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BASE OF THE PYRAMID (BOP) MARKET ENTRY

FINDING BOP OPPORTUNITIES THAT MATCH YOUR CUSTOMER RELATIONSHIP STRATEGY Duncan Duke Inter-American Development Bank June 2013


ttp://www.iadb.org The opinions expressed in this publication are those of the authors and do not necessarily reflect the views of the Inter-American Development Bank, its Board of Directors, or the countries they represent. The unauthorized commercial use of Bank documents is prohibited and may be punishable under the Bank’s policies and/or applicable laws. Copyright © Inter-American Development Bank. This paper may be reproduced for any non-commercial purpose. It may also be reproduced in any academic journal indexed by the American Economic Association’s EconLit, with previous consent by the Inter-American Development Bank (IDB), provided that the IDB is credited and that the author(s) receive no income from the publication. Corresponding author: Duncan Duke dod3@cornell.edu


INTRODUCTION The commercial potential of the world’s low-income market segments is enormous. There are more than $5 trillion dollars a year of total household income at the base of the global economic pyramid, accessible to those firms able to offer innovative goods and services to these underserved populations1. Since Prahalad & Hart coined the term “BOP” and crystallized this massive opportunity, hundreds of small and large firms have ventured into these waters2. Yet serving the BOP commercially has not been an easy endeavor. Established firms from developed countries have time and again hit brick walls when venturing into these markets. Sales do not materialize after substantial marketing efforts, revenues fail to cover break-even costs, anticipated social benefits are found lacking, and projects peter out over time instead of growing. Over the last decade, a large proportion of these BOP-focused initiatives have failed to live up to managers’ expectations. Disappointing results have been blamed on a variety of circumstances such as incomplete market knowledge, insufficient funds for effective customer education, the lack of purchasing power at the BOP, excessive regulations, or poor partnering. Yet successful cases suggest that these are not the primary factors that thwart incipient BOP ventures, the main challenge is discovering and nurturing the kind of business opportunities that match firms’ existing core capabilities. Many of the first wave of BOP-oriented ventures were too ambitious – they aimed to create brand new markets in alien environments and discovered that this required much more effort and expertise than expected. The pioneering firms ventured into unfamiliar territory for which they were unprepared. The key to increasing a company’s market entrance success is to effectively match the business opportunities to the firms’ competencies and expectations. This enables the company to efficiently innovate new business models that truly serve customers’ needs and provides the momentum required for dealing with the additional complexities of BOP markets. Good capability-to-opportunity fit also helps firms learn effectively from their failed attempts and improve their BOP market entry success rate over time.

1. See “The Next 4 Billion: Market Size and Business Strategy at the Base of the Pyramid”, 2007. World Resources Institute and International Finance Corporation. 2. C. K. Prahalad & S. Hart, “The Fortune at the Bottom of the Pyramid”, 2002. Strategy+Business.


This paper presents a framework for analyzing the structure of firms’ customer relationships and relating this to the BOP business arenas that best match their existing capability set and aspirations. Asking the right questions and choosing the entry point that best aligns their competencies with the BOP environment enables firms to increase their odds for success and shortens the business model innovation cycle. This framework is also useful to the constellation of non-business actors – such as multilateral organizations, development agencies, financial institutions, and consulting NGOs – interested in promoting and supporting new businesses that serve the BOP because they deliver quality products and services, create employment, or enable low-income producers and consumers to join the formal economy. It helps these organizations determine what kinds of initiatives are better aligned with their non-financial goals, and whether their corporate clients are truly well positioned and fully equipped to accomplish their objectives.

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THE STRUCTURE OF CUSTOMER RELATIONSHIPS Firms that deal with end consumers are often characterized as either retailers or service providers. Retailers sell physical products to their customers; service providers perform activities for their clients. In reality, companies’ offerings are often a mix of products and services. For example, while a car dealership certainly sells autos and spare parts, it also offers a variety of services such as extended warranties, repairs, and state inspections. The nature of a firm’s offering ultimately shapes its customer relationship strategy. Analyzing how a firm’s current offerings determine how it interacts with its customers enables the company to map the BOP opportunity space in an individualized way and understand how to leverage its capability sets in this context. Managers can start this analysis by examining their existing customer relationships along two dimensions: customer interaction and customer commitment. As its name implies, customer interaction reflects how customers currently interact with the company. An important element of this is the duration of the interaction, how long does it last? How much time does the customer spend in direct contact with the firm? How often do these interactions occur? Important and commonly used indicators of this are transaction frequency and transaction duration. Another element of customer interaction is the level of intermediation in the relationship. Firms whose employees interact personally and directly with customers have less intermediated relationships than those who use third parties or the Internet. Firms with high levels of customer interaction – those whose salespeople interact directly with clients on a frequent basis – have “high touch” business models. This kind of model is important in BOP environments, especially when customers need to be “educated” or demand for an offering has to be activated.

