Fortune at the base of the pyramid?

Really interesting blog post in Next Billion, called "Markets of the Poor: Limits and Opportunities". Reading it definitely resonates with my experience at LifeSpring, particularly the challenge of turning need into demand. For instance, just because there is a need for safe, institutional deliveries, there is not necessarily a market demand that leads to profitability and scale.

There is no "build it, and they will come" model of social enterprise. That's why marketing and customer relationship management teams are necessary: to truly understand who your customers are, and develop innovative, new models based on their needs.

In his post (click here for full article), Aneel Karnani writes:

"There is no fortune at the base of the pyramid. Marketing socially useful products to the poor offers only limited business opportunities. Still, there are some profitable opportunities and we need creative entrepreneurs to design the right business models to serve the poor. It is necessary to understand that unmet needs do not necessarily constitute a market opportunity. A 'market' can exist only if there are buyers willing and able to pay a price that covers the total cost of production, including the opportunity cost of capital used. Unfortunately, due to the very meager income of the poor, markets for many socially useful goods simply do not exist. The French company Essilor found that not enough poor people were willing to pay even $5 for a pair of customized eyeglasses conveniently delivered on the spot. Procter & Gamble found that not enough poor people were willing to pay even $0.01 per liter for clean drinking water.

To serve the markets of the poor, firms have to dramatically reduce costs, by as much as 90 percent in many cases. A significant improvement in technology could reduce costs dramatically, as for example in telecommunications. Unfortunately there have not been such technological leaps in most other product categories. It is thus often necessary to reduce quality in order to reduce costs significantly. This does not imply selling shoddy or dangerous products. To profitably serve the poor, firms need to make the cost-quality trade-off appropriately in order to make the products affordable by the poor; the challenge is to do this in such a way that the cost-quality trade-off is acceptable to poor consumers. A simple or minor adaptation of the business model from affluent markets usually results in products that are too expensive and not affordable by the poor."