Strategic Innovation at the Base of the Pyramid

Innovation in developing markets has less to do with finding new customers than addressing issues of product acceptability, affordability, availability and awareness.

Companies that develop new strategies to attack competitors and enter new markets often accomplish this by introducing architectural or business-model breakthroughs. They identify gaps in how an industry is organized, go after those gaps and then find ways to turn them into profitable markets. They find new customers (“new whos”), new products or services (“new whats”) or new ways of promoting, producing or distributing them (“new hows”). Although there has been a burst of interest in recent years in how economic growth is unfolding in the developing world, most of the research on strategic innovation is focused on developed markets. However, based on our research, that understand the dynamics of growth at the base of the economic pyramid in emerging markets have significant opportunities to unlock value.

We have studied strategic innovators in developing markets from a variety of industries to understand the reasons behind their success, and to explore how the success factors differed from what we have observed about innovators in the developed world. (See “About the Research,.”) We found that strategic innovation in developing markets differs in three important ways. First, the issue is not finding “new whos”— indeed, assuming products are affordable, there are plenty of under- and nonconsuming customers to tap. Second, it is not about creating new product features but adapting existing products to customers who have fewer resources or a different cultural background. And third, it is less about creating new business models or differentiating how you compete than establishing basic market ingredients such as distribution channels and customer demand from the ground up. Companies that are able to confront theses issues have often been able to achieve strong market share and profit growth.

Developing Affordable Products and Services

In many cases, finding customers is not the issue. The 20 biggest emerging economies have a total of more than 700 million households earning an aggregate of some $1.7 trillion per year, roughly equal to the gross domestic product of Germany.1 Brazil’s poorest 25 million households have an annual income of around $73 billion per annum; China’s 286 million lowest-income households have an annual income of about $691 billion; and India’s 171 million poorest households have spending power of about $378 billion.2

Perhaps the biggest hurdle that companies must overcome is ensuring that products or services are affordable. Low-income consumers have low disposable incomes and therefore do not consume at all or are infrequent buyers of products and services. Strategic innovators need to design products that match the cash flows of customers who are often paid on a daily rather than weekly or monthly basis. For example, two-thirds of Indian villagers are in the lowest-income category, making them acutely sensitive to price. They spend more than two-thirds of their income on food, and must pay for products such as soaps, scents, shampoos and telecommunications services with whatever funds are left over.

With close to 50% of the population in the Philippines living below the poverty line, the most pressing issues for mobile-telecommunications operators such as Smart Communications Inc. was affordability. Paying for mobile service was not a problem for middle- or upper-income customers. But for poor people, the lowest-price prepaid phone card available in 2002 was about U.S. $2, a major cash outlay and more than 80% of daily income for more than half of the population. At those rates, analysts didn’t see mobile-phone penetration going beyond 30% of the population until 2008 at the earliest.

In thinking about how to reach customers at the bottom of the market, Smart did not bother to benchmark others in the mobile industry; few, if any, mobile-network operators had successfully developed offerings for very low-income consumers. Instead, it studied successful players from other industries.

Procter & Gamble Co. and Unilever PLC, for example, have been particularly effective at developing strategies to keep product prices low, offering micropacks for items including shampoo, soaps, cigarettes and food. Although buying in small quantities, or sachets, was not the most economical way to purchase such goods, it did allow consumers to stay within their budgets. They bought the products through the country’s small sari-sari stores, which survived on high-turnover, low-value transactions. Indeed, buying goods in small amounts was part of daily life. Customer surveys revealed that low-income Filipinos made an average of four to five trips per week to their local sari-sari store.

To appeal to low-income consumers, Smart developed an over-the-air recharge technology and introduced prepaid pricing plans that offered airtime in sachet-like packages. Prices were broken down into small denominations that were not previously available (as low as around U.S. 50 cents). The new pricing strategy was a huge success; within ten months the small packages were generating revenues of more than $2 million a day. Smart subsequently launched a feature that made reloads more accessible for low-income customers. The new service, called Pasa Load, also allowed consumers to transfer values of as little as a few cents from one account to another.

