Poverty reduction for profit? A critical examination of business opportunities at the bottom of the pyramid

Poverty reduction for profit? A critical examination of business opportunities at the bottom of the pyramid

The poor are missing the boat – why we need to rethink business at the bottom of the economic pyramid

The author examines C.K Prahalad’s idea that selling to four billion poor people at the bottom of the economic pyramid (BoP) generates both profits for big business and eliminates poverty. A welcome, innovative and influential perspective, but an opportunity missed, he argues.

First, selling to the poor may do little to eradicate poverty, but potentially hurts small businesses and threatens local jobs and incomes. Second, a more precise analysis using household surveys shows a much smaller BoP market size, less than 5% of previous estimates. Third, virtually everyone in developing countries is classified as a ‘poor’ consumer in much of the BoP literature.

The focus and the bulk of purchasing power rests with India’s, China’s and Brazil’s emerging middle class, while the 2 billion people below $2 a day, especially those in Sub-Saharan Africa, are marginalised in this debate. Data for consumer prices confirms that the true challenge is to serve the latter group, those that are completely cut off from the global marketplace. This paper concludes that big business have a central role in shaping and expanding these future markets by generating employment and incomes.

The author notes some difficulties in the analysis of potential effects on poverty:

  • the poverty penalty (i.e. poor consumers pay more for certain goods) is linked to the fact that poor people often have to buy smaller quantities. This reduces the expected benefits from certain marketing techniques such as single serving sachets
  • replacing long-established goods and practices by newly introduced consumer brands may potentially be hazardous as the poor often lack proper information
  • investment through multinationals might have a positive multiplier effect and increase demand for goods and services to the benefit of domestic firms. However, the author argues that markets are generally not undercover. Therefore, entry by multinationals may hurt small businesses and could threaten local jobs and incomes.

The attractiveness of the Bottom of the Pyramid for big businesses depends on the size of the market and the likelihood of profit. Using new data, the author points out that:

  • customers with incomes between $5-8 per day are already relatively well catered for by big businesses, while the poorest are likely to remain underserved
  • reductions in firms' cost structures alone are not likely to bridge the gap between the poor's monthly income and the prices of typical consumer products
  • the success of big business thus requires supplementary strategies to expand consumer demand by generating employment and incomes