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Customer interaction Frequency & Duration

How much face-to-face time do customers have with company representatives? How often do customers meet company representatives?

Intermediation

Are elements of customer service outsourced? Can customers contact the company directly?

The second major dimension of the firm’s customer relationships that managers must analyze is the level of commitment an individual requires to become a customer. Most importantly, how many resources does the customer need to commit? In other words, how much money does the customer need to part with? And how much time must the customer invest to access the offering? An important aspect of customer commitment is the switching costs inherent in the company’s offering. How difficult is it for the customer to abandon the relationship with the company? Contracts, leases, and other instruments that legally bind a consumer to a firm increase the amount of customer commitment required. For example, when customers sign up for CEMEX’s home building materials financing program, Patrimonio Hoy, they commit to seventy weekly payments of around $20. Network effects and other customer lock-in mechanisms also play a role in determining how easy it is for a customer to switch providers or terminate the relationship.

Customer commitment Resource investment

How large and frequent are the payments? How much time does the customer have to spend on the transaction?

Switching costs

Are elements of customer service outsourced? Can customers contact the company directly?

Different combinations of customer interaction and customer commitment levels delineate specific opportunity arenas at the BOP. As seen in Figure 1, low levels of customer interaction and commitment are typical of consumable product markets whereas markets for continuous service products require high levels of both. In general terms, the BOP has typically been viewed as a consumable product market. The earliest and most famous examples of large corporations attempting to penetrate the BOP were of fast-moving consumer goods companies such as Hindustan-Lever and Procter & Gamble. Yet ever-increasing numbers of service providers are penetrating low income markets. Led by wireless communications and micro-finance firms, small and large companies offer mixtures of

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services and products to the BOP in diverse fields such as healthcare, education, entertainment, agriculture, and energy. For potential new entrants to the BOP, analyzing the customer interaction and customer commitment dimensions in conjunction provides an insightful means of identifying appropriate opportunity spaces that best fit their current capability set and strategic aspirations. Understanding a firm’s existing and desired positions within this matrix is the basis for building a coherent entry strategy – one tailored to the firm’s capabilities and operating structure. The following sections examine each of the quadrants of Figure 1 in greater detail, providing examples of firms operating under each one; detailing the complexities and challenges unique to each business arena and the core corporate capabilities required to seize opportunities in that area.

Customer commitment

Figure 1. The structure of customer relationships and BOP market arenas.

Durable products

Continuous services

Consumable products

Transactional services

Customer interaction

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CONSUMABLE PRODUCTS The lower left quadrant of the matrix – businesses with sparse customer interactions and low levels of customer commitment – is one of the most studied areas of BOP innovation. The majority of the large firms that cater to BOP end-users offer them packaged, frequently used products needed for everyday living, such as cosmetics, cleaning products, food, fuel, and clothing. These are also known as nondurable, soft, or consumable goods. Packaged foods companies such as Nestle have enormous footprints in the global BOP, as do beverage companies like Coca Cola and Anheuser-Busch InBev – one can find a cold Coke in the most remote fishing camp of Baja California or a Brahma Chopp deep within a Brazilian favela. Purchasing consumable goods does not require a large commitment on the part of customers. Transaction amounts are small and choosing among competing brands is relatively costless. In fact, many of these purchases are impulse buys. Similarly, customer interaction intensity is low; it is highly intermediated through brands and face-time with any third party representative is minimal. The main question a firm intent on entering this market must answer is the eternal market entry conundrum: Can we produce and distribute a product that has strong demand at a low enough price point? Three challenges undergird this question. First of all, demand; is there an established demand for the product category at the BOP? One of the most common mistakes made by firms attempting to enter the BOP is assuming that there will be a ready demand for their products. On paper, and in the planning and design stages, some products look like clear winners. Why wouldn’t someone want to buy a product that is inexpensive, modern, well designed, and provides so many benefits that the customer does not currently enjoy? Procter & Gamble thought that its PUR water purification sachets would be a great hit at the BOP; why, it would cost only a cent to conveniently purify a liter of water! The $20 million dollar initiative failed commercially soon after launch because there simply was no demand for the product. One of the main reasons that a product category may have weak demand is that consumers are simply unaccustomed to using or buying it. For many BOP communities, the thought of paying for drinking water is alien; why would they pay for something that they have never paid for before? If someone has never had a light to read by at night, how do they adjust to the idea that they should buy a lamp and pay for electricity? Companies intent on creating a new product category at the BOP – selling dairy products to segments that have not traditionally consumed them, for example – need to deploy or develop corporate demand-activation capabilities such as mass marketing expertise, new brand development, direct sales forces, or multi-level marketing to stimulate customer learning. Many demand creation strategies will actually require greater customer interaction intensity to help “educate” customers and create new buying habits. On the other hand, many firms assume that demand at the BOP is driven by the segment’s purchasing power. The poor can’t afford “luxuries” since their limited income is needed to cover their basic needs. Extensive research belies this notion, non-essential goods such as alcohol and tobacco

