The bottom of the pyramid is a term describing the largest and poorest global socio-economic group. Franklin D. Roosevelt first used the bottom of the pyramid (BOP) in a 1932 public address during the Great Depression. Roosevelt noted that – when talking about the ‘forgotten man:’ “these unhappy times call for the building of plans that rest upon the forgotten, the unorganized but the indispensable units of economic power.. that build from the bottom up and not from the top down, that put their faith once more in the forgotten man at the bottom of the economic pyramid.“
Aspect
Explanation
Concept Overview
– The Bottom of the Pyramid (BoP) is a socioeconomic concept that refers to the largest, but economically poorest segment of the global population. This segment consists of individuals and households living in low-income or poverty-stricken conditions, often earning less than a few dollars per day. The BoP concept, popularized by business scholar C.K. Prahalad, emphasizes the potential market opportunity and the potential for social impact by serving this underserved population.
Key Characteristics
– Vast Population: The BoP encompasses a significant portion of the global population, estimated to be around 4 billion people, mainly in developing countries. – Low Income: Individuals within the BoP typically have limited purchasing power due to their low incomes. – Diverse Needs: Despite low incomes, the BoP has diverse needs in areas such as healthcare, education, nutrition, housing, and employment. – Entrepreneurship: BoP markets can foster entrepreneurship and innovation in developing products and services that are affordable and accessible to this segment.
Business Opportunities
– The BoP concept suggests that businesses can tap into this underserved market by developing and offering products and services that are affordable, accessible, and tailored to the unique needs and constraints of the BoP population. – Examples include low-cost healthcare solutions, affordable housing, microfinance, and clean energy solutions. Businesses can achieve financial success while making a positive social impact.
Challenges and Risks
– Operating in BoP markets comes with challenges: 1. Infrastructure: Inadequate infrastructure in many BoP regions can hinder distribution and access. 2. Cultural Sensitivity: Understanding local customs and cultures is crucial. 3. Regulatory Hurdles: Navigating complex regulatory environments can be challenging. 4. Scalability: Achieving scale and profitability while keeping prices low is a constant challenge. 5. Ethical Concerns: Businesses must operate ethically and avoid exploitation.
Triple Bottom Line
– The BoP approach aligns with the concept of the triple bottom line, emphasizing profit, people, and planet. It aims to achieve sustainable profits while improving the lives of the BoP population and addressing environmental and social challenges. The triple bottom line considers the economic, social, and environmental dimensions of business impact.
Social Impact
– Beyond profitability, the BoP approach recognizes the importance of social impact. It seeks to address issues such as poverty alleviation, improved healthcare, education, employment generation, and access to basic services. It can lead to the empowerment and upliftment of marginalized communities.
Inclusive Business Models
– Successful BoP initiatives often involve inclusive business models that engage local communities and provide opportunities for employment, training, and partnerships. Inclusive models empower individuals within the BoP to become contributors and consumers.
Global Development
– BoP strategies align with global development goals, including the United Nations’ Sustainable Development Goals (SDGs), which emphasize poverty reduction, healthcare, education, clean energy, and economic empowerment. Businesses operating in BoP markets can contribute to the achievement of these goals.
Microfinance and Social Enterprises
– Microfinance institutions and social enterprises have played a significant role in addressing BoP challenges. Microfinance provides access to financial services for the underserved, while social enterprises create innovative solutions to meet BoP needs. These entities have shown that financial sustainability and social impact can coexist.
In modern parlance, it was author CK Prahalad who re-introduced the concept in 1998 and then again in his 2004 book The Fortune at the Bottom of the Pyramid.
He and Roosevelt refer to a vast group of people numbering almost 3 billion who live on less than $2.50 a day.
A core argument of Prahalad’s book is that while extremely poor, this group represents a fast-growing market with untapped buying power.
He also noted that the companies who learn to serve these people can not only increase their profits but also help people escape abject poverty.
Examples of companies who have targeted the bottom of the pyramid
Companies that can offer high-volume, low-margin, low-price products are better suited to BOP markets.
