prahalad's
proposition have been gathered inAdvancing the 'Base of the Pyramid' Debate.

Meanwhile, Hart and his colleague Erik Simanis at Cornell University's Center for Sustainable Global
Enterprise advance another approach, one that focuses on the poor as business partners and innovators,
rather than just as potential producers or consumers. Hart and Simanis have led the development of
the Base of the Pyramid Protocol, an entrepreneurial process that guides companies in developing
business partnerships with income-poor communities in order to "co-create businesses and markets that
mutually benefit the companies and the communities". This process has been adopted by the SC Johnson
Company[4] and the Solae Company (a subsidiary of DuPont)[5].

Furthermore, Ted London at the William Davidson Institute at the University of Michigan focuses on the

poverty alleviation implications of Base of the Pyramid ventures. He has identified the BoP Perspective as
a unique market-based approach to poverty alleviation. London has also developed the BoP Impact
Assessment Framework, a tool that provides a holistic and robust guide for BoP ventures to assess and
enhance their poverty alleviation impacts. Companies, non-profits, and development agencies in Latin
America, Asia, and Africa have implemented this framework.

Another recent focus of interest lies on the impact of successful BoP-approaches on sustainable
development. Some of the most significant obstacles encountered when integrating sustainable
development at the BoP are the limits to growth that restrict the extended development of the poor,
especially when applying a resource-intensive Western way of living. Nevertheless, from a normative
ethical perspective poverty alleviation is an integral part of sustainable development according to the notion
of intragenerational justice (i.e. within the living generation) in the Brundtland Commission's definition.
Ongoing research addresses these aspects and widens the BoP approach also by integrating it
into corporate social responsibilitythinking[6].

[edit]Examples

[edit]Micro-credit

As The Economist reported on August 11, 2005, one example of “bottom of the pyramid” is the
growing microcredit market in South Asia, particularly in Bangladesh. With technology being steadily
cheaper and more ubiquitous, it is becoming economically efficient to “lend tiny amounts of money to
people with even tinier assets”. The microfinance network discussed in the article, Sa-Dhan, argues that
the availability of credit to the poor “helps the poor but allow banks to increase their business”.

[edit]Agriculture

Another example of the bottom of the pyramid targeting at work is eChoupal in rural India. ITC manages an
agricultural trading company. To eliminate the inefficiencies in its supply chain caused by corrupt middle
men at local rural markets, it created a network of “e-Choupals” (choupal = village square) in rural
communities. Through these e-Choupals, individual farmers have been able to check the market trading
price of their produce and sell it directly to ITC. Both the individual farmers and ITC have increased their
revenues, because the layers of ineffiency no longer have a role in the transaction between seller and
buyer.

[edit]Market-specific products
One of many examples of products that are designed with needs of the very poor in mind is that of a
shampoo that works best with cold water and is sold in small packets to reduce barriers of upfront costs for
the poor. Such a product is marketed by Hindustan UNILever.

[edit]Venture capital
Whereas Prahalad originally focussed on corporations for developing BoP products and entering
BoPmarkets, it is believed by many that SME might even play a bigger role. For LPs, this offers an
opportunity to enter new venture capital markets. Although several social venture funds are already active,
true VC funds are now emerging.

[edit]Business and community partnerships

As Fortune reported on November 15, 2006, since 2005 the SC Johnson Company has been partnering
with youth groups in the Kibera slum of Nairobi, Kenya. Together SC Johnson and the groups have created
a community-based waste management and cleaning company, providing home-cleaning, insect treatment,
and waste disposal services for residents of the slum. SC Johnson's project was the first implementation of
the Base of the Pyramid Protocol.

[edit]BoP conferences
There have been a number of academic and professional conferences focused on the BoP. A sample of
these conferences is listed below:

 Eradicating Poverty through Profit[7] - December 2004 in San Francisco, CA - hosted by the World
Resources Institute(WRI).

 Business Opportunity and Innovation at the Base of the Pyramid [8][9] - August 2005 in São Paulo,
Brazil, September 2005 in Mexico City, Mexico - two sister conferences co-hosted by WRI,
the Multilateral Investment Fund and Ashoka.

 Research at the Base of the Pyramid[10] - May 2006 in Ann Arbor, MI - co-hosted by the William
Davidson Institute (WDI) and the Ross School of Business at the University of Michigan.

 Business with Four Billion[11] - September 2007 in Ann Arbor, MI - co-hosted by WDI and
the Center for Sustainable Global Enterprise at Cornell University.

 Sustainable Innovations at the Base of the Pyramid[12] - September 2008 in Helsinki, Finland -
hosted by the Helsinki School of Economics.

