MARKET SIZE AND BUSINESS STRATEGY AT THE BASE OF THE PYRAMID

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Market size and business strategy
at the base of the pyraMid

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Four billion low-income people, a majority of the world’s pop-
ulation, constitute the base of the economic pyramid. New
empirical measures of their behavior as consumers and their
aggregate purchasing power suggest significant opportunities for
market-based approaches to better meet their needs, increase
their productivity and incomes, and empower their entry into
the formal economy.
The 4 billion people at the base of the economic pyramid (BOP)—all
those with incomes below $3,000 in local purchasing power—live in rela-
tive poverty. Their incomes in current U.S. dollars are less than $3.35 a
day in Brazil, $2.11 in China, $1.89 in Ghana, and $1.56 in India.1 Yet to-
e
gether they have substantial purchasing power: the BOP constitutes a $5
x
e
c
trillion global consumer market.
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t
The wealthier mid-market population segment, the 1.4 billion people
i
v
e
with per capita incomes between $3,000 and $20,000, represents a $12.5

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u
trillion market globally. This market is largely urban, already relatively
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m
well served, and extremely competitive.
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In contrast, BOP markets are often rural—especially in rapidly growing
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Asia—very poorly served, dominated by the informal economy, and, as a

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h
result, relatively inefficient and uncompetitive. Yet these markets rep-
e

resent a substantial share of the world’s population. Data from national
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e
x
household surveys in 110 countries show that the BOP makes up 72%
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of the 5,575 million people recorded by the surveys and an overwhelm-
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b
ing majority of the population in Africa, Asia, Eastern Europe, and Latin
i
l
l
America and the Caribbean—home to nearly all the BOP.
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o
Analysis of the survey data—the latest available on incomes, expendi-
n

tures, and access to services—shows marked differences across countries
in the composition of these BOP markets. Some, like Nigeria’s, are con-
centrated in the lowest income segments of the BOP; others, like those in
Ukraine, are concentrated in the upper income segments. Regional dif-
ferences are also apparent. Rural areas dominate most BOP markets in


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Africa and Asia; urban areas dominate most in Eastern Europe and Latin
America.
Striking patterns also emerge in spending. Not surprisingly, food
dominates BOP household budgets. As incomes rise, however, the share
spent on food declines, while the share for housing remains relatively
constant—and the shares for transportation and telecommunications
grow rapidly. In all regions half of BOP household spending on health
goes to pharmaceuticals. And in all except Eastern Europe the lower in-
come segments of the BOP depend mainly on firewood as a cooking fuel,
the higher segments on propane or other modern fuels.
That these substantial markets remain underserved is to the detri-
ment of BOP households. Business is also missing out. But there is now
enough information about these markets, and enough experience with
viable business strategies, to justify far closer business attention to the
opportunities they represent. Market-based approaches also warrant far
more attention in the development community, for the potential ben-
efits they offer in bringing more of the BOP into the formal economy and

in improving the delivery of essential services to this large population
e
t
segment.
u
i
t
t
s
A BOP Portrait

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n
The development community has tended to focus on meeting the needs
s
e
of the poorest of the poor—the 1 billion people with incomes below $1
c
r
u
a day in local purchasing power. But a much larger segment of the low-
o
s
income population—the 4 billion people of the BOP, all with incomes
e
Spending
well below any Western poverty line—both deserves attention and is the

r
d
appropriate focus of a market-oriented approach.
l
Population
r
The starting point for this argument is not the BOP’s poverty. Instead,
o
it is the fact that BOP population segments for the most part are not inte-

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grated into the global market economy and do not benefit from it. They
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also share other characteristics:
2
• Significant unmet needs. Most people in the BOP have no bank
account and no access to modern financial services. Most do not
Spending
own a phone. Many live in informal settlements, with no formal
title to their dwelling. And many lack access to water and sanita-