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products, mobile phones, and high-priced meat cuts have ample demand at the BOP. In Banerjee and Duflo’s3 words “It is clear that things that make life less boring are a priority for the poor.” This realization may encourage firms to search for new BOP product markets that are not necessarily tied to essential goods and services. If a firm determines that there already is demand for its product in the target low-income market, the company must focus on achieving a price-point that can tap into it while providing sufficient revenues. The core competences required are low-cost manufacturing and efficient distribution. Firms that can develop cost advantages through economies of scale, preferential tax treatment, government subsidies, or strong relationships with distributors or suppliers stand to gain increased market share. Grupo Maseca came to dominate the Mexican and then global market for tortillas by building all these capabilities simultaneously. Extant demand and a low price point are necessary but not sufficient for cracking a BOP consumable products market – firms have to get their products into customers’ hands. Distribution is often one of the most vexing problems for BOP market entrants. Firms need to decide whether existing distribution channels work for their products and are deep enough to provide the desired market penetration. If the existing channels are adequate, the firm must then ascertain whether they are sufficiently cost-efficient. In many cases, firms that already have strong demand creation and lowcost production capabilities have to invest in creating brand new distribution channels to the BOP. When Procter & Gamble decided to enter the rural Moroccan market – 7000 tiny villages with no local store – it created a five-level distribution chain that culminated in home-based mini-stores operated by individuals selected by P&G. In other cases, firms have used existing distribution channels in novel ways. For example, Big Cola expanded through Latin America with a lowest-cost product by bypassing Coke and Pepsi’s expensive corner store/eatery distribution channel and selling exclusively in large supermarkets.

3. From “Poor Economics: A Radical Rethinking of the Way to Fight Global Poverty” A. Banerjee and E. Duflo, 2011, Public Affairs, New York.

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Consumable products for BOP consumers Market challenge

Corporate capability

Creating demand

Mass marketing, customer education

Reducing price points

Low-cost manufacturing & distribution

Reaching customers

Distribution channel management or creation

Mi Tienda

Strengthening a distribution channel to the BOP Mi Tienda is a distribution company that services more than 6,000 small stores in rural central Mexico. It offers these village retailers affordable two-day delivery of individual non-perishable food and personal care products, one-week payment terms, and free merchandising and sales advice. Mi Tienda’s main capabilities are its use of economies of scale in purchasing and warehousing coupled with effective management of the distribution system itself. Its sales agents travel six or seven different routes a week, covering about 700 stores to take orders. At the end of the day, orders are preassembled in boxes for delivery drivers to take out the following day. This pull-system is the opposite of the push-system used by competing wholesalers who normally make their rounds with unordered stock. In many cases, Mi Tienda is the only delivery service available to store owners. Mi Tienda’s trainers visit each participating outlet for a week to advise on product assortment, inventory management, accounting, working capital management, and store layout. These efforts not only increase Mi Tienda’s sales, as these stores typically show a 35% increase in sales, they also support Mi Tienda’s growing understanding of each market and its demand characteristics. For example, Mi Tienda carries very few generic items as it has discovered that rural Mexican consumers are highly brand conscious, preferring to buy smaller packages of branded goods to larger packages of generic ones. As Mi Tienda grows and continues to professionalize the distribution channel to small rural stores, more consumable product manufacturers will have a ready-made distribution partner to access the Mexican BOP.