 "The Bottom of the Pyramid in Practice"[13] - June 2009, hosted by the Institute for Money,
Technology and Financial Inclusion at the University of California, Irvine, and sponsored by Intel
Research, the UC Discovery program, and the Center for Research on Information Technology and
Organizations at UC Irvine.

 "Impact of Base-of-the-Pyramid Ventures"[14] - November, 2009 in Delft, the Netherlands - hosted

by the Delft University of Technology.
O ver the years, it has become fashionable to talk about the business opportunity offered by those at the

bottom of the (economic) pyramid. 

Many national and international seminars have been conducted to highlight this hitherto undiscovered gold-mine.
Any challenge to the business rationale for pursuing such a market is considered heretical and almost
blasphemous.

Under the assumption that it is the responsibility of all business managers to generate the optimum (and certainly
a minimum acceptable) rate of return on financial investment, and that any deployment of tangible financial and
management resources for the explicit purpose of chasing a business opportunity must have at least a theoretical
(and subsequently, practical) probability of generating the desired return on capital, there is a strong case for
very objectively examining the potential of this bottom-of-the-pyramid market before proceeding any further. 

In India's [ Images ] context, the estimated discretionary retail consumption in 2009 will be about $436 billion
(about Rs 18 lakh crore) out of the $720 billion (about Rs 31 lakh crore) of private consumption. 

Of this, about 45 per cent ($196 billion or about Rs 850,000 crore) is urban, and the balance is rural. By 2013,
both rural and urban retail markets could be as much as $290-300 billion each (and the total Indian retail market
over $600 billion), i.e. an increment of almost $200 billion in additional consumption at current prices over next
five years compared to 2008. 

Of this, modern retail, which currently is less than $15 billion (about Rs 65,000 crore), may touch $95-100 billion
by 2013, i.e. almost Rs 400,000 crore (Rs 4,000 billion). Food & beverages, of course, accounts for almost half of
this retail consumption, though, both in absolute terms as well as percentage terms, other product and service
categories will substantially increase in the coming years.

However, this consumption -- in absolute financial terms -- is largely accounted for by the middle and upper tiers
of the pyramid. Alas, the almost romantic notion of catering to the needs of those at the "bottom of the pyramid"
(BoP) does not really hold up to the harsh economic reality that this bottom does not offer a business
opportunity. 

According to NCAER estimates, in 2009, of the 222 million households in India, the absolutely BoP households
(annual incomes below Rs 45,000) account for 15.6 per cent of them or about 35 million (about 200 million
Indians). Another 80 million households are in income levels of Rs 45,000-90,000 per year. 

These numbers also are more or less in line with the latest World Bank estimates of the "below-the-poverty-line"
households that may total about 100 million (or about 456 million individuals). Of the $436 billion projected retail
consumption in 2009, the bottom BoP (35 million) households will account for only 5 per cent or about $21.8
billion (just about Rs 90,000 crore). 
To further complicate the situation, only 9 per cent of this consumption (i.e. about US$2 billion or Rs 8,600 crore)
is in urban India, spread across 5,500 towns, and the balance 91 per cent (or about US$20 billion) is spread
across the 660,000 plus villages in rural India. 

Lastly, of the minuscule Rs 90,000 crore (Rs 900 billion) consumption from these 200 million individuals in the 35
million BoP households, as much as 72 per cent is accounted for by food, another 4 per cent by tobacco and
other intoxicants, and about 7 per cent by clothing, and about 8 per cent by basic durables. 

In absolute terms, it means a market potential of no more than Rs 6,300 crore for clothing, and about Rs 7,200
crore (Rs 72 billion) for durables. Food, of course, is not really an opportunity for marketers since the product
basket is extremely basic and served through the public distribution system and other government support
channels. 

Finally, the BoP customer purchase frequency is much higher and from a business perspective, the transaction
costs are therefore much greater if any organised attempt is made to reach out to this group. 

Some of the marketers, of course, talk of their successes in the "bottom of the pyramid" market but they usually
end up redefining the bottom that for them actually starts somewhere above these 35 million poorest (or even
100 million) households.

The message, therefore, is that BoP households are a stark social reality -- those who are at the top of the
pyramid cannot just ignore the 200 plus million (or even 456 million) Indians who are at the absolute bottom of
the economic ladder -- simply because in absolute numbers, this BoP stratum has very significant socio-political
power and if their needs and aspirations are not looked into, they can, knowingly or unknowingly, create
significant social unrest and instability. 

The BoP stratum, therefore, should not be seen at this time as another business opportunity but a social
obligation for more privileged individuals and businesses to take cognizance of. Efforts should be made to
include them in the overall economic uplift process by way of creating/enabling conditions to make them
employable for higher-value added functions so that their income levels first increase to a point that they become
customers rather than mere consumers of basic needs.