Smart found that the profits margins on the sachets matched or exceeded what it made on prepaid cards. The result: At the end of 2006, the company’s earnings before interest, taxes, depreciation and amortization margin of 64% was among the highest of any mobile network operator in the Asia-Pacific region, despite the fact that its average revenue per user was among the lowest.

Other companies in other industries have fashioned similarly creative strategies to boost revenue and profit. In India, for example, small towns often experience long power outages lasting 8 to 12 hours a day. For many shopkeepers, an alternative source of power is essential, but many cannot afford to buy a generator; even the smallest Honda Motor Co. generator costs more than $400, and banks do not make unsecured loans to small retailers. In response, a Honda distributor in Uttar Pradesh came up with a solution. He organized 20 shopkeepers into a group, encouraging them to make monthly payments of $22 each month into a common pool. Then, through a lottery, one shopkeeper would win a Honda generator set every month; after 20 months, all 20 members of the pool would have their own generator. Honda subsequently expanded this financing mechanism to other parts of the country.3

Likewise in India, motorized transportation is still a luxury for low-income residents. It is not uncommon to see families of four riding on a single motor scooter. Accidents, hospitalizations and deaths are all too common. In response to the swelling demand for affordable automobiles, Tata Motors Ltd., the automotive division of the country’s largest conglomerate, hopes to market a new, low-cost car. A significant portion of the total cost of a new car in India is tied to distribution and storage costs, particularly in more isolated regions. Although Tata’s labor costs are not high by international standards, it saw an opportunity to reduce costs significantly by developing a flat-packed kit that could be assembled by employees at small and midsize repair shops in villages. In essence, Tata would eliminate the dealer and, hence, the dealer’s margin. Meanwhile, Tata is also experimenting with cost-saving materials and components, such as plastic body panels, and simplified manufacturing techniques. Rather than welding car bodies, it is assessing whether panels can be bolted or glued together. The goal is to build a car that can be sold for $2,200 by the end of 2008.4

Dealing With Product and Service Acceptability

Beyond affordability, another important challenge in serving low-income markets is gaining customer acceptability for products or services. To do so, companies may have to adjust their product’s price-performance ratio and make other types of modifications to ensure that the product is culturally acceptable. Reducing or eliminating features is one way to make products more acceptable. To be successful, companies must be ready to make other changes to address market resistance.

Indeed, for cultural, societal, religious or political reasons, products designed for developed-world customers may be inappropriate. Consider Indian women and hair grooming. In a country that has cultural taboos against displays of luxury, hair grooming is often a woman’s only indulgence. At the same time, there is a common belief that inexpensive shampoos are too harsh; in fact, many low-income women prefer to use a single soap for both hair and body. Rather than try to fight this percep-tion, Hindustan Unilever Ltd., a subsidiary of Unilever that was formerly known as Hindustan Lever Ltd., began selling an inexpensive, general-purpose soap, called Breeze 2-in-1, with special ingredients for healthy hair. By the end of 2006, more than 30% of the rural poor in India were using shampoo in bar or liquid form; Hindustan Unilever had a 48.5% market share in the shampoo category. (See “Growth of Personal Care Products in India.”)

Fighting against prevailing cultural attitudes can be complicated. In the mid-1990s, Haier Group Co., China’s leading home-appliance manufacturer, discovered that many poor, rural residents considered it frivolous to own a washing machine just to wash clothes. Indeed, many of those who bought washing machines used them for multiple tasks, such as cleaning vegetables. Some companies might have disapproved of such usage, but Haier saw it as an opportunity. In fact, product managers asked engineers to modify the existing washing machines so that pipes wouldn’t clog with vegetable peels. The company then developed instructions for how to use the product to clean vegetables. Haier also developed a washing machine to make cheese from goats’ milk. Such innovations increased the acceptability of washing machines among low-income Chinese consumers and helped Haier win market leadership in China’s rural provinces, insulating it from the price wars that have plagued the country’s appliance industry.5

Sometimes meeting the needs of customers requires broadening the definition of what the product can do. For example, Smart Communications’ consumer research in the Philippines found that prospective mobile-phone customers wanted to use their phones not just for entertainment and enjoyment but also for practical purposes and to save money. A phone would reduce the need for travel to adjacent villages or towns to find work or to check market prices for people’s agricultural produce. They could send a text message to a prospective employer in the next village for less than one-tenth the cost of traveling there by public transport. Likewise, they could use a phone to seek medical advice or to call a doctor.

