If your company has hit upon a financially sustainable model for low income base of the pyramid business by this time in the first 2-3 years of business operations then you are one of the fortunate one ! If not, then it’s likely there is a lingering doubt in the mind of your managers who are developing innovative business models in this space. The question in their mind is “Is it possible to run a profitable business in the medium term serving the low income households?”  

Now in spite of the odds it makes a lot of business sense for established corporates to invest resources for developing these markets. If you have passed the stage of desk research at headquarters and have come to the conclusion that there is an opportunity for you but the business model and commercial viability is still to be proven then the following 3 reasons should give a gentle nudge in the direction of investing resources to frame the opportunity, develop pilot models and invest in medium to long term strategic positioning.

1. Positioning the company now to seize the opportunity when the market matures

The starting assumption here is that the market that your company is targeting is not mainstream and you have doubts about developing a profitable business model in the medium term. Then should you invest?

The answer is yes if you find you are in a similar position where ICICI Bank in India was in 2000/2001. Way back then lending to “unbankable” low income households by private banks was not mainstream. The core business of any Bank is about raising funds and deploying funds and profitability results from managing the margin spread. This fundamental principle was still applicable for low income markets but the critical unknowns were managing the risk and cost structure to serve the low income market in rural India. ICICI Bank invested resources to develop business models for this opportunity and tested the critical unknowns .Its microfinance model evolved from SHG lending to lending to partner MFIs to achieve the scale of operations. As the Microfinance market matured and became more and more mainstream ICICI Bank grew with that from 10,000 customers in 2001 to more than 1 million customers now through partner MFI organisations. The business is likely to be profitable now and if not very shortly it will be given the scale it has reached and the growth targets. So ICICI’s early entry into the low income market and experimentation positioned them suitably to take a leadership position when the market matured.

Would you like to place your company in a position like that in the future?

2.  Partnering with the low income consumers in their evolution pathway

The starting assumption here is that more often than not when MNCs innovate in this space the new business model along with products and services is significantly different from their established product portfolio. The question that is unanswered that will this new product and service will ever form the significant portion of sales in future.

The perspective that needs to be kept in mind that the first product and service introduced in this space is just the entry product. The idea here is to partner with the low income consumers in their evolution pathway keeping a 3 years to 10 years horizon. Most likely a portion of them will graduate to the established products and services of your company. A relevant example in this case will be about how the credit card companies target graduate students in their final year of studies. The credit card companies act on the belief that these students will graduate and enter into the job market and the entry level credit card is the starting point of the long term relationship and the associated cash flows.

Does your company believe that the current low income consumers will graduate to your established product and services portfolio? If yes, surely you would not like to pass on the chance of becoming top of the mind brand recall when this shift happens. So the approach is to partner with them in their difficult times so that they remember your company in their good times

 A word of caution is that you need not act just based on what you believe. This can be further supported by industry specific analytics to map how the consumers will evolve as their income levels rise and the time frame to achieve that.

  3.  Building organizational skills and knowledge of the low income markets

The starting assumption here is that right now you are having trouble to see a clear pathway to profitability in this space still you cannot ignore the fact that as a company you need to develop skills and knowledge in the low income markets.  You also realise that when in future the opportunity is right for you to act you will not have the time to learn about these markets from scratch.

So business development in these markets will typically give you an opportunity to train a new breed of leaders and entrepreneurs.  This opportunity will typically attract the young and ambitious associates of your company.  The challenging constraints that these markets offer ensure real time workouts in innovative thinking in terms of designing business models, products and services. The skills to straddle both the formal economy and informal economy to design business model, working with multiple partners will develop a pool of leaders in your company steeped in the knowledge of developing new business in the low income markets of emerging economies.

Do you need these skills in the future?

There are challenges to build a profitable business in this market space and to overcome that requires a lot of answers to “how “, “what “and “where “ , “when” questions. However if  you clearly articulate “why” as a company you are entering in this market space, then when the going gets tough reflecting on the “ why “ provides meaning and the energy to tackle  the rest of the questions.