POLICY Serving the World’s Poor,
Profitably
by C.K. Prahalad and Allen Hammond
FROM THE SEPTEMBER 2002 ISSUE C onsider this bleak vision of the world 15 years from now: The global economy recovers
from its current stagnation but growth remains anemic. Deflation continues to threaten,
the gap between rich and poor keeps widening, and incidents of economic chaos, governmental collapse, and civil war plague developing regions. Terrorism remains a constant
threat, diverting significant public and private resources to security concerns. Opposition to the
global market system intensifies. Multinational companies find it difficult to expand, and many
become risk averse, slowing investment and pulling back from emerging markets. Now consider this much brighter scenario: Driven by private investment and widespread
entrepreneurial activity, the economies of developing regions grow vigorously, creating jobs and
wealth and bringing hundreds of millions of new consumers into the global marketplace every year.
China, India, Brazil, and, gradually, South Africa become new engines of global economic growth,
promoting prosperity around the world. The resulting decrease in poverty produces a range of social
benefits, helping to stabilize many developing regions and reduce civil and cross-border conflicts.
The threat of terrorism and war recedes. Multinational companies expand rapidly in an era of
intense innovation and competition. Both of these scenarios are possible. Which one comes to pass will be determined primarily by one
factor: the willingness of big, multinational companies to enter and invest in the world’s poorest
markets. By stimulating commerce and development at the bottom of the economic pyramid, MNCs
could radically improve the lives of billions of people and help bring into being a more stable, less
dangerous world. Achieving this goal does not require multinationals to spearhead global social development initiatives for charitable purposes. They need only act in their own self-interest, for
there are enormous business benefits to be gained by entering developing markets. In fact, many
innovative companies—entrepreneurial outfits and large, established enterprises alike—are already
serving the world’s poor in ways that generate strong revenues, lead to greater operating
efficiencies, and uncover new sources of innovation. For these companies—and those that follow
their lead—building businesses aimed at the bottom of the pyramid promises to provide important
competitive advantages as the twenty-first century unfolds. Big companies are not going to solve the economic ills of developing countries by themselves, of
course. It will also take targeted financial aid from the developed world and improvements in the
governance of the developing nations themselves. But it’s clear to us that prosperity can come to the
poorest regions only through the direct and sustained involvement of multinational companies. And
it’s equally clear that the multinationals can enhance their own prosperity in the process. Untapped Potential
Everyone knows that the world’s poor are distressingly plentiful. Fully 65% of the world’s
population earns less than $2,000 each per year—that’s 4 billion people. But despite the vastness of
this market, it remains largely untapped by multinational companies. The reluctance to invest is
easy to understand. Companies assume that people with such low incomes have little to spend on
goods and services and that what they do spend goes to basic needs like food and shelter. They also
assume that various barriers to commerce—corruption, illiteracy, inadequate infrastructure,
currency fluctuations, bureaucratic red tape—make it impossible to do business profitably in these
regions. But such assumptions reflect a narrow and largely outdated view of the developing world. The fact
is, many multinationals already successfully do business in developing countries (although most
currently focus on selling to the small upper-middle-class segments of these markets), and their
experience shows that the barriers to commerce—although real—are much lower than is typically
thought. Moreover, several positive trends in developing countries—from political reform, to a
growing openness to investment, to the development of low-cost wireless communication networks
—are reducing the barriers further while also providing businesses with greater access to even the
poorest city slums and rural areas. Indeed, once the misperceptions are wiped away, the enormous
economic potential that lies at the bottom of the pyramid becomes clear. Take the assumption that the poor have no money. It sounds obvious on the surface, but it’s wrong.