One of the biggest barriers to market growth had been the high cost of mobile handsets. Few low-income consumers had savings or incomes sufficient to qualify for subsidized mobile devices. But since 2001, relatively inexpensive handsets, many of them second-hand, have flooded the market. Another barrier had been the reluctance of sari-sari stores to stock prepaid cards due to inventory costs and security concerns, but the introduction of over-the-air technology and sachet-based pricing removed this obstacle. Smart took steps to ensure that retailers could enter the mobile-phone business easily. All they needed was a bank account, a global system for mobile communication-compatible handset, the right smart card (costing less than U.S. $2) and an initial load balance of slightly more than $5.

Within a few months, several hundred thousand retailers had signed on to partner with Smart, allowing the company to build an extensive retail footprint. Retailers earned a 15% commission on sales, and for many of them the income they earned from selling over-the-air minutes rapidly became the biggest part of their business. By the end of 2006, Smart had more than 600,000 resellers, approximately 90% of which were micro-businesses or independent resellers such as students and housewives. Total mobile-phone market penetration had grown to 68%. (See “Mobile Phone Adoption by Income Segment in the Philippines, 2006.”)

Addressing Supply Chain and Exposure Issues

A critical aspect of serving low-income consumers in developing markets is ensuring the availability of products and services and marketing. In the developing world, that often means establishing distribution channels when none exist and learning how to generate market demand. As Tata’s efforts to build and market a cheap automobile illustrate, producing, delivering or distributing products or services can be a complex undertaking.

India’s low-income consumers, for example, live in more than 600,000 villages scattered across the country. In many regions, the roads are little more than rutted dirt tracks, which can be washed out during the monsoon season or snowbound for weeks at a time during the winter.6 Nevertheless, many large companies see poor countries as the key to long-term growth and profitability. Unilever, for example, expects that half its sales will come from the developing world by 2010, up from 32% in 2000. Another company looking to low-income customers for growth is Eveready Industries India Ltd. With 46% of the country’s battery market and 85% of the flashlight market, Eveready claims to have the largest company-owned van distribution system in the country, comprised of 1,000 vans, more than 4,000 distributors and 44 warehouses. Each van calls on 50 to 60 retail outlets per day and revisits retailers every 15 days to restock inventory.

In some ways, the microfranchise sales and distribution model that Avon Products Inc. created decades ago in the United States and other developed countries is ideally suited for developing markets. Witness Brazil, where Avon saleswomen travel along the Amazon and its tributaries in ferries, small boats and canoes to serve isolated communities.7 By overcoming barriers to distribution in far-flung communities, saleswomen have helped to propel the company to a leading position in the Brazilian cosmetics market, despite a tough economic environment. In India, Hindustan Unilever is creating a similar neighbor-to-neighbor distribution model, training local women to sell shampoo, detergents and other health and hygiene products door to door.

Beyond the challenges of distribution, companies often face basic issues of exposure: how to reach potential customers who may not be familiar with their products and who can’t be contacted with conventional advertising. In India, for example, only 41% of poor rural households have access to TV, and in other developing markets the levels are even lower. As a result, companies need to develop other, grass-roots-style marketing methods.

To overcome the lack of TV penetration in many parts of the rural Philippines, Smart invested heavily in roadside billboards and point-of-sale marketing materials tailored specifically for sari-sari stores. In addition, it bought advertisements on the sides of jeepneys (vehicles that are the most pervasive form of public transport) and three-wheeled taxis. Smart has also invested in dealer training; its largest national dealers were encouraged to train subdealers and others down the distribution chain. In addition, Smart agents visited colleges and universities, where they held seminars on how to become a retailer. In return for being allowed on campus, Smart sponsored activities and events. It held other dealer-recruitment events in low-income communities throughout the country. The effort was geared toward growing its retailer base and thereby promoting word-of-mouth sales in local communities.

