5 Reasons to Invest in BOP (Bottom of the Pyramid)

According to C.K Prahalad, “Bottom of the Pyramid is a socio-economic concept that allows us to group that vast segment – in excess of about four billion of the world’s poorest citizens constituting an invisible and un-served market blocked by challenging barriers that prevent them from realizing their human potential for their own benefit, those of their families, and that of society’s at large. Technically, a member of the BOP is an integral part of the largest but poorest groups of the world’s population, who live with less than $2.50 a day and are excluded from the modernity of our globalized and civilized societies. Some estimates based on the broadest segment of the BOP put its demand as consumers at about $5 trillion in Purchasing Power Parity terms, making it a desirable objective for creative and leading visionary businesses throughout the world. One of the undeniable reasons in this process is the explosion of the Micro-finance industry.”
Characteristics of the BOP Market
  1. Unmet Needs: One could infer that some needs and wants of the BOP tier and other tiers resemble one another. However, some needs and wants of one BOP may be different from those of other BOPs. For instance, BOP and all other tiers may have common needs for efficient transportation system, ICT” (Information and Communication Technologies) equipment, banking services, water, electricity, health services, etc. However, need for electronics, apparel, entertainment, etc., may vary across people in BOP tiers and other tiers in the world economic pyramid. People at the BOP are willing to pay for it, but don’t have access to it.
  2. Subsistence Livelihood: Subsistence livelihood can be explained as the minimum resources required to fulfill the basic needs necessary for one’s survival. One may argue that subsistence livelihood is earning above the government determined poverty line or earning minimum wage prescribed by the government of India.
  3. Poverty Penalty: Poverty Penalty can be explained as the excessive price paid by the poor segment of the population against the price paid by the rich for the same goods and services. Despite the meager income and financial uncertainties inherent to the BOP, people in BOP tier often end up paying higher prices than people in the top tiers for same goods or services. For instance, BOP tier constituents often obtain loans from money lenders because they do not have access to organized banking services. The rate of interest charged by these money lenders is much higher than the rate of interest charged by the banks. This is clearly an indication of the onslaught of informal lending practices.
Reasons to invest in BOP
  • BOP has exclusive financial resources: Private sector can tap the BOP market potential and gain a competitive advantage. Private sector can develop efficient marketing systems to not only expand their market into the BOP segment but can provide some relief to the consumers in the BOP tier.
  • Limited Government Outreach: Government invests significantly in empowering the rural BOP sector. However, looking at the BOP segment globally, it can be inferred that initiatives by the government alone cannot help in improving the standards of living of the BOP constituents. Thus, there is an impetus for private sector participation. Business firms can enter the BOP sector as a Social Business Enterprise (SBE), which is a termed coined for firms that make profits while creating a positive social impact in the operational areas.
  • Widening the Target Customers: More often than not, private sector firms focus on meeting the expectations of first 3 tiers, targeting the middle and higher income groups. Given the changes in international trade over the last few decades, the world is now a single global market. To leverage on the economies of scale, private sector firms may look forward to widen the target customer base.
  • Increasing Aspiration of the People: It is believed that the BOP constituents are deprived of various commodities that could improve their standard of living. For example, people in BOP tier don’t have access to TVs and internet. To improve their standard of living, private sector may focus on urban planning and play a vital role that eventually leads to a balanced development.
  • Transition from BOP to Middle Class: A study by ‘The Economist’ states that “half of the world” can be categorized as the emerging middle income group. People from the lower income segments are gradually moving towards the middle income segments.
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