Is there (business) life at the Bottom of the Pyramid?

Some years ago, I received a call from a top officer working for the International Group of a major US operator.  The reason of the call was to know if the consulting services firm I was partner at that time, was able to help them in some of their existing Latin American operations to develop a profitable model to serve the segment known as “The Bottom of the Pyramid” or BOP.

One of the drivers of such request was by that time, the recent publishing of a book named precisely “The Fortune at The Bottom of the Pyramid”, written by an author called C.K. Prahalad, which stressed the economic relevance of such segment.

This book defined the BOP segment as comprised by the 4 billion people living on less than US$2 per day.  Prahalad proposes that businesses, governments, and donor agencies stop thinking of the poor as victims and instead start seeing them as resilient and creative entrepreneurs as well as value-demanding consumers. He proposes that there are tremendous benefits to multi-national companies who choose to serve these markets in ways responsive to their needs. After all the poor of today is the middle-class of tomorrow. There are also poverty reducing benefits if multi-nationals work with civil society organizations and local governments to create new local business models.

Coming back to our case, it is important to say that the client knew us through several projects we had developed for them in other operations in the region related to the re-engineering of their Prepaid Business. Those projects had resulted in a boost of revenues and profitability in all cases. Obviously, attacking the BOP would mean an extra twist on the Prepaid line of business. We immediately accepted the challenge, and quickly launched the project, deploying a team to visit the two operations in question.

The very first task was to agree with the client the scope of the BOP segment. The convention taken was to consider a client as part of the BOP, if her/his telecommunications “share of wallet” is around US$4 per month. It is important to remark that this “share of wallet” includes not only services but also a pro-rata of the handset cost.

A major portion and also key activities of the project was to thoroughly “hit the street” on both markets. I cannot stress enough how key the findings of this stage were to the development of the sub-sequent Business Plan. (On the other hand, the diversity of stories and the creativity of the street players, merit the development of a separate blog).

Initial finding was that independently of the close vicinity of the two countries analyzed, differences in the formal and informal distribution of handsets and replenishment, people behavior and even regulations, made the tactics to address each markets quite dissimilar.

You can check the sanitized presentation attached to read every detail of the final document presented to the client, but let me give you a list of bullet points on the most important issues to face if you are willing to profitable serve the BOP with mobile services.

1. Assure the client access to affordable handsets. This is fundamental to the sustainability of the business since the customer telecommunications “share of wallet” Is heavily impacted by this cost. Please, don’t read me wrong, this does not mean in any way to subsidize the handset acquisition. Totally the contrary, is the very difficult art to use the reality of the market – which is normally far from perfection, in your favour. Things as “guaranteed” refurbished handsets or “disposable phones” should be carefully analysed. Definitively it will demand a very open minded approach and partnership with economic agents that are physically very close to the BOP customer.
2. Electronic replenishment only. There is no room for the typical scratch card distribution, since the cost of this channel prevents profitability of the model. The most adequate electronic replenishment method is the “mobile to mobile” because the flexibility to charge any given amount, independently the insignificance of it (in Philippines the minimum amount of replenishment equals the cost of a SMS), and the lack of any additional infrastructure needs. Of course, the billing platform needs to be aligned to this flexibility
3. Tailored service plans. Operators need to think on plans that are adequate to BOP customers that will mostly replenish their credits on a day by day basis. These plans are called “sachet” plans after the way Fast Moving Consuming Goods (FMCG) companies sell the cosmetic and personal care articles to this segment.
4. Self funded commissions. Agents and distributors should be remunerated by the customer itself, at the activation moment, avoiding any fraud and/or upfront disbursement by the operator.
5. “Near zero” Call Center and Customer Care costs. Thorough analysis on how to heavily automate the Customer Care activities.

You will see in the two examples of the presentation the influence of the different market environments in the final profitability.    Anyway, both are profitable enough to justify the focusing on how to serve the BOP particular economic and other needs. Launching of a comprehensive plan will definitively improve the contribution of this segment, and will allow to gain scale in it, which at the end of the day could be an extraordinary bucket of business in over saturated markets or in new markets in less favored wealthy countries.

Keep me posted on your thoughts…

Daniel Mark – Head of mmC Group’s LatAm’s office