Developing countries are often plagued by problems associated with inefficient regulation, lack of rudimentary infrastructure, widespread corruption, underdeveloped banking and financial structures and exploitation of citizens. The critics (Crabtree, 2007; Davidson, 2009;
Gangopadhyay & Wadhwa, 2004; Garrette & Karnani, 2010; Jaiswal, 2007; Karnani, 2007) of the BOP proposition, therefore, feel that the emphasis in these countries should be on
77
ensuring that the basic needs of the poor are fulfilled before these consumers can be looked upon as a lucrative market to serve.
The main criticisms of the BOP proposition can be summarized as follows:
Overestimated size of the BOP market: According to Prahalad (2005), the BOP market consists of approximately 4 billion people with a per capita income of less than $2 per day at purchasing power parity (PPP) rates and estimates the size of BOP market to be about $13 trillion. Karnani (2007) and other researchers (Golliath Business News, 2005), however, contradict Prahalad’s estimates saying that it is simply an excessive overestimation and concedes that, although the BOP market is indeed colossal in terms of number of consumers, it is relatively small monetarily. According to Karnani’s (2007) calculations, the BOP market size is merely $1.2 trillion after having used the World Bank’s estimate of $1.25 per day as the average consumption of its estimated 2.7 billion globally poor people. Based on these calculations, Jaiswal (2008) further asserts that the people who live on less than $1 per day, which the World Banks considers to be extreme poverty, cannot be viewed as a profitable market by MNCs and if a fortune did in fact exist, it will be at the lower-middle and middle of the pyramid, certainly not at the bottom. Warnholz (2007) and Crabtree (2007) agree that Prahalad’s estimation of the size of the BOP market is imprecise and that the exact figures seem to be of a lesser importance to Prahalad (2005) than the overall direction of his proposition. Warnholz (2007) states that clarity on the classification of the BOP market is important because businesses are likely to use different models to serve those living on less than $1 per day as compared to the models that are used in servicing the needs of consumers who have comparatively higher earnings. Warnholz (2007) agrees with Jaiswal (2008) that the variable definitions and measurements of the BOP market may very well lead to a movement away from the true bottom of the pyramid to the more lucrative middle of the pyramid.
High costs of serving BOP consumers: The BOP proposition indicates that there is substantial untapped purchasing power at the bottom of the pyramid and that there is potential for BOP markets to yield soaring profit margins for MNCs. Karnani (2007) and other researchers (Goliath Business News, 2005), however, disagree with this viewpoint and perceive the BOP market as being highly unprofitable owing to the price
78
sensitivity of its consumers. They argue that the cost of serving these people will be immense because of their geographical spread and cultural heterogeneity, thereby increasing distribution and marketing costs, and that it will prove formidable for MNCs to exploit economies of scale in this market. Garrette and Karnani (2010) state that the difficulties in distribution to this market coupled with MNCs being forced to create distribution networks from scratch, will result in an escalation in distribution costs. The problem of distribution is exacerbated since MNCs are often ill-equipped to engage in forward integration in terms of distribution especially in unfamiliar environments (Garrette & Karnani, 2010). Furthermore, Karnani (2007) believes that profitability will be affected by poor infrastructure in these markets as well as small-size transactions, which Jaiswal (2007) also does not regard as being workable or as making economic sense, elucidating that it is by selling bigger packages that companies can reduce their processing and transaction costs and not by doing the converse.
Lack of education leads to exploitation of BOP consumers: It is argued that the BOP proposition will ultimately lead to the exploitation of the poor because they are vulnerable by virtue of a lack of education as well as experience in evaluating advertising claims (Davidson, 2009) and are, therefore, susceptible to spending money on unnecessary products like shampoo and televisions instead of spending on high- priority products that will enhance their nutrition, health and education (Karnani, 2007).
BOP consumers are price sensitive and cannot afford to purchase luxuries: Bhan and Tait (2008) believe that low-income consumers prefer superior product brands, not because they are particularly brand conscious but desire value for money. Karnani (2007) supports this aspect of the BOP proposition that poor people desire quality products, lack self-control and give in to temptation (Banerjee & Duflo, 2007;
Fafchamps & Shilpi, 2008; Luttmer, 2005). However, Gangopadhyay and Wadhwa (2004) state that the problem lies in the fact that they cannot afford to purchase such products as the poor spend about 80% of their measly income on food, clothing and fuel.
Making provision to purchase these luxury items would mean sacrificing the purchase of essential items that are crucial to their well-being. Jaiswal (2007), therefore, proposes a framework for the promotion of selective consumption by BOP consumers in order to avert their “undesirable inclusion” (marketing products to the poor that are unlikely to
79
improve their well-being) and “undesirable exclusion” (not tendering products that will undoubtedly enhance their welfare) in target market selection by the private sector.
Prahalad (2005 cited in Davidson, 2009) explains that BOP consumers cannot afford to make mistakes in purchasing decisions and are, therefore, more inclined to purchasing branded products that are reputable and whose quality they can trust. However, brands gain recognition and respect through extensive and expensive advertising and other forms of promotion, the costs of which are borne by consumers in the form of higher product prices. Davidson (2009), therefore, questions the ethical implications of selling premium brands to BOP consumers, especially for classes of products where there are no significant functional differences between the branded product and the cheaper, unbranded, generic counterpart.