While individual incomes may be low, the aggregate buying power of poor communities is actually
quite large. The average per capita income of villagers in rural Bangladesh, for instance, is less than
$200 per year, but as a group they are avid consumers of telecommunications services. Grameen
Telecom’s village phones, which are owned by a single entrepreneur but used by the entire
community, generate an average revenue of roughly $90 a month—and as much as $1,000 a month
in some large villages. Customers of these village phones, who pay cash for each use, spend an
average of 7% of their income on phone services—a far higher percentage than consumers in
traditional markets do. It’s also incorrect to assume that the poor are too concerned with fulfilling their basic needs to
“waste” money on nonessential goods. In fact, the poor often do buy “luxury” items. In the Mumbai
shantytown of Dharavi, for example, 85% of households own a television set, 75% own a pressure
cooker and a mixer, 56% own a gas stove, and 21% have telephones. That’s because buying a house
in Mumbai, for most people at the bottom of the pyramid, is not a realistic option. Neither is getting
access to running water. They accept that reality, and rather than saving for a rainy day, they spend
their income on things they can get now that improve the quality of their lives. Another big misperception about developing markets is that the goods sold there are incredibly
cheap and, hence, there’s no room for a new competitor to come in and turn a profit. In reality,
consumers at the bottom of the pyramid pay much higher prices for most things than middle-class
consumers do, which means that there’s a real opportunity for companies, particularly big
corporations with economies of scale and efficient supply chains, to capture market share by
offering higher quality goods at lower prices while maintaining attractive margins. In fact,
throughout the developing world, urban slum dwellers pay, for instance, between four and 100
times as much for drinking water as middle- and upper-class families. Food also costs 20% to 30%
more in the poorest communities since there is no access to bulk discount stores. On the service side
of the economy, local moneylenders charge interest of 10% to 15%per day, with annual rates
running as high as 2,000%. Even the lucky small-scale entrepreneurs who get loans from nonprofit
microfinance institutions pay between 40% and 70% interest per year—rates that are illegal in most
developed countries. (For a closer look at how the prices of goods compare in rich and poor areas,
see the exhibit “The High-Cost Economy of the Poor.”) The High-Cost Economy of the
Poor It can also be surprisingly cheap to market and When we compare the costs of essentials
in Dharavi, a shantytown of more than 1
million people in the heart of Mumbai,
India, with those of Warden Road, an
upper-class community in a nice Mumbai
suburb, a disturbing picture emerges.
Clearly, costs could be dramatically
reduced if the poor could benefit from the
scope, scale, and supply-chain efficiencies
of large enterprises, as their middle-class
counterparts do. This pattern is common
around the world, even in developed
countries. For instance, a similar, if less
exaggerated, disparity exists between the
inner-city poor and the suburban rich in
the United States. That’s because many of them live in cities that are deliver products and services to the world’s poor. densely populated today and will be even more so
in the years to come. Figures from the UN and the
World Resources Institute indicate that by 2015,
in Africa, 225 cities will each have populations of
more than 1 million; in Latin America, another
225; and in Asia, 903. The population of at least
27 cities will reach or exceed 8 million.
Collectively, the 1,300 largest cities will account
for some 1.5 billion to 2 billion people, roughly
half of whom will be bottom-of-the-pyramid
(BOP) consumers now served primarily by
informal economies. Companies that operate in
these areas will have access to millions of
potential new customers, who together have
billions of dollars to spend. The poor in Rio de
Janeiro, for instance, have a total purchasing
power of $1.2 billion ($600 per person).
Shantytowns in Johannesburg or Mumbai are no
different. The slums of these cities already have distinct ecosystems, with retail shops, small businesses,
schools, clinics, and moneylenders. Although there are few reliable estimates of the value of
commercial transactions in slums, business activity appears to be thriving. Dharavi—covering an
area of just 435 acres—boasts scores of businesses ranging from leather, textiles, plastic recycling,
and surgical sutures to gold jewelry, illicit liquor, detergents, and groceries. The scale of the
businesses varies from one-person operations to bigger, well-recognized producers of brand-name
products. Dharavi generates an estimated $450 million in manufacturing revenues, or about $1
million per acre of land. Established shantytowns in São Paulo, Rio, and Mexico City are equally
productive. The seeds of a vibrant commercial sector have been sown. While the rural poor are naturally harder to reach than the urban poor, they also represent a large
untapped opportunity for companies. Indeed, 60% of India’s GDP is generated in rural areas. The
critical barrier to doing business in rural regions is distribution access, not a lack of buying power.