Population
tion services, electricity, and basic health care.
• Dependence on informal or subsistence livelihoods. Most
in the BOP lack good access to markets to sell their labor, handi-

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crafts, or crops and have no choice but to sell to local employers or
to middlemen who exploit them. As subsistence and small-scale
farmers and fishermen, they are uniquely vulnerable to destruc-
tion of the natural resources they depend on but are powerless to
protect (World Resources Institute and others 2005). In effect,
informality and subsistence are poverty traps.
• Impacted by a BOP penalty. Many in the BOP, and perhaps most,
pay higher prices for basic goods and services than do wealthier
consumers—either in cash or in the effort they must expend to
obtain them—and they often receive lower quality as well. This high
cost of being poor is widely shared: it is not just the very poor who
often pay more for the transportation to reach a distant hospital or
clinic than for the treatment, or who face exorbitant fees for loans
or for transfers of remittances from relatives abroad.
Addressing the unmet needs of the BOP is essential to raising welfare,
e
productivity, and income—to enabling BOP households to find their own
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e
c
route out of poverty. Engaging the BOP in the formal economy must be a
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t
critical part of any wealth-generating and inclusive growth strategy. And
i
v
e
eliminating BOP penalties will increase effective income for the BOP.

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Moreover, to the extent that unmet needs, informality traps, and BOP
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m
penalties arise from inefficient or monopolistic markets or lack of atten-
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tion and investment, addressing these barriers may also create significant
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market opportunities for businesses.

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h
Perhaps most important, it is the entire BOP and not just the very poor
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who constitute the low-income market—and it is the entire market that
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e
x
must be analyzed and addressed for private sector strategies to be effec-
t

tive, even if there are segments of that market for which market-based
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solutions are not available or not sufficient.
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Taking a market-based approach to poverty reduction
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Analysis of BOP markets can help businesses and governments think
more creatively about new products and services that meet BOP needs
and about opportunities for market-based solutions to achieve them.
For businesses, it is an important first step toward identifying business
opportunities, considering business models, developing products, and

expanding investment in BOP markets. For governments, it can help

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focus attention on reforms needed in the business environment to allow
a larger role for the private sector.
BOP market analysis, and the market-based approach to poverty re-
RURAL
duction on which it is based, are equally important for the development
community. This approach can help frame the debate on poverty reduc-
URBAN
tion more in terms of enabling opportunity and less in terms of aid. A
successful market-based approach would bring significant new private
sector resources into play, allowing development assistance to be more
targeted to the segments and sectors for which no viable market solu-
tions can presently be found.
RURAL
URBAN
There are distinct differences between a market-based approach
to poverty reduction and more traditional approaches. Traditional ap-
proaches often focus on the very poor, proceeding from the assumption
that they are unable to help themselves and thus need charity or public
assistance. A market-based approach starts from the recognition that
being poor does not eliminate commerce and market processes: virtu-
ally all poor households trade cash or labor to meet much of their basic

RURAL
needs. A market-based approach thus focuses on people as consumers
e
t
and producers and on solutions that can make markets more efficient,
u
URBAN
i
t
competitive, and inclusive—so that the BOP can benefit from them.
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s
Traditional approaches tend to address unmet needs for health care,

i
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clean water, or other basic necessities by setting targets for meeting those
s
e
needs through direct public investments, subsidies, or other handouts.
c
r
u
The goals may be worthy, but the results have not been strikingly suc-
o
s
cessful. A market-based approach recognizes that it is not just the very
e
poor who have unmet needs—and asks about willingness to pay across

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d
market segments. It looks for solutions in the form of new products and
l
r
new business models that can provide goods and services at affordable
o
prices.

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Those solutions may involve market development efforts with ele-
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ments similar to traditional development tools—hybrid business strat-
2
egies that incorporate consumer education; microloans, consumer
finance, or cross-subsidies among different income groups; franchise or
retail agent strategies that create jobs and raise incomes; partnerships
with the public sector or with nongovernmental organizations (NGOs).