Hindustan Unilever has been similarly innovative about building brand awareness for its personal care products. It makes widespread use of street performers — magicians, singers, dancers and actors — adjusting their scripts and acts based on the clientele the company wants to reach. Following a series of street performances in northeastern India, the company saw public awareness of Breeze 2-in-1, its low-priced shampoo-soap, increase from 22% to 30%. During a six-month period during 2005, it saw awareness of Rin Shakti, a detergent bar, jump from 28% to 36%.8

STRATEGIC INNOVATION TAKES PLACE at the bottom of the economic pyramid much the same as it does in developed markets: Companies find gaps in the industry positioning map; they go after them; and they exploit the opportunity. The challenges generally have less to do with finding customers than addressing issues of product affordability, acceptability, availability and awareness. For those that succeed, the payoff can be significant. For example, as market penetration in the Philippine mobile-telephone market increased from 40% to 68%, Smart Communications’ parent company saw its market value increase more than threefold.9 In India, meantime, as the market for its products expanded, Hindustan Unilever saw revenue growth of 11% in 2005 and 9.5% in 2006, with profit growth of more than 30%. Companies that meet the basic challenges in developing markets can build enormous market value.


1. C.K. Prahalad and S.L. Hart, “The Fortune at the Bottom of the Pyramid,” Strategy+Business 26, no. 1 (2002): 2–14.

2. C.K. Prahalad and A. Hammond, “Selling to the Poor,” Foreign Policy (May–June 2004): 30–37.

3. P. Kashyap and S. Raut, “The Rural Marketing Book (Text/Practice)” (New Delhi: DreamTech Press, 2006).

4. R.V. Pandit, “What’s Next for Tata Group: An Interview With Its Chairman,” McKinsey Quarterly 4 (2005): 60–69.

5. L.S. Paine and R.J. Crawford, “The Haier Group (A),” Harvard Business School case no. 9-398-101 (Boston: Harvard Business School Publishing, 1998).

6. P. Balakrishna and B. Sidharth, “Selling in Rural India,” Hindu Business Line, Feb. 16, 2004.

7. J. Franklin, “Paddling for Profits: Despite Hard Times, Avon’s Huge, Mostly Female Workforce Is on the Move in Latin America,” Latin Trade (December 2003).

8. For a good discussion of Hindustan Unilever’s use of street performances, see R. Balu, “Strategic Innovation: Hindustan Lever Ltd.,” Fast Company Online, no. 47 (May 2001): 120. For more detailed information on the company’s strategy in the detergent market, see P.H. Werhane, M.E. Gorman and J. Mead, “Hindustan Lever Limited (HLL) and Project STING (B),” Darden Business Publishing case no. UVA-E-0267 (Charlottesville, Virginia: University of Virginia Darden Business Publishing, 2004). For a wider discussion of the fast moving consumer goods industry in India, see A.N. Radhika, “Changing Trends in Retailing and FMCG Industry in India,” ICFAI Center for Management Research minicase no. CLBS019 (Hyderabad, India: ICFAI Center for Management Research, 2004).

9. The market capitalization of Philippine Long Distance Telephone Co., Smart Communications Inc.’s parent, increased from U.S. $3.048 billion on December 31, 2003, to U.S. $9.489 billion on December 31, 2006.

i. A.M. Pettigrew, “Longitudinal Field Research on Change: Theory and Practice,” Organizational Science 1, no. 3 (1990): 267-292.

ii. R.K. Yin, “Case Study Research: Design and Methods Revised,” 3rd ed. (London: Sage, 2004).


1 Comment On: Strategic Innovation at the Base of the Pyramid

  • Dinesh Kumar | June 19, 2015

    As rural marketing models of many companies do not succeed, companies have to implement innovative models. The first step would be finding talent to work in BOP markets, as city-educated youths do not want to work in such markets. Much of the research is also done without leaving cities. That is why this is valuable research indeed.

Add a comment