But new information technology and communications infrastructures—especially wireless—promise
to become an inexpensive way to establish marketing and distribution channels in these
communities. Conventional wisdom says that people in BOP markets cannot use such advanced technologies, but
that’s just another misconception. Poor rural women in Bangladesh have had no difficulty using
GSM cell phones, despite never before using phones of any type. In Kenya, teenagers from slums are
being successfully trained as Web page designers. Poor farmers in El Salvador use telecenters to
negotiate the sale of their crops over the Internet. And women in Indian coastal villages have in less
than a week learned to use PCs to interpret real-time satellite images showing concentrations of
schools of fish in the Arabian Sea so they can direct their husbands to the best fishing areas. Clearly,
poor communities are ready to adopt new technologies that improve their economic opportunities
or their quality of life. The lesson for multinationals: Don’t hesitate to deploy advanced technologies
at the bottom of the pyramid while, or even before, deploying them in advanced countries. A final misperception concerns the highly charged issue of exploitation of the poor by MNCs. The
informal economies that now serve poor communities are full of inefficiencies and exploitive
intermediaries. So if a microfinance institution charges 50% annual interest when the alternative is
either 1,000% interest or no loan at all, is that exploiting or helping the poor? If a large financial
company such as Citigroup were to use its scale to offer microloans at 20%, is that exploiting or
helping the poor? The issue is not just cost but also quality—quality in the range and fairness of
financial services, quality of food, quality of water. We argue that when MNCs provide basic goods
and services that reduce costs to the poor and help improve their standard of living—while
generating an acceptable return on investment—the results benefit everyone. The Business Case
The business opportunities at the bottom of the pyramid have not gone unnoticed. Over the last five
years, we have seen nongovernmental organizations (NGOs), entrepreneurial start-ups, and a
handful of forward-thinking multinationals conduct vigorous commercial experiments in poor communities. Their experience is a proof of concept: Businesses can gain three important
advantages by serving the poor—a new source of revenue growth, greater efficiency, and access to
innovation. Let’s look at examples of each. Top-Line Growth.
Growth is an important challenge for every company, but today it is especially critical for very large
companies, many of which appear to have nearly saturated their existing markets. That’s why BOP
markets represent such an opportunity for MNCs: They are fundamentally new sources of growth.
And because these markets are in the earliest stages of economic development, growth can be
extremely rapid. Markets at the bottom of the economic pyramid
are fundamentally new sources of growth for
multinationals. And because these markets are
in the earliest stages, growth can be extremely
rapid.
Latent demand for low-priced, high-quality goods is enormous. Consider the reaction when
Hindustan Lever, the Indian subsidiary of Unilever, recently introduced what was for it a new
product category—candy—aimed at the bottom of the pyramid. A high-quality confection made with
real sugar and fruit, the candy sells for only about a penny a serving. At such a price, it may seem
like a marginal business opportunity, but in just six months it became the fastest-growing category
in the company’s portfolio. Not only is it profitable, but the company estimates it has the potential
to generate revenues of $200 million per year in India and comparable markets in five years.
Hindustan Lever has had similar successes in India with low-priced detergent and iodized salt.