Yet the solutions are ultimately market oriented and demand driven—
and many successful companies are adopting such strategies.

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Perhaps most important, traditional approaches do not point toward
sustainable solutions—while a market-oriented approach recognizes
that only sustainable solutions can scale to meet the needs of 4 billion
people.
Growing interest, growing success in BOP markets
Business interest in BOP markets is rising. Multinational companies have
been pioneers, especially in food and consumer products. Large national
companies have proved to be among the most innovative in meeting the
needs of BOP consumers and producers, especially in such sectors as
housing, agriculture, consumer goods, and financial services. And small
start-ups and social entrepreneurs focusing on BOP markets are rapidly
growing in number. But perhaps the strongest and most dramatic BOP
success story is mobile telephony.
Between 2000 and 2005 the number of mobile subscribers in devel-
oping countries grew more than fivefold—to nearly 1.4 billion. Growth
e
was rapid in all regions, but fastest in sub-Saharan Africa—Nigeria’s sub-
x
e
c
scriber base grew from 370,000 to 16.8 million in just four years (World
u
t
Bank 2006b). Household surveys confirm substantial and growing mobile
i
v
e
phone use in the BOP population, which has clearly benefited from the

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access mobile phones provide to jobs, to medical care, to market prices, to
m
m
family members working away from home and the remittances they can
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r
send, and, increasingly, to financial services (Vodafone 2005).
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A strong value proposition for low-income consumers has translated

t
h
into financial success for mobile companies. Celtel, an entrepreneurial
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company operating in some of the poorest and least stable countries in
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e
x
Africa, went from start-up to telecom giant in just seven years. Acquired
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for US$3.4 billion in 2005, the company now has operations in 15 African
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countries and licenses covering more than 30% of the continent.
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l
l
Not all sectors have found their footing in the BOP markets yet. The
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o
experience of private-sector municipal water systems has been mixed,
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with some notable successes in innovating to reach the poor, such as in
Manila, but with political and financial setbacks elsewhere. The private
energy sector has a better record in delivering grid-based rural services,
but less success in affordable off-grid electricity. Nonetheless, new ven-
tures and advances in technology are combining with BOP business mod-

els in ways that offer new encouragement for these sectors.

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Moving toward a more hospitable environment for business
The operating and regulatory environments in developing countries can
be challenging. Micro and small businesses especially face disadvantages.
If they are informal, they cannot get investment finance, participate in
value chains of larger companies, or sometimes even legally receive ser-
vices from utilities. Condemned to remain small, they cannot generate
wealth or many jobs. Nor do they contribute to the broader economy by
paying taxes.
Most face barriers to joining the formal economy in the form of anti-
quated regulations and prohibitive requirements—dozens of steps, delays
of many months, capital requirements beyond attainment for most of the
BOP. In El Salvador, for example, starting a legitimate business used to
take 115 days and many separate procedures—until recent reforms re-
duced the effort to 26 days and allowed registration with four separate
agencies in a single visit. But even for legitimate small businesses, invest-
ment capital is generally unavailable and supporting services scarce.
Fortunately, there is growing recognition of the importance of remov-

ing barriers to small and medium-size businesses and a growing toolbox
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t
for moving firms into the formal economy and creating more efficient
u
i
t
markets. And as the World Bank and International Finance Corporation
t
s
(IFC) show, in their annual Doing Business reports, there is also mount-

i
n
ing evidence that the tools work. In El Salvador five times as many busi-
s
e
nesses register annually since its reforms. Many countries, including
c
r
u
China, have dropped minimum capital requirements. The pace of reform
o
s
is accelerating, with more than 40 countries making changes in the most
e
recent year surveyed.2

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Coupled with reform is growing attention to enterprise development
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r
initiatives focusing on BOP markets and investment capital for small and
o
medium-size businesses. Several international and bilateral development

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agencies are launching investment funds to support the growth of small
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and medium-size enterprises across the developing world. These efforts,
2
and the growing private sector interest in investing in such enterprises
in developing countries, explicitly recognize that an expanded private
sector role and a bottom-up market approach are essential development
strategies.


