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

(Reprint #:49116)

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