Low incomes can give business high profits

Recently many companies have begun to see opportunities in once-neglected areas in Africa, the Middle East, and Central Asia.
The distinguished management consultant and business theorist C. K. Prahalad urged business to seek opportunities in these less affluent markets in his 2004 book “The Fortune at the Bottom of the Pyramid.” In his book, Prahalad claims that companies can prosper by serving the 4-5 billion consumers that live on under $2 a day ― a market he values at $13 billion a year. Prahalad does not suggest that companies embrace low-income markets as a charity. Instead, he contends that serving low-income markets is the best thing companies can do for their bottom line.
Of course, making money is no trivial task, and the challenges are especially daunting in low-income markets. Annual income per household in emerging economies currently stands at less than $5,000-$6000, and though populations are vast, resources for consumption are correspondingly limited. To this end, it is necessary for businesses to deploy different tactics to address low-income consumer needs. Some of these tactics may include:
Systems on a chip: By integrating disparate functions into a single low-cost chip, companies can save on production costs. System-on-a-chip technology is expected to result in $20 mobile phones by 2009.
Customized low-cost platforms: Platforms used in advanced countries cannot simply be cut down to suit low-income consumers. Instead, customized platforms that reduce production costs can bring products to new markets, resulting in, for example, sub-$100 PCs.
Original development manufacturin: Companies can design and produce their products locally, to meet low-income requirements and reduce costs. Production for multiple clients can also generate economies of scale.
Many other techniques and methods, including vertical integration and process improvement, are available for companies to succeed in low-income markets. Most importantly, however, companies need to understand that simply dumbing down existing products and services will not result in improvements in their bottom line. Developing markets require special considerations that need attention from the design stage.
In fact, some of the world’s most successful companies are also pioneers in low-income economies. Motorola, with its low-cost Motofone, has been a leader in developing products tailored to the needs of low-income markets. The fast growth in the market for sub-$100 mobile phones in India, Latin America and Eastern Europe proves the potential for profits in low-income markets.
Toyota, the world’s largest carmaker, has officially announced plans to develop low-cost $5,000 cars that specifically target emerging markets. In all cases, companies that are succeeding in low-income economies are doing so by deploying strategies designed from the outset for low-income market needs.

The author is a research fellow at Samsung Economic Research Institute. Inquiries on this article should be addressed to seribae@seri.org.

By Bae Young-Il