Beyond generating new sales, the company is establishing its business and its brand in a vast new
market. There is equally strong demand for affordable services. TARAhaat, a start-up focused on rural India,
has introduced a range of computer-enabled education services ranging from basic IT training to
English proficiency to vocational skills. The products are expected to be the largest single revenue
generator for the company and its franchisees over the next several years.1 Credit and financial services are also in high demand among the poor. Citibank’s ATM-based banking experiment in
India, called Suvidha, for instance, which requires a minimum deposit of just $25, enlisted 150,000
customers in one year in the city of Bangalore alone. Small-business services are also popular in BOP markets. Centers run in Uganda by the Women’s
Information Resource Electronic Service (WIRES) provide female entrepreneurs with information on
markets and prices, as well as credit and trade support services, packaged in simple, ready-to-use
formats in local languages. The centers are planning to offer other small-business services such as
printing, faxing, and copying, along with access to accounting, spreadsheet, and other software. In
Bolivia, a start-up has partnered with the Bolivian Association of Ecological Producers Organizations
to offer business information and communications services to more than 25,000 small producers of
ecoagricultural products. It’s true that some services simply cannot be offered at a low-enough cost to be profitable, at least
not with traditional technologies or business models. Most mobile telecommunications providers,
for example, cannot yet profitably operate their networks at affordable prices in the developing
world. One answer is to find alternative technology. A microfinance organization in Bolivia named
PRODEM, for example, uses multilingual smart-card ATMs to substantially reduce its marginal cost
per customer. Smart cards store a customer’s personal details, account numbers, transaction
records, and a fingerprint, allowing cash dispensers to operate without permanent network
connections—which is key in remote areas. What’s more, the machines offer voice commands in
Spanish and several local dialects and are equipped with touch screens so that PRODEM’s customer
base can be extended to illiterate and semiliterate people. Another answer is to aggregate demand, making the community—not the individual—the network
customer. Gyan-doot, a start-up in the Dhar district of central India, where 60% of the population
falls below the poverty level, illustrates the benefits of a shared access model. The company has a
network of 39 Internet-enabled kiosks that provide local entrepreneurs with Internet and
telecommunications access, as well as with governmental, educational, and other services. Each
kiosk serves 25 to 30 surrounding villages; the entire network reaches more than 600 villages and
over half a million people. Networks like these can be useful channels for marketing and distributing many kinds of low-cost
products and services. Aptech’s Computer Education division, for example, has built its own
network of 1,000 learning centers in India to market and distribute Vidya, a computer-training
course specially designed for BOP consumers and available in seven Indian languages. Pioneer HiBred, a DuPont company, uses Internet kiosks in Latin America to deliver agricultural information
and to interact with customers. Farmers can report different crop diseases or weather conditions,
receive advice over the wire, and order seeds, fertilizers, and pesticides. This network strategy
increases both sales and customer loyalty. The World Pyramid Most companies target consumers at the upper tiers of the economic pyramid,
completely overlooking the business potential at its base. But though they may each be earning the
equivalent of less than $2,000 a year, the people at the bottom of the pyramid make up a colossal
market—4 billion strong—the vast majority of the world’s population. Reduced Costs.
No less important than top-line growth are cost-saving opportunities. Outsourcing operations to
low-cost labor markets has, of course, long been a popular way to contain costs, and it has led to the
increasing prominence of China in manufacturing and India in software. Now, thanks to the rapid
expansion of high-speed digital networks, companies are realizing even greater savings by locating
such labor-intensive service functions as call centers, marketing services, and back-office transaction processing in developing areas. For example, the nearly 20 companies that use
OrphanIT.com’s affiliate-marketing services, provided via its telecenters in India and the
Philippines, pay one-tenth the going rate for similar services in the United States or Australia.