Unilever is widely recognized as a pioneer in these markets.
Lead by a CEO with a passion for improving the world, the company generates more than half its sales from emerging markets.
A portable water purification system, Pureit, is available for sale in Latin America, Africa, and India.
Unilever also sells a range of products such as washing detergent and shampoo in small, “single-serve” sachets.
However, the success of Unilever is the exception rather than the rule. Procter & Gamble released its own water purification system in 2004, but the product was not commercially viable.
Global innovator DuPont sought to improve nutrition by selling soy-based snack food in India – but the idea was similarly abandoned after no path to profitability could be found.
How businesses can make BOP work
Consultants believe that success in BOP markets can only be achieved when a business has a focus on making a profit and not on alleviating poverty.
This does not mean that the business cannot make a profit and alleviate poverty at the same time.
Many organizations would also do well to look at Unilever as a successful case study.
Second, Unilever followed an incremental cost model by selling very small quantities of its products in poor neighborhoods.
Lastly and perhaps most importantly, Unilever sold products that BOP citizens were already familiar with.
As a result, the company did not have to spend money on generating demand or training consumers on how to use its products.
Key takeaways
The bottom of the pyramid is a term describing a vast and extremely poor socio-economic group who subsists on less than $2.50 a day.
Bottom of the pyramid markets was popularized by author CK Prahalad. He argued that despite their lack of wealth, collectively the market was a large, untapped source of buying power.
Businesses operating at the bottom of the pyramid markets have had mixed success. Unilever is the most successful example because of its pre-existing distribution channels and a focus on single-serve products to reduce costs.
Key Highlights
Origins and Definition: The term “Bottom of the Pyramid” refers to the largest and poorest global socio-economic group. It was first used by Franklin D. Roosevelt in 1932 during the Great Depression. He referred to the “forgotten man” at the bottom of the economic pyramid as essential to economic plans. This term was later reintroduced by author CK Prahalad in 1998 and popularized in his 2004 book “The Fortune at the Bottom of the Pyramid.”
BOP Population: The BOP includes nearly 3 billion people who live on less than $2.50 a day. Despite their extreme poverty, Prahalad argued that this group represents an untapped market with significant buying power.
Market Potential: CK Prahalad’s central argument is that companies that learn to serve the BOP market can not only increase their profits but also contribute to lifting people out of poverty. The BOP represents a potential market for products and services that cater to their specific needs and affordability constraints.
Successful Examples: Companies that can offer high-volume, low-margin, low-price products are better suited for BOP markets. Unilever is a notable success story, generating a significant portion of its sales from emerging markets. The company offers products like portable water purification systems and single-serve sachets of detergent and shampoo.
Challenges and Failures: While some companies have succeeded in the BOP market, others have faced challenges or failures. Procter & Gamble’s water purification system and DuPont’s soy-based snack food initiative in India are examples of unsuccessful attempts.
Keys to Success: Consultants suggest that successful BOP market entry requires a focus on profitability rather than just poverty alleviation. Unilever’s success can be attributed to its existing distribution channels, incremental cost model, and offering products familiar to BOP consumers.
Profit and Poverty Alleviation: It’s possible for businesses to both make a profit and contribute to poverty alleviation in BOP markets. Success in these markets often involves finding innovative ways to meet the needs of BOP consumers while keeping costs low.
Lessons from Unilever: Unilever’s success in BOP markets can be attributed to its established distribution channels, emphasis on small quantities and single-serve products, and offering products that BOP consumers were already familiar with.
Related Concepts
Description
When to Apply
Inclusive Innovation
Inclusive Innovation focuses on creating products, services, and technologies that address the needs of marginalized or underserved communities, including the Bottom of the Pyramid (BoP). It emphasizes accessibility, affordability, and sustainability to ensure that innovations benefit a wider range of stakeholders, particularly those with limited resources or access to mainstream solutions. By adopting inclusive innovation approaches, businesses can unlock new market opportunities, drive social impact, and foster sustainable development.
– When developing new products, services, or technologies to address societal challenges or reach underserved markets.
