The Power at the Base of the Pyramid

We recently talked about the softer side of impact investing in our Weekly Review. This post is inspired by Booz&Co’s report “Understanding the Forgotten Billions: Meeting the World’s Least Advantaged Consumers Where They Live,” by Sudipta Bhattacharya, Ganesh Panneer, Vikas Sehgal, and Edward Tse (2010). The report discusses the Base of the Pyramid (BoP) – a segment with underestimated buying power and the dire need for social change.

Forward-thinking and social-minded entrepreneurs are jumping on the opportunity to create products and services for this underserved segment. Similarly, investors and fund managers (like us) know that there is a huge potential for high returns and high impact. The softer side about the BoP’s desperate need for change, where a little change can go a long way, speaks for itself. At ID, we are firm believers that the heart of the social sector combined with the efficiency of the free market can create radical progress in the eradication of poverty. However, this post is to remind entrepreneurs and investors of the valuable potential that lies in emerging markets and at the BoP, even if they do not consider themselves to be social entrepreneurs or impact investors.

The BoP segment formally consists of those who earn between US $2.50 and $7.50 a day, although with varying costs of living and inconsistent access to goods and services, poverty is measured in ways beyond monetary value (for more on defining poverty, read this article). Either way, the BoP make up a segment that “includes more than 1.5 billion people.”(2010, p. 1). That’s about a fifth of the world! To get an idea of how big the base of the pyramid is and how close you are to top, click here, and you’ll find out just how rich you really are (you may be surprised).

The Booz&Co Report acknowledges that is difficult to communicate with the BoP, or in their words, “hard to reach by conventional communication and distribution methods and have little access to traditional credit,” (2010, p. 4). In other words, there are challenges for those looking to serve the BoP, but with a little bit of innovation and a lot of guts, anyone can overcome these challenges. 

Regardless of the challenges, the BoP is a giant group of consumers that entrepreneurs can turn into customers. Consider their spending power:

“China’s 286 million lowest-income households have a total annual income of about $691 billion, India’s 171 million poorest households have spending power of about $378 billion a year, and Brazil’s poorest 25 million households have an annual income of about $73 billion,” (2010, p. 6).

This income is not disposable, but rather will be spent on basic needs like nutrition, clothing, shelter, lighting, transportation, and communication (2010, p. 7). Bhattacharya et al. (2010) wisely point out that products and services should be appropriately positioned for the BoP segment (p. 7). For example, Danone, maker of Dannon yogurt, modified their product for their BoP customers with great success. As a result, they have reported “that 42 percent of its sales come from emerging markets – up from just 6 percent 10 years ago,” (2010, p. 8).

Social entrepreneur or not, there is a huge opportunity for success in emerging markets, and ID is here to help. We are always looking for new, seed-stage investment opportunities for entrepreneurs with great business ideas for alternative energy and mobile technology. Even if you’re not into the “saving the world” side of entrepreneurship, you can’t deny that they’ve got potential.

Hey, it’s possible to earn money and do good at the same time. Remember, bees do it for the honey, too.