Reprint: R1206J
There’s a fatal flaw in the low-price, low-margin, high-volume strategy that multinationals have been pursuing in the bottom of the economic pyramid for the past decade: In order to cover the built-in costs of doing business among low-income customers scattered in rural villages and urban slums, penetration rates must be impractically high—often 30% or more.
Erik Simanis of Cornell University’s Johnson School of Management argues that companies seeking to improve the lives of the world’s poor should focus on a more realistic route to profitability: They need to elevate gross margins far above the company average by pushing down variable costs and boosting the price consumers are willing to pay for a unit of product. They also need to raise the price point for a single transaction. This combination of higher margins and higher price points increases the contribution—the amount of money that goes to covering fixed and operating costs—generated from every transaction.
Achieving sustainable margins in low-income markets requires a margin-boosting platform that integrates three common approaches—bundling products, offering an enabling service, and cultivating customer peer groups—into a coherent strategy. In this way, companies can launch flourishing ventures capable of transforming the lives of millions of low-income people across the developing world.