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DURABLE PRODUCTS Multinational firms that produce and commercialize durable goods – those, like household appliances, that provide utility over an extended period of time – rarely target the BOP directly, assuming that this market segment does not have the requisite buying (or saving) power. Nonetheless, there are huge markets for durable goods at the BOP. The lowliest earthen-floor huts often sport flat-screen TVs and antenna dishes; Mexican slums’ skylines are crowded with black tinacos – rooftop water tanks. Selling durable goods does not require intense and prolonged interaction with customers; once the product is bought the customer rarely contacts the firm again. But it does require a high level of customer commitment. Transactions are sizable; the customer has to save up beforehand or commit to a long-term financing scheme. For BOP customers, decisions around durable goods are even more irreversible than for their richer counterparts. If they choose poorly and the product does not perform as expected, they are unlikely to be able to get it replaced or fixed under warranty. Once they make a decision, it will probably be years before they have the opportunity and means to switch to another brand. Durable goods typically find their way to the BOP through secondary and used-goods markets because their direct distribution channels are incapable of dealing with the informality of the sector. Furniture and home appliance retail chains such as Casas Bahia in Brazil, and Elektra and Coppel in Mexico – which target lower middle class markets by offering installment plan purchases – fail to adequately penetrate low income markets. Their stores are usually located in downtown or upscale commercial areas and only serve urban customers with formal jobs and permanent addresses – requirements for offering them credit. Utility firms, which in many cases also distribute durable goods, also typically target the urban middle class. Thus, the first question a durable goods firm must ask before entering the BOP is: How can we get our product to the BOP? Firms that have attempted to provide durable goods to the BOP have had to deal with the lack of existing distribution channels. Companies such as SELCO, which sells solar power systems in the Indian BOP, and Amanco, which provides irrigation systems in Latin American low income markets, have had to spend considerable resources, effort, and time to set up their own distribution channels. When Hindustan Unilever decided to launch its first durable good in India – the “Pureit” water purifier – it first set out to build a 10,000 person direct sales force capable of educating its customers.

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Durable goods also face the obstacle of limited purchasing power at the BOP; target customers simply do not have the cash on hand to buy them outright. Most durable goods businesses for the BOP have to include a financing component that enables customers to pay for the product over time. A particular consideration around financing is the informality of the BOP. One way of parsing the BOP, rather than in terms of income, is in terms of formality, or access to services such as banking. Large efforts are underway across the developing world to “bank the unbanked”, but the majority of the BOP remains unbanked and operates in the informal sector – by some estimates, 50 to 75% of all non-agriculture employment occurs in the informal sector4. Firms selling durable goods must recognize that most financing instruments are designed to function within the formal sector; with customers that have legal identification, can provide collateral, have a stable and easily identifiable residence, can prove the existence of a steady income, etc. Many of these conditions do not hold in low income communities. Thus, serving the BOP usually requires innovation in the financing components of the business model in order to effectively bridge the formal and informal sectors. There are numerous instruments, tools, and partnering institutions to do this with: from micro-credits to leases, and from on-the-ground micro-finance institutions to commercial banks. To the extent that firms use third parties to handle financing and collection, they are also outsourcing the high touch component of the customer relationship. If a firm is unable to secure external financing for its customers, it needs to develop a working capital model that can support large capital expenditures, as it will have to finance the durable goods itself. Some firms, like the aforementioned Elektra and Casas Bahia prefer to keep the financing and collection in-house, the increased interaction with customers enables them to generate repeat buys and to profit from the financing component of the offering. The third major challenge for durable goods at the BOP is its deficient physical, institutional, and commercial infrastructure. To function correctly, durable goods often require complementary services and infrastructure. For example, the market for cars requires the availability of roads, traffic laws, garages and gas stations. Refrigerators require a steady supply of electricity. One way firms deal with the lack of supporting services is to redesign the product to function without them. Thus, water purifiers targeted to the BOP are often gravity-fed to avoid the need for electricity.

4. See Alter Chen, 2007 “Rethinking the Informal Economy: Linkages with the Formal Economy and the Formal Regulatory Environment,” DESA Working Paper #46.

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In low-infrastructure environments, durable goods are often subject to extreme conditions and heavy use for which they weren’t originally designed. It is very common for trucks in developing countries to be overloaded at more than twice their rated cargo capacity. Careful design for the BOP provides the requisite ruggedness for heavy and unconventional use. Lastly, durable goods often require more support than simply reaching a sales agreement; they need to be delivered, installed, serviced, and repaired. Simplified products which are easy to repair and use standard spare parts enable the flourishing of supportive thirdparty infrastructure. The original manufacturer then does not have to provide these additional services, and when an ecosystem grows around a firm’s product, network effects kick in and stimulate further demand. The original Volkswagen Beetle, for example, was so well designed for ruggedness and ease of repair that it created a third-party support infrastructure in Mexico large enough to sustain its local production for more than twenty years after it was discontinued in the rest of the world.

