World Dialogue on Regulation

The World Resources Institute has published the report The Next 4 Billion: Market Size and Business Strategy at the Base of the Pyramid. The report measures and predicts business opportunities at the base of the economic pyramid markets and proposes guidelines for market-based and sustainable poverty reduction approaches.

Four billion low-income people, a majority of the world’s population, constitute the base of the economic pyramid. The report The Next 4 Billion: Market Size and Business Strategy at the Base of the Pyramid provides new empirical measures of their behavior as consumers and their aggregate purchasing power. The authors suggest significant opportunities for market-based approaches to better meet their needs, increase their productivity and incomes, and empower their entry into the formal economy.

The four billion people at the base of the economic pyramid (BOP)—all those with incomes below $3,000 in local purchasing power—live in relative poverty. Their incomes in current U.S. dollars are less than $3.35 a day in Brazil, $2.11 in China, $1.89 in Ghana, and $1.56 in India. Yet together they have substantial purchasing power: the BOP constitutes a $5 trillion global consumer market.

The wealthier mid-market population segment, the 1.4 billion people with per capita incomes between $3,000 and $20,000, represents a $12.5 trillion market globally. This market is largely urban, already relatively well served, and extremely competitive.

In contrast, BOP markets are often rural—especially in rapidly growing Asia—very poorly served, dominated by the informal economy, and, as a result, relatively inefficient and uncompetitive. Yet these markets represent a substantial share of the world’s population. Data from national household surveys in 110 countries show that the BOP makes up 72% of the 5,575 million people recorded by the surveys and an overwhelming majority of the population in Africa, Asia, Eastern Europe, and Latin America and the Caribbean—home to nearly all the BOP.

Analysis of the survey data—the latest available on incomes, expenditures, and access to services—shows marked differences across countries in the composition of these BOP markets. Some, like Nigeria’s, are concentrated in the lowest income segments of the BOP; others, like those in Ukraine, are concentrated in the upper income segments. Regional differences are also apparent. Rural areas dominate most BOP markets in Africa and Asia; urban areas dominate most in Eastern Europe and Latin America.

Striking patterns also emerge in spending. Not surprisingly, food dominates BOP household budgets. As incomes rise, however, the share spent on food declines, while the share for housing remains relatively constant—and the shares for transportation and telecommunications grow rapidly.

That these substantial markets remain under-served is to the detriment of BOP households. Business is also missing out. But there is now enough information about these markets, and enough experience with viable business strategies, to justify far closer business attention to the opportunities they represent. Market-based approaches also warrant far more attention in the development community, for the potential benefits they offer in bringing more of the BOP into the formal economy and in improving the delivery of essential services to this large population segment.

According to the authors of the report, business interest in BOP markets is rising. Multinational companies have been pioneering in food and consumer products. Large national companies have proved to be among the most innovative in meeting the needs of BOP consumers and producers, especially in such sectors as housing, agriculture, consumer goods, and financial services. And small start-ups and social entrepreneurs focusing on BOP markets are rapidly growing in number. But perhaps the strongest and most dramatic BOP success story is mobile telephony.

Between 2000 and 2005 the number of mobile subscribers in developing countries grew more than fivefold—to nearly 1.4 billion. Growth was rapid in all regions, but fastest in sub-Saharan Africa—Nigeria’s subscriber base grew from 370,000 to 16.8 million in just four years according to the figures of the Worldbank. Household surveys confirm substantial and growing mobile phone use in the BOP population, which has clearly benefited from the access mobile phones provide to jobs, to medical care, to market prices, to family members working away from home and the remittances they can send, and, increasingly, to financial services.

The regulatory environment in many countries in the developing world pose huge challenges for the business-based approach that is promoted in the report. Micro and small businesses especially face disadvantages. Reforms are therefore needed. Evidence from El Salvador and China proves that reforms that shorten the time for registration and limits the amounts needed for investment capital lead to a huge increase of the number of startup businesses.

The report is structured along the lines of the market sectors. In nine chapters the report discusses the challenges and potential of eight different markets. In chapter three the ICT market is examined. It is interesting to see that the report confirms that the potential impact of ICT on the BOP is huge. As the researchers note: “It may seem obvious, but those in the BOP cannot join the global economy, and benefit from it, until they are connected to it.” (p. 42). Continuing rapid growth in the ICT sector in developing countries suggests ample untapped demand.

Especially in Africa, growth is expected in the rural areas that are now hardly connected. At the same time it is important to note that the majority of the spending in the sector is on phone services. The spending on ICT equipment (television sets, music players, computers phones and cameras) is smaller. However, with an increase of the spending power, a significant increase in ICT spending per household is expected in Asia and Africa. In order to promote the further penetration of ICT in the BOP market, the development of appropriate technology plays a key role. Low investment costs for equipment that opens up the rural market potential is an important future strategy.  

Throughout the report the authors try to identify strategies that prove to be a success in the BOP market. Successful enterprises use four broad strategies that appear to be critical:

1. Focusing on the BOP with unique products, unique services, or unique technologies that are appropriate to BOP needs and that require completely re-imagining the business, often through significant investment of money and management talent.
2. Localizing value creation through franchising, through agent strategies that involve building local ecosystems of vendors or suppliers, or by treating the community as the customer, all of which usually involve substantial investment in capacity building and training.
3. Enabling access to goods or services—financially (through single-use or other packaging strategies that lower purchase barriers, prepaid or other innovative business models that achieve the same result, or financing approaches) or physically (through novel distribution strategies or deployment of low-cost technologies).
4. Unconventional partnering with governments, NGOs, or groups of multiple stake-holders to bring the necessary capabilities to the table.