Single-serve packages to enhance affordability of products is a fallacy: The BOP proposition advocates the use of smaller-unit packages in order to encourage consumption, create affordability and offer a greater choice to BOP consumers.
Researchers (Goliath Business News, 2005) believe this claim of increased affordability to be a fallacy and Karnani (2007) articulates that although small packages increase convenience and assists the poor in managing cash flows, it does not increase affordability and asserts that the only way to do so is to reduce the price per use which he believes is not achievable by using sachet packaging. Byron (2007 cited in Davidson, 2009) states that single-serve packages may cost more than larger packages from a per- ounce basis which leads critics (Davidson, 2009; Jaiswal, 2007; Karnani, 2007) to believe that the poor are being misled into thinking that the smaller packages are cheaper whilst the true reality is that they are paying more on a per unit basis. Further to this, Karnani (2007) points out that smaller unit packaging places additional burden on the environment with regard to pollution. In addition, Hawken (cited in Katz, 2006) argues that what the poor want are rights and not foil packaging. Ireland (2008) agrees with Karnani (2007) that sachets and smaller package sizes are conducive to promoting impulse purchases by BOP consumers who, owing to lack of security and banking services, find it difficult to save money.
Financing schemes for BOP consumers does not increase affordability: Prahalad and Hart (2002) outline that by providing BOP consumers with access to credit, their
80
purchasing power will be increased, thereby enhancing affordability of commodities.
Karnani (2007) believes that providing credit to BOP consumers does not change the affordability of a product, even though it does provide some non-economic value to them in the form of increased self-esteem, social cohesion and empowerment.
Microcredit was found to have worsened poverty through the superfluous burden of debt (Hulme & Mosley, 1996 cited in Karnani, 2007) and although it reduces vulnerability through leveling consumption, it does not alleviate poverty (Morduch, 1998 cited in Karnani, 2007).
The only realistic way to reduce prices is to reduce cost and quality: Prahalad (2005) advocates that it is imperative for companies to reduce prices without reducing quality when serving the BOP market and he believes that the poor have a right to determine how to spend their limited income on products in a way that will maximise their utility, and the act of selling low-quality products to them is extremely disrespectful. However, researchers (Garrette & Karnani, 2010; Jaiswal, 2007; Karnani, 2007) consider this BOP proposition to be too ambitious claiming that the only realistic way to reduce the price to the consumer is by reducing the cost to the producer and business process redesign will seldom reduce cost by over 50% without reducing quality (Goliath Business News, 2005). Furthermore, Karnani (2007) opposes Prahalad’s conviction by stating that improvements in technology can reduce prices without reducing quality in products like computers and in the telecommunications sector but this is not the case for most other product categories and that there has to be a cost-quality trade-off that is acceptable to the poor. He cites the example of Nirma (a cheap detergent powder that contained no whitener, perfume or softener and one that was very harsh on the skin) as being more successful in the Indian BOP market than Hindustan Lever Limited’s Surf, purely because it was the cheaper alternative and he strongly believes that poor people do like inexpensive, low-quality products.
Small to medium-sized local enterprises are better suited to serving BOP markets than MNCs: Karnani (2007) believes that local enterprises are best suited to selling to the poor because BOP markets, with their weak infrastructures, are geographically and culturally fragmented and, therefore, unable to generate significant economies of scale.
81
Treat the BOP as producers rather than consumers: Jaiswal (2007) and Karnani (2007) believe that BOP consumers should be viewed as producers rather than consumers and that the best way to alleviate poverty is to raise their income by emphasising buying from them as opposed to selling to them. Jaiswal (2007) cited the example of Amul, a large dairy in India which assisted local farmers by centralising its high-tech milk processing facilities so that it is easily accessible to farmers who previously incurred losses due to travelling long distances, only to have their milk spoil due to inappropriate and non-refrigerated storage whilst in transit.
De-emphasis of the role of government in providing basic services and infrastructure:
Karnani (2009) disagrees with the affirmation made by the BOP proposition that the private sector needs to play the leading role in poverty alleviation, stating that this will inadvertently lead to an under-emphasis of the role and responsibility of the government in poverty reduction. Karnani (2009) also asserts that it is the government’s prerogative to provide basic services such as infrastructure, public health, safety and education which are important for increasing the productivity and employability of BOP consumers. Karnani (2009) is of the opinion that the BOP proposition will cause a distraction in correcting the failure of the government to provide these crucial services.
Disassociation of the BOP concept from Corporate Social Responsibility: Davidson (2009) argues that Prahalad incorrectly distances his concept of BOP from corporate social responsibility when he should in fact disassociate the concept from charity. In fact, Davidson (2009) believes that engagement with the BOP can be successful only if the core elements of corporate social responsibility are understood and included into the BOP strategy from its inception.
The criticisms of the BOP proposition focus primarily on the fact that the BOP market will not be a lucrative market due to the population being highly dispersed, the transportation infrastructure being abysmal or non-existent, household incomes being meager and sporadic and the adversities in creating brand trust and awareness because traditional marketing efforts will simply not work in BOP markets. A critical understanding of the challenges of doing business at the bottom of the pyramid is necessary in order to devise effective strategies to overcome the obstacles.
82