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Durable products for BOP consumers Market challenge

Corporate capability

Reaching customers

Distribution channel development, push marketing

Limited purchasing capacity & informality of the sector

Strong partnerships with finance institutions, working capital models for large CAPEX

Deficient infrastructure

Product design capabilities (ruggedness, reliability, ease of repair)

Covelo Foundation

Introducing a novel durable good to the BOP Covelo Foundation is Honduras’ largest financer of microfinance institutions; it also provides them advisory services and spearheads the design of innovative financial products for the poor. Its latest initiative is a dedicated renewable energy line of credit for microfinance institutions in Honduras and El Salvador. These micro-credits will be offered by the MFIs to BOP rural clients to buy photovoltaic power systems. Using one or several solar panels, these systems can power appliances such as light bulbs and radios; the larger ones can even power water pumps and refrigerators. Besides the novel durable product tied to the credit, the offering is unique to the industry in that the photovoltaic systems themselves are used as collateral. The photovoltaic systems have 15 to 20 year life spans, but have to be correctly installed and maintained because if the systems break down, the borrowers have no incentive to continue paying the loans. Covelo Foundation’s two main challenges to successfully launching the program to provide this new durable product to BOP customers are: a) To cost-effectively train and sustain a direct sales force, considering that demand for the product has to be created. Covelo Foundation plans to use existing loan officers from partner MFIs. b) To establish a network of photovoltaic system providers that can install and reliably service the systems in remote areas at acceptable price points.

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TRANSACTIONAL SERVICES Overall, fewer established companies serve the BOP with offerings that require a high level of customer interaction. These are high-touch business models in which there is considerable personal contact with customers, but which require little commitment on the customer’s part. Customers can easily select competitors or forgo a purchase, and transactions are relatively small. These offerings are not spot transactions; they are provided over a period of time, with payment occurring before or after they are offered. The disjuncture between the time of payment and the provision of the service or product requires one of two conditions: a trusting relationship between provider and client, or that the company controls a space in which the offering is provided. The “service” economy at the BOP falls mostly into the second category; it is composed of small independent establishments that serve their customers within the confines of their restaurants, hairdressing salons, and day care centers. Besides hiring or supporting trusted housekeepers, rarely are services provided within homes. BOP service providers who cannot afford their own space often offer their services in public areas. Since they cannot control their clients during service provision, they are limited to providing brief and inexpensive offerings – usually dependent on the use of task-specific portable equipment such as shoe polishing or knife sharpening gear. In light of the existing service economy at the BOP, the first question aspirant BOP entrants with high customer relationship intensity business models need to answer is: Do we need to control a physical space to provide our offerings? The relative lack of appropriate real estate in low-income communities is often the main barrier to setting up standardized service centers near customers’ homes. In slums and similar areas, suitable locales available to rent or buy are few and far in between. Gaining formal and uncontested ownership of lots to build on is difficult, very time-consuming, and ultimately risky. In areas where land tenure is not fully formalized, established organizations are much more likely to be the victims of opportunistic litigation of title claims. In India, for example, about 90% of land titles are unclear as to who really owns the land5. Moreover, the additional costs of owning, renovating, and maintaining a service center to meet a firm’s established standards of safety, hygiene, and brand appeal usually increase the costs too far above those of local competitors that do not maintain the same standards.

5. See William Lewis, 2004, “The Power of Productivity” University of Chicago Press.

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Firms that need to control a space or deploy task-specific equipment to offer their service have tried several models for doing so at the BOP. Many firms have designed mobile labs or service points. For example, Essilor International – which dominates the global ophthalmic lens industry – experimented with offering ophthalmology services to the rural Indian BOP population through refraction vans which visited villages to provide eye care. As with many similar ventures, Essilor’s project has been unable to recoup its costs and barely covers its operating costs; each stocked van costs approximately $50,000 but averages less than $200 in revenue per day.6 Mobile solutions usually look good on paper, but often have to reach unfeasible volumes to reach breakeven. Another option is to use a franchise model in which the parent company relegates the task of renting, renovating, or acquiring suitable spaces to the franchisees. The main drawback to this approach is achieving the desired penetration at the BOP, considering the relative dearth of potential franchisees with the requisite capabilities in the desired locations. A third option is to control fewer premises in more centralized locations and have customers travel to them. One of the most successful examples of this model is Aravind Eye Hospitals which operates seven hospitals with a combined total of 4000 beds yet handles more than 300,000 surgeries a year, 75% of them free or at steeply subsidized prices for the poor. To feed customers to its hospitals, Aravind has developed an extensive network of partners that do community outreach and organize “eye camps” in rural areas. Despite these options, most firms sacrifice BOP penetration in favor of certainty in space control. The most common strategy for moving down-market with more high-intensity customer interaction business models is to partner with retailers that already have a presence and formally control a space. When Farmacias Similares – Mexico’s largest pharmacy chain, which focuses primarily on low income consumers – decided to diversify into medical consultations, it set up a sister organization to which it rents doctors’ office space right alongside its more than 2,000 drugstores.