Social Impact Investing
Social Impact Investing involves allocating capital to businesses, organizations, or projects that generate positive social or environmental impact alongside financial returns. It aims to address pressing social issues, including poverty, healthcare, education, and environmental sustainability, by mobilizing private investment towards sustainable solutions. Social impact investors prioritize measurable outcomes and leverage innovative financing mechanisms to drive systemic change and improve the well-being of communities, including those at the Bottom of the Pyramid (BoP).
– When seeking investment opportunities that align with social or environmental goals.
Community Development
Community Development focuses on empowering local communities to drive sustainable social, economic, and environmental improvements. It involves collaborative efforts among stakeholders, including residents, government agencies, non-profit organizations, and businesses, to identify needs, assets, and priorities and implement solutions that build community resilience and enhance quality of life. Community development initiatives encompass various areas, such as affordable housing, infrastructure development, healthcare access, education, and economic empowerment, to address the diverse needs of communities, including those at the Bottom of the Pyramid (BoP).
– When initiating projects or programs to strengthen communities and promote inclusive growth.
Market Segmentation
Market Segmentation is the process of dividing a heterogeneous market into distinct groups of consumers with similar characteristics, needs, or behaviors. It enables businesses to tailor their products, services, and marketing strategies to meet the specific preferences and requirements of different market segments effectively. Market segmentation is particularly relevant for reaching diverse customer groups, including those at the Bottom of the Pyramid (BoP), by understanding their unique demographics, preferences, affordability levels, and consumption patterns.
– When designing marketing strategies, product offerings, or distribution channels to target specific customer segments.
Poverty Alleviation
Poverty Alleviation encompasses strategies, policies, and interventions aimed at reducing and ultimately eliminating poverty in all its forms. It involves addressing the root causes of poverty, such as lack of access to education, healthcare, employment, and economic opportunities, while promoting social inclusion and equity. Poverty alleviation efforts target vulnerable populations, including those at the Bottom of the Pyramid (BoP), by providing essential services, livelihood support, skills training, and access to financial resources to improve their well-being and economic prospects.
– When designing social programs, policies, or interventions to lift individuals and communities out of poverty.
Sustainable Development Goals (SDGs)
The Sustainable Development Goals (SDGs) are a set of 17 global goals adopted by the United Nations to address pressing social, economic, and environmental challenges and achieve sustainable development by 2030. The SDGs cover a wide range of issues, including poverty, hunger, health, education, gender equality, clean water, renewable energy, climate action, and sustainable cities. Businesses, governments, civil society organizations, and individuals worldwide are working towards achieving the SDGs by implementing strategies and initiatives that promote inclusive growth, environmental stewardship, and social progress, benefiting populations at all levels, including the Bottom of the Pyramid (BoP).
– When aligning organizational objectives, initiatives, and investments with global sustainability priorities.
Access to Healthcare
Access to Healthcare refers to the ability of individuals and communities to obtain timely, affordable, and quality healthcare services when needed. It is a fundamental human right and a key determinant of health outcomes and well-being. Access to healthcare is particularly critical for populations at the Bottom of the Pyramid (BoP), who often face barriers such as financial constraints, geographic remoteness, lack of healthcare infrastructure, and inadequate health education. Efforts to improve access to healthcare include expanding healthcare infrastructure, increasing affordability, enhancing healthcare delivery models, and promoting preventive care and health literacy initiatives.
– When designing healthcare policies, programs, or interventions to address disparities and improve health outcomes.
Renewable Energy Solutions
Renewable Energy Solutions are technologies and systems that harness renewable energy sources, such as solar, wind, hydro, and biomass, to generate electricity, heat, or mechanical power. They offer sustainable alternatives to fossil fuels, reduce greenhouse gas emissions, and promote energy access and affordability, particularly in underserved and off-grid areas. Renewable energy solutions play a crucial role in addressing energy poverty and environmental sustainability challenges, providing clean, reliable, and affordable energy to communities, including those at the Bottom of the Pyramid (BoP).
– When promoting clean energy adoption, reducing carbon emissions, or expanding energy access in underserved regions.
