Bottom of pyramid strategies boost bottom line
BOTTOMof the pyramid strategies for companies are essential when increasing market share in developing countries in a way that contributes towards eradicating poverty. However, only a few companies truly understand the value of the people who are poor and at the bottom of the pyramid.
According to CK Prahalad, a University of Michigan Business School professor who wrote Fortune at the Bottom of the Pyramid: Eradicating Poverty through Profits, the bottom of the pyramid demands low prices, great value and sturdy products.
Although ideological beliefs, normal experiences and business habits often stand in the way, society must challenge its assumptions to discover the fortune at the bottom of the pyramid. For instance, it is incorrect to assume that, because the poor have no money individually, they are not a market. In fact, the poor are a vast potential market. Retailers such as Cashbuild, Pick n Pay’s Boxer Stores brand, Shoprite Checkers and Spar are seeing the potential of this market, which is having a good effect on their bottom line. They have recognised the opportunity of serving this area of the market.
The question is how did they crack it? These companies have been able to create the population’s capacity to consume, based on three factors identified by Prahalad: affordability, accessibility and availability.
Affordability ensures that the product is affordable without compromising quality. Accessibility looks at convenient distribution because bottom of the pyramid consumers usually do not own vehicles and may have to work all day to have the cash to buy what they need for that evening. Stores must be nearby and must be open after the work day ends. Availability recognises the reality that the people at the bottom of the pyramid buy when they have cash. Therefore the product must be available when they can buy it.
Let’s take an example of Boxer Stores in most rural, semi-rural and peri-urban areas. They are conveniently situated where people can access them. The pricing is reasonable compared to the general dealers in the townships. People are able to buy in bulk when they have the money, which allows them to plan ahead. So most food retailers are seeing value in this expansion strategy.
While there are positives for the consumers, the entrepreneurs in the above-mentioned areas are complaining that they are being wiped out by these big retailers. These entrepreneurs do not have the economic muscle to compete with them so they close their operations down. This is demoralising to the process of building black-owned businesses in the rural and township areas.
I guess the reality for consumers is that they would have been charged a higher price by these entrepreneurs because of the high cost of getting their stock due to the lack of economies of scale. Secondly, the consumers are lured away by the surroundings of the big retailers’ store because for some of them this is the closest they will get to the experience of the town or the city, so it is a treat for them to shop in the big stores.
For the long-term sustainability of these areas it is important to balance the value that goes to the consumers with the encouragement of entrepreneurs in order to accelerate economic growth and transformation.
This is also a challenge faced by other African countries where South African companies are expanding to, because if the cash leaves these countries without economic value accruing in a meaningful manner to the population – not just to consumers – it amounts to economic colonisation with disastrous effects on the horizon.
The other reality facing companies that move their normal brands to the townships, rural areas, and so on, is that they are not always guaranteed success because the township people prefer going to town to do their shopping. For them the trip to town is not always about getting the goods but also about getting out of their sometimes dreary township environment. The experience of the high-end shops closing down at the Soweto-based Maponya Mall proves this point.
So balance between profits and reinvestment into the community is critical in tapping into the bottom of the pyramid, as that is how poverty will be eradicated.