6. See Garrette & Karnani, 2010, “Challenges in Marketing Socially Useful Goods to the Poor”, California Management Review. Vol. 52(4).

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Beyond controlling a space, a major challenge for offering services at the BOP is the added difficulty of standardizing the offering across locations. In developed countries, the offering of standardized services by a single firm across different locations and geographies is a relatively recent innovation, famously spearheaded by Ray Kroc at McDonalds during the late 1950s. Efficient standardization relies to a certain extent on the effects of soft and hard homogenizing infrastructure. Stable legal structures, paved roads, and standardized electrical outlets all help to equalize an offering across different locations and thus accede to the requisite economies of scale. As McDonalds and similar firms have expanded across the globe, they have landed in pockets of relative affluence where the infrastructure is most similar to that of developed countries. Low-income communities, on the other hand, are known primarily for their lack of this homogenizing infrastructure – access is difficult, property rights are hazy, and cultural habits are not in sync with the more regularized lifestyle patterns of industrialized societies. One way to achieve standardization despite these barriers is to simplify and streamline the offering to its most basic and value-adding essentials. This not only reduces the number of elements that need to be standardized, it also enables firms to ascend learning curves at a faster pace, thus gaining almost increasing returns to standardization. Again, Aravind Eye Hospitals are a great example of this, their focus on only a few kinds of operations enables a single doctor to perform six to eight procedures per hour, an average of about 2,000 operations each year! Process streamlining also helps overcome the third major barrier to high touch business models at the BOP, which is their relatively high cost. The larger labor component of the offering puts limits on the economies of scale that can be achieved – Aravind’s surgeons can’t move any faster! The main solution to this constraint – besides paying lower wages to employees – is to design the offering in such a way that the face-to-face time with customers is used to maximum advantage and only adds value to the transaction. One way to do this is to modularize the process so that as many parts of it can be performed in central and more efficient facilities and its customer-facing component can be bundled with other goods and services.

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Transactional services for BOP consumers Market challenge

Corporate capability

Lack of appropriate spaces

Design of cost effective mobile service points, franchise development, partnering with retailers

Standardization

Process streamlining

Cost efficiency

Process modularization & redesign

VisionSpring

Developing a new BOP service model VisionSpring is a nonprofit organization that provides eye-care services and sells affordable eyeglasses to low-income populations in Asia, Latin America, and Africa through a micro-franchise model. The model is based on a small kit called “Business in a Bag”; the kit has all the products and materials that the “Vision Entrepreneurs” need for marketing and selling eyeglasses. After receiving training in sales and marketing, Vision Entrepreneurs then travel to their customers’ homes and villages where they can provide the eye care services directly. VisionSpring launched operations in El Salvador in 2004. While effectively reaching underserved communities, the initiative struggled to grow, mainly because the Vision Entrepreneurs could not provide in-depth eye care services in the field, so their work was limited to simple vision assessments. In 2009, VisionSpring decided to complement the micro-franchise model with physical stores. In 2010, it opened five stores in El Salvador. Besides serving as sales points for urban customers, the stores supported the work of Vision Entrepreneurs in hard-to-reach communities and offered other services to customers – such as in-depth eyesight consultations – that entrepreneurs were unable to provide in the field. Although 80% of sales still occur via roving Vision Entrepreneurs, this “hub-and-spoke” model has allowed VisionSpring to more than quintuple its revenue in two years. Besides the expected benefits of being able to offer more comprehensive services and access new customer bases, the stores have had other benefits, such as increasing the legitimacy of the Vision Entrepreneurs. VisionSpring’s “hub-and-spoke” has validated itself as a unique solution to the need to have a space to provide services while also engaging with BOP clients in their own communities and homes.

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CONTINUOUS SERVICES Development and institutional economists often argue that undeveloped countries – and the BOP in general – have been unable to progress because they have weak bedrock institutions such as the rule of law, property rights, and free markets. At the core of these developmentpromoting institutions are relationships of trust among members of society. Do people keep their promises? Do they honor their debts? Do they habitually take advantage of strangers? It is still very unclear which combinations of social conditions and cultural norms lead to the rise and spread of trust in society, but the fact of the matter is that BOP markets remain for the most part low-trust environments. Strangers are viewed suspiciously and people do not fully trust those with whom they do not have long-established relationships. High customer commitment business models generally require an increased level of trust between firms and their customers. Customers need to have greater levels of trust the greater the commitment they have to make to a company or a transaction – they don’t want that expensive good they have just purchased to fall apart as soon as they buy it. They don’t want their life-savings to disappear when the newest financial service provider closes its local office. Companies, on the other hand, also need their customers to live up to large or sustained commitments; repossessing the unpaid kitchen appliance is not a profitable operation for the firm. High-touch business models naturally help build levels of customer-firm trust. Familiarity might breed contempt, but first it helps build trust. The main challenge for high-touch business models is their relatively high cost structures. Their offerings are composed mostly of labor, rather than physical products, and labor is not as amenable to the economies of scale available in manufacturing, so the cost-per-transaction of businesses that depend on intense face-to-face customer relationship management do not descend much with time. To avoid the cost inherent in most high customer contact business models, the first question a firm looking to offer a high commitment service to BOP consumers is: Can we reduce the level of trust needed to establish a profitable relationship? Or in other words, can the firm reduce the level of customer interactions needed to either acquire the customer or provide the service?

