Tapping BOP

Tapping BOP, profit or loss?

The Bottom of Pyramid (BOP) proposition says that, large companies can make a fortune by tapping the BOP i.e., poor people, by selling to them products and services that these large companies provide and simultaneously help eradicate poverty.

The BOP proposition according to C.K Prahalad can be summarized as follows,

• · There is much untapped purchasing power at the bottom of the pyramid. Large companies can make significant profits by selling to the poor.
• · By selling to the poor, these companies can bring prosperity to the poor, and thus can help eradicate poverty.
• · Large MNC’s should play the leading role in this process of selling to the poor.

Thus, Prahalad argues that selling to the poor can simultaneously be profitable and eradicate poverty.

According to the latest statistics by World Bank 2003 report, there are 2,733 million people who live on less than $2 a day. The total number of poor people in India is close to 300 million i.e., 27% of the overall population. Widespread poverty is an economic, social, political and moral problem. At this level of poverty, the basic needs of survival are met, that too just barely.

Prahalad also claims that the BOP potential market is $13 trillion at PPP. According to the data from World Bank, 2003, assuming that there are 2,733 poor people and also the average consumption of poor people is $1.25 day; this implies that a BOP market size is of $1.2 trillion at PPP. The claim made by Prahalad, I believe is way too romantic!

I feel that the market size of BOP is quite small. The costs involved in serving the markets at the bottom of pyramid can be very high. Poor people are classified as urban poor and rural poor. The concentration of urban poor is much denser as most of them live in slums. But, the concentration of rural poor is largely displaced geographically and is culturally heterogeneous. This dispersion of the rural poor increases distribution and marketing costs and makes it difficult to exploit the economies of scale. Transportation and communication infrastructure is still weak in India; this will increase the cost of doing business at the rural level. Small size of each transaction can also be a major factor resulting in higher costs.

Moreover, poor people are price sensitive and value-conscious consumers. Prahalad also assumes that, poor people often do spend on luxury goods. Given the $2 a day income, which would primarily be spent on food, clothing and other needs, I wonder how they would ever save to consume a luxury item.

To conclude, I believe that there lies less fortune at the bottom of the pyramid. The poor people find it difficult to make their ends meet day in and day out. The fortune from this market, according to me is much hyped. I do not deny the fact that there is market. There is definitely a market, but a modest one.