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What BOP markets look like
Total household income of $5 trillion a year estab-
lishes the BOP as a potentially important global
market. Within that market are large variations
across regions, countries, and sectors in size and
other characteristics.
Asia (including the Middle East) has by far
the largest BOP market: 2.86 billion people with
income of $3.47 trillion. This BOP market repre-
sents 83% of the region’s population and 42% of
the purchasing power—a significant share of Asia’s
rapidly growing consumer market.
Eastern Europe’s $458 billion BOP market
includes 254 million people, 64% of the region’s
population, with 36% of the income.
In Latin America the BOP market of $509 bil-
e
lion includes 360 million people, representing 70%
x
e
c
of the region’s population but only 28% of total
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t
household income, a smaller share than in other
i
v
e
developing regions.

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Africa has a slightly smaller BOP market, at
m
m
$429 billion. But the BOP is by far the region’s
a
r
dominant consumer market, with 71% of purchas-
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ing power. It includes 486 million people—95% of the surveyed population.

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Sector markets for the 4 billion BOP consumers range widely in size. Some are relatively small,
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such as water ($20 billion) and information and communication technology, or ICT ($51 billion as
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measured, but probably twice that now as a result of rapid growth). Some are medium scale, such
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as health ($158 billion), transportation ($179 billion), housing ($332 billion), and energy ($433
4

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billion). And some are truly large, such as food ($2,895 billion).3
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l
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Evidence of BOP penalties emerges in several sectors. Wealthier mid-market households are
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o
seven times as likely as BOP households to have access to piped water. Some 24% of BOP house-
n

holds lack access to electricity, while only 1% of mid-market households do. Rural BOP households
have significantly lower ICT spending and are significantly less likely to own a phone than rural
mid-market households or even urban BOP households—consistent with the broad lack of access
to ICT services in rural areas.


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BOP business strategies that work
Why are some enterprises succeeding in meeting BOP needs, and others
are not? Successful enterprises operating in these markets use four broad
strategies that appear to be critical:
• Focusing on the BOP with unique products, unique services, or
unique technologies that are appropriate to BOP needs and that
require completely reimagining the business, often through sig-
nificant investment of money and management talent. Examples
are found in such sectors as water (point-of-use systems), food
(healthier products), finance (microfinance and low-cost remit-
tance systems), housing, and energy.
• Localizing value creation through franchising, through agent
strategies that involve building local ecosystems of vendors or
suppliers, or by treating the community as the customer, all of
which usually involve substantial investment in capacity building
and training. Examples can be seen in health care (franchise and
agent-based direct marketing), ICT (local phone entrepreneurs

and resellers), food (agent-based distribution systems), water
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t
(community-based treatment systems), and energy (mini-hydro-
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i
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power systems).
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s
• Enabling access to goods or services—financially (through sin-

i
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gle-use or other packaging strategies that lower purchase barri-
s
e
ers, prepaid or other innovative business models that achieve the
c
r
u
same result, or financing approaches) or physically (through novel
o
s
distribution strategies or deployment of low-cost technologies).
e
Examples occur in food, ICT, and consumer products (in packaging

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goods and services in small unit sizes, or “sachets”) and in health
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care (such as cross-subsidies and community-based health insur-
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ance). And cutting across many sectors are financing strategies that

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range from microloans to mortgages.
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• Unconventional partnering with governments, NGOs, or groups
2
of multiple stakeholders to bring the necessary capabilities to the
table. Examples are found in energy, transportation, health care,
financial services, and food and consumer goods.
1 0
Enterprises may—and often do—use more than one of these strategies
serially or in combination.

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