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A few successful cases, such as the mobile phone industry, have penetrated the BOP by doing just this. Pay-as-you-go plans coupled to pre-paid phone cards were the two innovations that allowed the industry to reduce the required level of trust while maintaining profitability per customer interaction. In this model, firms do not have to trust their BOP customers at all – customers have to pay up front for services to be rendered in the future. BOP consumers are willing to do this because they truly value the service and it has been structured so that their level of initial commitment is relatively low – they don’t have to sign contracts nor spend more than the value of a pre-paid phone card. The underlying mechanism that has allowed telecommunication firms to offer continuous services to BOP consumers is digitalization. Harnessing the technological innovations that have stemmed from the digital revolution – everything from affordable telecommunications to big data – enables firms to offer products and services with very low or almost non-existent marginal costs. While initial investment in cell towers, switching stations, and bandwidth may be very large, the cost of offering cell phone service to each additional client is very low. Once costs have been recouped with a high-paying customer segment – such as business customers – the firm can offer much more affordable services to lower income segments. Incorporating digital technologies into an offering also helps to “de-skill” or focus its labor component. One of the reasons for the high cost structure of some services is the need for highly trained, and thus high-cost customer-facing employees. This affects all kinds of industries such as healthcare, where doctors tend to be very expensive, and financial services, which require certified accountants and advisors. In developed countries, digital and algorithmic capabilities are gradually being brought to bear in these industries. For example, Intuit has become one of the major conduits for tax returns in the US by providing consumers with the means to file their taxes on their own through its TurboTax software and webpage. While disruptive firms in developed countries are endeavoring to disintermediate growing numbers of mature industries, the challenges are greater at the BOP. The main reason for this is that most BOP customers do not have ready access to the Internet – the primary medium for leveraging the digital revolution.

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This does not mean that the Internet and exponentially growing computing power cannot be used to reduce the costs of the labor components of firms’ offerings, it can be done at a different level in the value chain. Instead of full disintermediation, BOP-focused firms can offload the most technical components of their service to algorithms, enabling the customer-facing employees to focus on relationship building. This lowers costs since it’s the technical skills of specialists that increase cost the most. Prime examples of this kind of digital technology leverage are the algorithms used for reviewing creditworthiness; these are much more robust than individuals making the decision, and can be done on site by an employee with lower-level financial skills. In many cases, sophisticated algorithms can be captured in simple checklists, rules of thumb, and paper-based scoring systems. The other important example of large firms profitably and sustainably offering continuous services to the BOP is that of microfinance. Not all micro-finance institutions (MFIs) are large, nor do they all operate using the same business model, but the Grameen Bank serves as an archetypal example. Contrary to the mobile phone industry, the microfinance industry strives to resolve the trust issue rather than work around it. In fact, Grameen Bank has developed its business model almost entirely around trusting relationships with its customers. Its model’s unique elements – such as the lack of collaterals and targeting loans to start-ups – is the epitome of building off of trust. To develop this trust, Grameen had to create a unique customer acquisition model built on a low-wage yet highly committed direct sales force. To service 6.5 million borrowers, Grameen had more than 22,000 employees in more than 2,500 offices in 2011. Furthermore, it took more than 30 years to build this high-trust customer base. Building trusting relationships as a basis for a BOP-oriented business requires an entirely different corporate capability set, operational philosophy, investment model, and time horizon compared to low-trust business models. MFIs have invested enormous amounts of time, money and effort to develop these relationships – in many cases operating unprofitably for decades. Although expensive to develop, these grassroots relationships form fundamental platforms for achieving enduring development impacts and orchestrating social change. Grameen Bank’s loyal customer-owner base is its main asset for deploying other social businesses such as Grameen Telecom. BRAC – the world’s largest non-governmental development institution – also depends on the trusting relationships it has developed with its beneficiaries for launching for-profit or business-based programs such as its volunteer/entrepreneur program “Shasthya Shebikas.”