Venture capitalist Vinod Khosla describes the remote-services opportunity this way: “I suspect that
by 2010, we will be talking about [remote services] as the fastest-growing part of the world
economy, with many trillions of dollars of new markets created.” Besides keeping costs down,
outsourcing jobs to BOP markets can enhance growth, since job creation ultimately increases local
consumers’ purchasing power. But tapping into cheap labor pools is not the only way MNCs can enhance their efficiency by
operating in developing regions. The competitive necessity of maintaining a low cost structure in
these areas can push companies to discover creative ways to configure their products, finances, and
supply chains to enhance productivity. And these discoveries can often be incorporated back into
their existing operations in developed markets. For instance, companies targeting the BOP market are finding that the shared access model, which
disaggregates access from ownership, not only widens their customer base but increases asset
productivity as well. Poor people, rather than buying their own computers, Internet connections,
cell phones, refrigerators, and even cars, can use such equipment on a pay-per-use basis. Typically,
the providers of such services get considerably more revenue per dollar of investment in the
underlying assets. One shared Internet line, for example, can serve as many as 50 people, generating
more revenue per day than if it were dedicated to a single customer at a flat fee. Shared access
creates the opportunity to gain far greater returns from all sorts of infrastructure investments. In terms of finances, to operate successfully in BOP markets, managers must also rethink their
business metrics—specifically, the traditional focus on high gross margins. In developing markets,
the profit margin on individual units will always be low. What really counts is capital efficiency—
getting the highest possible returns on capital employed (ROCE). Hindustan Lever, for instance,
operates a $2.6 billion business portfolio with zero working capital. The key is constant efforts to
reduce capital investments by extensively outsourcing manufacturing, streamlining supply chains,
actively managing receivables, and paying close attention to distributors’ performance. Very low capital needs, focused distribution and technology investments, and very large volumes at low
margins lead to very high ROCE businesses, creating great economic value for shareholders. It’s a
model that can be equally attractive in developed and developing markets. Streamlining supply chains often involves replacing assets with information. Consider, for example,
the experience of ITC, one of India’s largest companies. Its agribusiness division has deployed a total
of 970 kiosks serving 600,000 farmers who supply it with soy, coffee, shrimp, and wheat from 5,000
villages spread across India. This kiosk program, called e-Choupal, helps increase the farmers’
productivity by disseminating the latest information on weather and best practices in farming, and
by supporting other services like soil and water testing, thus facilitating the supply of quality inputs
to both the farmers and ITC. The kiosks also serve as an e-procurement system, helping farmers
earn higher prices by minimizing transaction costs involved in marketing farm produce. The head of
ITC’s agribusiness reports that the company’s procurement costs have fallen since e-Choupal was
implemented. And that’s despite paying higher prices to its farmers: The program has enabled the
company to eliminate multiple transportation, bagging, and handling steps—from farm to local
market, from market to broker, from broker to processor—that did not add value in the chain. Innovation.
BOP markets are hot-beds of commercial and technological experimentation. The Swedish wireless
company Ericsson, for instance, has developed a small cellular telephone system, called a MiniGSM,
that local operators in BOP markets can use to offer cell phone service to a small area at a radically
lower cost than conventional equipment entails. Packaged for easy shipment and deployment, it
provides stand-alone or networked voice and data communications for up to 5,000 users within a
35-kilometer radius. Capital costs to the operator can be as low as $4 per user, assuming a shareduse model with individual phones operated by local entrepreneurs. The MIT Media Lab, in
collaboration with the Indian government, is developing low-cost devices that allow people to use
voice commands to communicate—without keyboards—with various Internet sites in multiple
languages. These new access devices promise to be far less complex than traditional computers but
would perform many of the same basic functions.2 As we have seen, connectivity is a big issue for BOP consumers. Companies that can find ways to
dramatically lower connection costs, therefore, will have a very strong market position. And that is
exactly what the Indian company n-Logue is trying to do. It connects hundreds of franchised village kiosks containing both a computer and a phone with centralized nodes that are, in turn, connected
to the national phone network and the Internet. Each node, also a franchise, can serve between
30,000 and 50,000 customers, providing phone, e-mail, Internet services, and relevant local
information at affordable prices to villagers in rural India. Capital costs for the n-Logue system are
now about $400 per wireless “line” and are projected to decline to $100—at least ten times lower
than conventional telecom costs. On a per-customer basis, the cost may amount to as little as $1.3
This appears to be a powerful model for ending rural isolation and linking untapped rural markets to
the global economy. New wireless technologies are likely to spur further business model innovations and lower costs
even more. Ultra-wideband, for example, is currently licensed in the United States only for limited,
very low-power applications, in part because it spreads a signal across already-crowded portions of
the broadcast spectrum. In many developing countries, however, the spectrum is less...

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