Reality Check at the Bottom of the Pyramid

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.

• Developing countries
• Poverty
• Multinational corporations
• Strategy
• Profitability
• Pricing strategy