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As the microfinance movement has matured and spread across the globe, increasing numbers of firms have attempted to adopt elements of its core business model. The main lesson they have learnt is the need for large direct sales forces. Many manufacturing and retail firms have pulled back from their BOP initiatives once they realize the required size of the sales force and recognize that recruiting and managing such sales forces is not one of their strengths. Many others have looked to partner with organizations that can provide ready-made sales forces. The main challenge for these arrangements is maintaining a motivated and well-trained sales force in the field – for-hire sales people will gravitate to the most lucrative and low-effort opportunities, not the ones that require the most customer interaction. A second lesson acquired from organizations with direct sales business models is the design of models that off-load much of the customer interaction to unpaid or commission-based personnel. Microfinance’s peer lending model deposits much of the customer interaction burden on the lenders themselves, who educate, monitor and support each other. Another mechanism for doing this is by recruiting top customers to become company representatives or ambassadors.

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Continuous services for BOP consumers Market challenge

Capacidades de la Empresa

Substituting for trust

Digitalizing offerings, developing cross-subsidized business models, algorithm design & fine-tuning

Building trust

Direct sales force training & management, designing social support structures

CEMEX

Stimulating collective consumer action CEMEX is a multinational cement company based in Mexico with a history of devising creative business models to serve BOP customers. In the 1990s, it launched “Patrimonio Hoy”, a program through which 300,000 low-income households have improved their homes in stages through a system of microloans. CEMEX is in the process of testing and scaling another BOP-focused initiative called “Mejora tu Calle” to mobilize both public and private funds to pave streets in lowincome neighborhoods. In this program, city residents are receiving individual microloans that are pooled to finance a portion of the cost of street pavement for their neighborhood. Municipalities will contribute the balance of the cost. The success of this program rests on CEMEX’s ability to generate a climate of trust among its customers, as well as with local governments. Each household has to trust that all its neighbors will make each of the 70 weekly payments, that the municipal government will honor its promise to pay the other half, and that CEMEX will manage the program honestly until its completion. This is a prickly collective action conundrum, how can the free rider problem be resolved? CEMEX’s main tool for building trust with its customers is its well-trained and managed direct sales force. The company built its direct sales force management capability with the Patrimonio Hoy program and is leveraging it for Mejora tu Calle. The sales force – consisting mainly of women known as “promotoras” – markets the loans and collects the payments; CEMEX manages the collections and client base using its well-developed operational management systems.

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CONCLUSION A great number of firms across the globe have ventured into the BOP. A few have been successful, but many have abandoned their initial efforts, with a bittersweet aftertaste in their mouths. Their main realization is that creating businesses that serve the BOP in beneficial ways is much harder than they thought it would be. This is coupled to the recognition that their ideas about what would work at the BOP were generally wrong and that their existing capability sets were not what was required. After many corporate efforts, we now have a better understanding of the particular complexities and obstacles firms will find at the BOP, as well as numerous successful case studies. By taking a hard look at what they would like to accomplish, and the capabilities that they can bring to bear, managers are now in a better position to make more informed decisions about how to enter the BOP. Considering the kind of offerings and customer relationships they currently have, and the ones they would like to develop at the BOP, they can determine whether they have the necessary skillset, knowhow and resources. In most cases they will need to acquire fresh resources, build fresh partnerships, and develop new capabilities. But they don’t have to reinvent the wheel; there are now many organizations with extensive experience in BOP business development whose mission is to support firms to enter this space. This support comes in many flavors, from financing, to brokering, and providing advisory services. For example, many firms do not have the financial and operational horizons to effectively exploit long-term opportunities at the BOP that require significant up-front investment and managerial commitment. Multilateral and financial organizations have programs specifically designed to help firms over these hurdles, ranging from bespoke “patient capital� financing and custom-made BOP immersion workshops designed to get upper-management on board to specialized market intelligence and strategic consulting services. Other organizations help companies deal with uncertain regulatory frameworks, internal strategic alignment, and finding suitable local partners. Newer BOP entrants can and should leverage this accumulated expertise.

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Overall, the greater the number of firms that serve the BOP, the greater its overall development can be. Not only does increased commercial activity provide greater consumer surplus, it also serves as a mechanism for fostering the “sticky� institutions that support development. Economic history shows that it is very difficult, if not impossible, to establish these institutions and behavioral norms in a top-down fashion, but that they instead tend to develop in a grassroots manner. Engaging the BOP commercially is at the end of the day, a grassroots effort, it is about serving the majority. Thus, this is a great opportunity for spreading development-promoting practices and creating new ones.

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Opportunities for the Majority 1300 New York Avenue NW Washington, DC 20577 USA +1. 202.623.1819


BOP Market Entry Duncan Duke June 2013