Mobile Banking
Mobile Banking, also known as Mobile Money, refers to financial services delivered through mobile devices, such as smartphones and feature phones. It enables individuals to access banking and financial services conveniently, securely, and affordably, without the need for traditional bank branches or physical infrastructure. Mobile banking is particularly beneficial for populations at the Bottom of the Pyramid (BoP), who may lack access to formal banking services or live in remote or underserved areas. It facilitates financial inclusion, promotes savings, enables convenient payments and transfers, and supports entrepreneurship and economic empowerment.
– When expanding financial inclusion, promoting digital payments, or reaching unbanked populations.
Fair Trade Practices
Fair Trade Practices are principles and standards that promote ethical and sustainable trade relationships between producers in developing countries and buyers in developed countries. They aim to ensure fair compensation, safe working conditions, environmental sustainability, and community development for producers, particularly small-scale farmers and artisans operating at the Bottom of the Pyramid (BoP). Fair trade organizations and certifications verify compliance with fair trade standards and provide consumers with assurance that their purchases contribute to positive social and environmental impacts. Fair trade practices empower producers, reduce poverty, promote gender equality, and support sustainable livelihoods and communities.
– When sourcing products, commodities, or ingredients ethically and supporting sustainable supply chains.
The idea of a market economy first came from classical economists, including David Ricardo, Jean-Baptiste Say, and Adam Smith. All three of these economists were advocates for a free market. They argued that the “invisible hand” of market incentives and profit motives were more efficient in guiding economic decisions to prosperity than strict government planning.
Positive economics is concerned with describing and explaining economic phenomena; it is based on facts and empirical evidence. Normative economics, on the other hand, is concerned with making judgments about what “should be” done. It contains value judgments and recommendations about how the economy should be.
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Asymmetric information as a concept has probably existed for thousands of years, but it became mainstream in 2001 after Michael Spence, George Akerlof, and Joseph Stiglitz won the Nobel Prize in Economics for their work on information asymmetry in capital markets. Asymmetric information, otherwise known as information asymmetry, occurs when one party in a business transaction has access to more information than the other party.
Autarky comes from the Greek words autos (self)and arkein (to suffice) and in essence, describes a general state of self-sufficiency. However, the term is most commonly used to describe the economic system of a nation that can operate without support from the economic systems of other nations. Autarky, therefore, is an economic system characterized by self-sufficiency and limited trade with international partners.
Creative destruction was first described by Austrian economist Joseph Schumpeter in 1942, who suggested that capital was never stationary and constantly evolving. To describe this process, Schumpeter defined creative destruction as the “process of industrial mutation that incessantly revolutionizes the economic structure from within, incessantly destroying the old one, incessantly creating a new one.” Therefore, creative destruction is the replacing of long-standing practices or procedures with more innovative, disruptive practices in capitalist markets.
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An oligopsony is a market form characterized by the presence of only a small number of buyers. These buyers have market power and can lower the price of a good or service because of a lack of competition. In other words, the seller loses its bargaining power because it is unable to find a buyer outside of the oligopsony that is willing to pay a better price.
The term “animal spirits” is derived from the Latin spiritus animalis, loosely translated as “the breath that awakens the human mind”. As far back as 300 B.C., animal spirits were used to explain psychological phenomena such as hysterias and manias. Animal spirits also appeared in literature where they exemplified qualities such as exuberance, gaiety, and courage. Thus, the term “animal spirits” is used to describe how people arrive at financial decisions during periods of economic stress or uncertainty.
State capitalism is an economic system where business and commercial activity is controlled by the state through state-owned enterprises. In a state capitalist environment, the government is the principal actor. It takes an active role in the formation, regulation, and subsidization of businesses to divert capital to state-appointed bureaucrats. In effect, the government uses capital to further its political ambitions or strengthen its leverage on the international stage.
The boom and bust cycle describes the alternating periods of economic growth and decline common in many capitalist economies. The boom and bust cycle is a phrase used to describe the fluctuations in an economy in which there is persistent expansion and contraction. Expansion is associated with prosperity, while the contraction is associated with either a recession or a depression.
