Margin Boosting Solutions @ BoP

What connects Casas Bahia, Patrimonio Hoy, Aravind Eye Hospital, Jaipur rugs, eChoupal and Project Shakti? The answer - all of the aforementioned organizations or initiatives feature in the book "Fortune at the Bottom of the Pyramid". Using the lessons learnt from these very endeavors, Prahlad proposed the marketing at the BoP by adopting a low-price, low-margin, high-volume model. Majority of these initiatives begun well before Prahlad published his findings. Post 2004, determined to tap into the billion dollar BoP industry [and hopefully to do good by doing well], various multinationals tried their luck at serving those at the BoP.

While it's too soon to comment on the validity of the model based on the success or failure of a handful of initiatives, it has been recently suggested by Erik Simanis, Managing Director of Market Creation Strategies at the Center for Sustainable Global Enterprise at Cornell University, in a HBR article [subscription required] that this model calls for an impractically high target market penetration rate. Given his credentials, I thought of deep diving into his suggestions.

The Flaw:
Simanis points out that not only is the cost structure of such a model too restricting but also that a venture might end-up putting in lot of efforts to create product awareness. These issues coupled with operational and distribution challenges present a herculean obstacle for the companies to surmount. Star performers enlisted in Prahlad's work, like Hindustan Unilever and CEMEX, boast of a well established distribution network and brand identity, a platform not all firms can count upon.

The Workaround:
Simanis explores the possibility of raising the gross margin of the product. This could be achieved by decreasing the variable costs on one hand, and increasing the price point for a single transaction on the other. His solution tackles two other issues - first, the increase in marginal costs accompanying scaling efforts at village level and second, getting the consumers to ease into adopting to and accepting the product.

The Solution:

1. Localize and Bundle Base Products:
Simanis asserts that businesses could save on labor costs by decentralizing the final step in processing of the product prior to its sale. Additionally, bundling the core offering with secondary products can enhance a business’s offering mix by creating differentiation while minimizing costs.

It seems that Simanis has taken a leaf out of traditional business models. Husk Power Systems sets up decentralized power plants, with the capacity of  catering to the needs of 400 households, which serves a luster of villages. Moreover, it trains local youth at Husk Power University to manage the daily operation of these plants. Although it sounds practical, one needs to realize that the feasibility of of carrying out the final processing in local environment depends on two unknowns - the nature of the product/ service and the skill set of the local people. Bundling of products is already being extensively used in the banking industry, FMCG sector and few low-cost models. As long as the additional features aren't unnecessary luxuries, the trend is bound to pick up in the coming years.

2. Enabling Services:
Creating a platform for the consumers to interact with the service providers could come in handy for marketing products the usage of which doesn't come naturally to consumers at the BoP. While the consumers could gain insights into extracting maximum value out of their investment, the service providers could leverage the program to better understand the consumer behavior towards their product.

No doubt that such a structure will help improve consumer awareness and brand loyalty. However, I fail to see this being implemented in villages. The service provided by CEMEX, mention in the article, is restricted to urban and peri-urban areas. e-Choupal and Project Shakti, which are based on similar consumer engagement models for rural markets, are both supported by multi-billion corporations. I  don't think these services, apart from in high-density urban markets, will drastically alter the marginal cost - scalability equation.

3. Cultivate customer peer groups
The concept of peer groups is not new to the BoP. Simanis argues in favor of establishing product-specific peer groups, thereby capitalizing on the potential of the members to "help one another adopt new behaviors and mind-sets that makes the product more beneficial".

Microcredit is largely based on joint liability model, wherein the group pressure ensures the repayment rate. Owing to the nature of the product offered, micro-credit organizations have an extended contact with such groups and can afford to send someone to  monitor these meetings. This might not be the case with all products. Nonetheless, having a common platform for exhibition of potentially useful products could reduce costs associated borne by a single business.


Final Thoughts:

Although the solutions enlisted by Simanis have already been tried out in the past, it would be interesting to see how the three might interact. However, at some level, I feel that, in general, some of the suggestions related to BoP-based-models fail to take into account the fact soon we might have a range of products being marketed at the BoP. Could we practically have peer groups for all these products? Can technology overcome the need to offer high-touch customer services? Could we design products which customers can readily accept? I don't think manufacturers, upon hitting an apt price point, had a tough time selling TVs and cell-phones at the BoP. And lastly, could companies producing different products for the same target market combine their efforts to bring down costs?