Building New Marketplaces at the Bottom of the Pyramid
In 2004, the late CK Prahalad, an influential management professor and author, published The Fortune at the Bottom of the Pyramid, a book that urged companies to use a new lens to view the poor. Prahalad advocated for envisioning those at the bottom of the economic pyramid as producers and consumers of products, rather than merely as philanthropic beneficiaries.
Ten years later, several large companies have adopted Prahalad’s ideas and, in the process, have demonstrated that serving the “base of the pyramid” consumer can make good business sense. I analyzed several of these “base of the pyramid” business models — what we call “Building a Marketplace” — in Model Behavior: 20 Business Model Innovations for Sustainability, a report that I co-wrote and released earlier this year.
In the report, I showed that when companies deploy this model, they build new markets for their products in innovative and socially responsible ways. Among other things, this can include delivering social programs, adapting to local markets and bundling with other services like microfinance and technical assistance.
Improving healthcare in India
The pharmaceutical company Novartis implemented the building a marketplace model through its Arogya Parivar initiative, a for-profit effort to improve health in poor, rural communities in India without access to affordable healthcare.
Using a “1 plus 1 education” strategy, Arogya Parivar employs health educators to instruct villagers on a variety of health topics, thereby creating greater confidence in medicine. An accompanying supervisor, the “plus one”, educates doctors, service providers and pharmacies, and assesses an area’s needs.
Rather than solely focusing on selling products to a market, Novartis has taken on the challenge of empowering entire communities by educating potential customers – along with those who assess health and provide medicine – about their community health needs. To ensure the program’s success, Novartis has altered its product pricing structure, making medications available in small packs at affordable prices. In most cases, the cost doesn’t exceed $1.25 a week.
Arogya Parivar started in 2007 as a pilot program in South India. Since then, it has spread to ten Indian states and now reaches more than 40 million people. Novartis reports that the program broke even within 30 months. Recently, the company expanded it to Kenya and Vietnam, and plan to open in Indonesia.
The road to scale has not been easy, and Novartis has had to invest in an entirely new business ecosystem. However, by doing so, the company aims to earn trust, brand allegiance and revenue from a new group of consumers who might have increased spending power in the future.
Microfinance in Mexico
On the other side of the world in Mexico, Cemex, a company in an entirely different industry, has taken a similar approach to building a new marketplace. Over 100 years old, the company is one of the world’s largest building materials suppliers and cement producers. Sixteen years ago, it established the Patrimonio Hoy program, which makes building materials like cement, concrete blocks and steel available to low-income urban and peri-urban communities at market rates.
Although its prices are often on par, or slightly higher, than those of its competitors, Patrimonio Hoy offers greater value. Through the program, customers are able to access microfinance loans that allow them to pay for the products over time. Patrimonio Hoy also offers technical assistance and architectural guidance for customers, nearly all of whom construct their own homes.
Patrimonio Hoy doesn’t just sell to communities; it also works within their existing social structures. Key to the success of the model is its network of community-based promoters, usually women, who tell friends and family members about the company and its program. Promoters are rewarded on a commission basis for every customer they bring in.
Through Patrimonio Hoy, Cemex has supplied affordable building materials and services, along with more than $135m in microcredit, to finance the construction of new homes for 420,000 families. The program has had an outsize impact in some communities, creating new jobs for local masons, increasing property values, and enabling the establishment of home-based businesses.
Selling insurance via mobile phones in Zambia
MicroEnsure, a global insurance provider, is building marketplaces in a slightly different way, leaning on local partners to secure customers and market its products. Working in emerging markets, in which at least 95% of the population is uninsured, MicroEnsure faces an uphill battle: Customers are reticent to buy a product that they might need in three years.
Rather than selling insurance directly to customers, MicroEnsure handles the product design, technology platform and call center for its products, but works with local insurance providers to shoulder the risk. It also collaborates with mobile phone service providers, who have established relationships and brand recognition, to market its products. The mobile providers offer insurance to existing customers for free upfront for six months, and then invite them to pay a small fee, about $1 per month, to continue their coverage. The mobile providers are willing to pay the cost of the premium to MicroEnsure because the insurance makes mobile customers less likely to switch providers and more likely to increase the amount they spend.
Together, with local partners, MicroEnsure is building an entirely new insurance marketplace. The model appears to be working: MicroEnsure currently serves seven million customers around the world and is growing monthly. Earlier this year, the company entered Zambia, where previously only 1% of the population was insured. After a month, 17% of the population was insured.
Building a successful, scalable marketplace is a long-term business plan and one that is not without challenges. Novartis, for example, must keep the greater good of the community in mind through intensive education initiatives rather than just marketing and selling, per business as usual. Cemex team members have taken up residence in villages to truly understand the communities they are trying to reach.
While building a marketplace has its challenges, it’s a smart entry point for a company that wants to establish a new customer base, especially as more people are lifted out of poverty and into the middle class around the world.
This article was originally published in Guardian Sustainable Business. It is the fourth in a series of posts by SustainAbility about business model innovations that accelerate social and environmental impact.
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