Doing Business With The Poor Actually Makes Business Sense

Muhammad Yunus, often called the father of micro-credit, garnered worldwide headlines by winning the 2006 Nobel Peace Prize.

He was a pioneer in doing business with the poor, the population segment with the least resources, which is a subject that is increasingly attracting special attention from many quarters.

This was further demonstrated by the entry of Equity Bank into the banking sector in Kenya which has also won several accolades due its business model of working with the bottom of the pyramid i.e. the poor. Prior to its entry a large section of the population had remained unbanked since the players then had made the assumption that they were not profitable or worth the effort. Equity bank demonstrated that doing business with the poor is profitable and went ahead to make super profits and has become the envy of banks, telecommunication companies, insurance companies and many more companies.

In this article we are going to learn that businesses can be able to deliberately target the poor as a very lucrative sector and not a by-product of another market.

Traditionally certain conditions were required to be able to operate in a market sector;

• Measurable,
• Substantial,
• Accessible,
• Differentiable
• Operable

Most companies have always taken the wrong assumption that the above mentioned conditions cannot be applied to the population group called the low-income group or, without employing euphemisms, the poor.

The potential of this low-resources market, not only in terms of development of business activity, but also in terms of strengthening ethical values and service, is now an unquestionable fact.

Why Work With The Poor?

The poor can manage -Doing business with the poor has restored many a person’s self-respect by considering them not as a passive and dependent subject but rather as the protagonist of his own development, able to resolve his own saving and consumer needs if given the opportunity. In more cases than not, such trust in the poor’s ability to manage their own affairs has proven accurate.

This is well demonstrated by the meteoric rise of Equity Bank that has become the biggest and most profitable bank in East and Central African.

Capitalism need not be restrictive An inclusive vision of capitalism, taking in population groups that are artificially excluded from its economic logic, has proven to be good for society and good business as well.

Is working with the poor a sustainable business model?

The critical question yet to be answered is whether doing business with the poor is sustainable: can such businesses endure up-and-down business cycles over an extended period of time?

The company that is searching for new markets and business opportunities may find a means of commercial revitalization and ethical commitment by concentrating on the most disadvantaged.

Without doing anything out of the ordinary, it can look after its traditional customers – those at the top of the income pyramid – while at the same time concentrating on those at the bottom.

Obviously it cannot do this without making essential adjustments, but these do not cancel out the advisability of directing attention to the marketplace found when working with the poor of bottom of the pyramid.

Low-resource consumers have traditionally been “invisible” to the business world since its efforts have been focused on the upper part of the income pyramid.

Low-income consumers have been considered “accidental consumers or by-product consumer” and, when product marketing has met with success among them, most companies have been unable to explain it, since they were never intentional in targeting them in the first place.

Perhaps a degree of marketing myopia has prevented the business world from seeing reality and made it difficult to identify new opportunities to create value and do business in unexplored parts of society.

This myopia is partly due to a fear of innovation but also due to the lack of comprehension of the needs of the poor.

Many companies in Africa and the world are working overtime trying to get a fraction of a per cent increase in market share in large cities and urban areas where the rich and middle class population can be found.

What they are forgetting which an extremely dangerous assumption is is that they are neglecting to address a potentially large market: people who earn less than USD 5 a day translating to USD 1,500 p.a. who are mostly in urban slum and rural areas.

Dangerous Assumptions To Avoid

Many companies still assume that those with little income only allocate their spending to basic needs, thus making it impossible to do business profitably with them.

There are three key deadly assumptions that many companies make regarding doing business with the bottom of the pyramid:

The poor have no money & Purchasing power This supposition sounds obvious but is superficial and confusing. Although each member of a family may earn very little, the joint purchasing power of poor families and communities is large.

 Spending by the poor is restricted to basic needs On the contrary, the poor usually buy “luxury”items, such as a television or gas stove. Since buying a car or a house is not a realistic option,rather than saving, the poor spend their money on things they can afford that will improve their quality of life.

 The poor only buy cheap things Since they cannot obtain bulk discounts, poor consumers usually pay much higher prices than middle-class consumers do for the same goods.

A good example can be; compare how much the poor pay for kerosene for lighting or drinking water as compare to the middle class. Large companies with economies of scale and efficient supply chains have a real opportunity to offer quality goods at affordable prices and with attractive margins.

It can be done!

Serving this new market segment requires a combination of factors of small-unit packaging, low unit margins and huge volume of sales.

To actually begin doing business with the bottom of the pyramid, three basic questions need to be resolved:

• How to bring the finance system to the segment (credit services as well as savings and investments)
• How to make technological advances accessible to enable process efficiency
• How to adapt the products and brands to its buying and consumer habits

Interestingly, addressing these questions by marketing to “poor” customers can actually generate ideas that can be exported to other environments and circumstances Access by adapting As with any new market, companies need to account for the uniqueness of doing business with such customers.

Some of the issues involved include analyzing customers’ ability to pay and thus to put forth a reasonable pricing strategy, educating the customer in the use of the product and adapting to rapid changes that often occur in this market segment.

As in most other markets, adequate distribution has an impact on creating increased capacity for consumption; for these customers, we often stress the triple A factors:

• Affordability
• Access
• Availability

Making an offer that the consumer can buy, that solves a real need (is attractive) and that can be found in the place and time needed.

In essence, companies searching for new business can find it in bottom of the pyramid territories if they will adopt a mindset like that used to move business beyond their home borders.

Companies need to take into consideration these two factors:

• Managers must stop thinking of poverty as a “problem”
• Managers must be willing to learn how to do business with the poor (as opposed to “getting business from” the poor).

The key to keeping a business going in this market segment relies on, as always, solid business performance.

Whenever a company commits to accessing a new marketplace that is populated by the poor, it is in essence resting its future on two tracks.

1-      The need to augment solid business results achieved in traditional market segments with additional solid revenues generated in the bottom of the pyramid market segment. Thus, we would argue that doing business at the bottom of the social pyramid is not akin to charity; it should be considered one more item in the set of business activities that make corporate profits possible, a wider organizational vision, as it were.

Doing business with the poor must be seen as doing business in a new marketplace, one with growing potential – not as a complex and tortuous route to obtain one more sliver of profit by “donating” corporate resources. It must be seen as a way to augment the primary business activity of the firm.

2-       Once the soundness of a decision to access business by working with the poor has been accepted as adding weight and stability to the corporate vision, a company can begin to redefine its own potential by acknowledging its openness to caring about society in a pronounced, public way.

The poor pay, and they pay well. They repay credit under terms and conditions with ratios that would be the envy of many finance entities. They buy products following the same guidelines and demands as the high-income consumer; they make cross-purchases; and once they have grown in strength as people, becoming fully integrated into the formal system of the market with the same rights and obligations as the rest, they respond by giving their loyalty.

As the Equity bank business case shows, one can operate at the bottom of the pyramid successfully – and that business can be sustained because it is both good for the company and good for society