The paradox of thrift was popularised by British economist John Maynard Keynes and is a central component of Keynesian economics. Proponents of Keynesian economics believe the proper response to a recession is more spending, more risk-taking, and less saving. They also believe that spending, otherwise known as consumption, drives economic growth. The paradox of thrift, therefore, is an economic theory arguing that personal savings are a net drag on the economy during a recession.
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Rational choice theory states that an individual uses rational calculations to make rational choices that are most in line with their personal preferences. Rational choice theory refers to a set of guidelines that explain economic and social behavior. The theory has two underlying assumptions, which are completeness (individuals have access to a set of alternatives among they can equally choose) and transitivity.
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The term “knowledge economy” was first coined in the 1960s by Peter Drucker. The management consultant used the term to describe a shift from traditional economies, where there was a reliance on unskilled labor and primary production, to economies reliant on service industries and jobs requiring more thinking and data analysis. The knowledge economy is a system of consumption and production based on knowledge-intensive activities that contribute to scientific and technical innovation.
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The bottom of the pyramid is a term describing the largest and poorest global socio-economic group. Franklin D. Roosevelt first used the bottom of the pyramid (BOP) in a 1932 public address during the Great Depression. Roosevelt noted that – when talking about the ‘forgotten man:’ “these unhappy times call for the building of plans that rest upon the forgotten, the unorganized but the indispensable units of economic power.. that build from the bottom up and not from the top down, that put their faith once more in the forgotten man at the bottom of the economic pyramid.”
Glocalization is a portmanteau of the words “globalization” and “localization.” It is a concept that describes a globally developed and distributed product or service that is also adjusted to be suitable for sale in the local market. With the rise of the digital economy, brands now can go global by building a local footprint.
Market fragmentation is most commonly seen in growing markets, which fragment and break away from the parent market to become self-sustaining markets with different products and services. Market fragmentation is a concept suggesting that all markets are diverse and fragment into distinct customer groups over time.
The L-shaped recovery refers to an economy that declines steeply and then flatlines with weak or no growth. On a graph plotting GDP against time, this precipitous fall combined with a long period of stagnation looks like the letter “L”. The L-shaped recovery is sometimes called an L-shaped recession because the economy does not return to trend line growth. The L-shaped recovery, therefore, is a recession shape used by economists to describe different types of recessions and their subsequent recoveries. In an L-shaped recovery, the economy is characterized by a severe recession with high unemployment and near-zero economic growth.
Comparative advantage was first described by political economist David Ricardo in his book Principles of Political Economy and Taxation. Ricardo used his theory to argue against Great Britain’s protectionist laws which restricted the import of wheat from 1815 to 1846. Comparative advantage occurs when a country can produce a good or service for a lower opportunity cost than another country.
The Easterlin paradox was first described by then professor of economics at the University of Pennsylvania Richard Easterlin. In the 1970s, Easterlin found that despite the American economy experiencing growth over the previous few decades, the average level of happiness seen in American citizens remained the same. He called this the Easterlin paradox, where income and happiness correlate with each other until a certain point is reached after at least ten years or so. After this point, income and happiness levels are not significantly related. The Easterlin paradox states that happiness is positively correlated with income, but only to a certain extent.
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An economy of scope means that the production of one good reduces the cost of producing some other related good. This means the unit cost to produce a product will decline as the variety of manufactured products increases. Importantly, the manufactured products must be related in some way.
Price sensitivity can be explained using the price elasticity of demand, a concept in economics that measures the variation in product demand as the price of the product itself varies. In consumer behavior, price sensitivity describes and measures fluctuations in product demand as the price of that product changes.
Gennaro is the creator of FourWeekMBA, which reached about four million business people, comprising C-level executives, investors, analysts, product managers, and aspiring digital entrepreneurs in 2022 alone | He is also Director of Sales for a high-tech scaleup in the AI Industry | In 2012, Gennaro earned an International MBA with emphasis on Corporate Finance and Business Strategy.
