Raise Income

In fact, there is neither a fortune nor glory to be attained by selling to the bottom of the pyramid. It is erroneous to claim that there is much “untapped” purchasing power at the bottom of the pyramid. The poor obviously consume most of what they earn, and as a consequence have a low savings rate. Getting the poor to consume more will not eliminate their poverty. Their problem is that they cannot afford to consume more. The only way to help the poor and alleviate poverty is to raise their real income. There are only two ways to do this: (1) lower prices and (2) raise their incomes.

Lowering Prices

Reducing the prices of the goods and services the poor buy (or would buy) increases their effective income. Thus, to have a significant impact on the purchasing behavior of the poor, the BOP proposition calls for price reductions of over 90 percent.50 This is a very ambitious and rarely achieved target. It would be useful to settle for lower, but still significant, price reductions of, say, 50 percent.

There are only three possible ways to reduce prices: (1) reduce profits; (2) reduce costs without reducing quality; and (3) reduce costs by reducing quality. If it is true that the average profit margin in a market is well over 50 percent, then working to make the market more efficient to reduce monopoly profits would result in significant price reductions. Even allowing that the poor are often subject to local monopolies, this is a rare situation. Therefore, the only realistic way to reduce prices to the poor consumer is to reduce the producers’ costs. Unless all current producers are grossly inefficient, redesigning business processes will not reduce costs by over 50 percent without also reducing quality. A significant improvement in technology, however, could reduce costs dramatically. A good example is telecommunications, which is discussed in greater detail in

Chapter 5. Unfortunately, similar examples of technology leading to such dramatic cost reductions in other product categories (besides electronics) are rare. The poor spend over 80 percent of their income on food, shelter, clothing, and fuel—products that have not benefited from such dramatic technological changes in a long time. Back in the 1950s and 1960s, the “green revolution” significantly reduced agricultural costs.51 But it is often necessary to reduce quality in order to reduce costs; the challenge is to do this in such a way that the cost-quality trade-off is acceptable to poor consumers.

 
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