Allen L. Hammond, William J. Kramer,
Robert S. Katz, Julia T. Tran, and Courtland Walker
The Next 4 Billion
In an informal suburb of Guadalajara, Mexico, a growing family is struggling to
expand its small house. Help arrives from a major industrial company in the form
of construction designs, credit, and as-needed delivery of materials, enabling rapid
completion of the project at less overall cost.
In rural Madhya Pradesh, an Indian farmer gains access to soil testing servic-
es, to market price trends that help him decide what to grow and when to sell, E
to higher prices for his crop than he can obtain in the local auction market. IL
new system is an innovation of a large grain-buying corporation, which also ben-
efits from cost saving and more direct market access.
A South African who lives in an impoverished, crime-ridden neighborhood of
Johannesburg has no bank account, cannot order items from a distant store, and is
sometimes robbed of her pay packet. She finds that a new financial service offered
by a local start-up company allows her mobile phone to become a solution—her
pay is deposited directly to her phone-based account, she can make purchases via
an associated debit card, and she carries no cash to steal.
In a small community outside Tianjin, China, a small merchant whose chil-
dren have been repeatedly sickened by drinking water from a heavily-polluted river
is distraught. He finds help not from the overwhelmed municipal government but
from a new, low-cost filtering system, developed by an entrepreneurial company,
which enables his family to treat its water at the point of use.
Allen L. Hammond is Vice President for Innovation and Special Projects at WRI, E
also Director of the Development Through Enterprise Project. William J. Kramer is
Deputy Director of Development Through Enterprise. Robert S. Katz, Julia T. Tran,
and Courtland Walker are Research Analysts with Development Through Enterprise,
and are principal analysts of household survey data for “The Next 4 Billion: Market
Size and Business Strategy at the Base of the Pyramid.”
The World Resources Institute is an environmental and international develop-
ment think tank that goes beyond research to create practical ways to protect the Earth
and improve people’s lives. The authors are part of the Development Through
Enterprise project at WRI, which catalyzes sustainable economic growth by identify-
ing market opportunities and business models that meet the needs of underserved
communities at the base of the pyramid. For more WRI and Development Through
Enterprise, Vedere
© 2007 World Resources Institute
innovazioni / winter & spring 2007
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Hammond, Kramer, Katz, Tran, and Walker
Figura 1.
Four billion people such as these form the base of the economic pyramid
(BOP)—those with incomes below $3,000 (in local purchasing power). The BOP makes up 72% del 5.75 billion people recorded by available national household surveys worldwide and an overwhelming majority of the population in the devel- oping countries of Africa, Asia, Eastern Europe, and Latin America and the Caribbean—home to nearly all the BOP. This large segment of humanity faces significant unmet needs and lives in rel- ative poverty: in current U.S. dollars their incomes are less than $3.35 a day in
Brasile, $2.11 in China, $1.89 in Ghana, E $1.56 in India. Yet together they have substantial purchasing power: the BOP constitutes a $5 trillion global consumer
market. (See figure 1.)
The wealthier mid-market population segment, IL 1.4 billion people with per
capita incomes between $3,000 E $20,000, represents a $12.5 trillion market globally. This market is largely urban, already relatively well served, and extremely competitive. BOP markets, in contrast, are often rural—especially in rapidly growing Asia—very poorly served, dominated by the informal economy, and as a result rel- atively inefficient and uncompetitive. Discussion of global business opportunity in the 21st century tends most often to be framed in terms geographically defined “emerging markets.” In contrast, the BOP markets that we describe in this paper—what the editors of this journal term “ascending markets”—are defined in terms of income. In a world where high-mar- gin profit opportunities in mature markets are increasingly costly to identify and to pursue, ascending BOP markets have particular characteristics that may make them for more attractive to business now than than ever before. Their size alone 148 innovazioni / winter/spring 2007 Scaricato da http://direct.mit.edu/itgg/article-pdf/2/1-2/147/704139/itgg.2007.2.1-2.147.pdf by guest on 07 settembre 2023 The Next 4 Billion Figure 2. provides significant incentive for attention. More significantly, they are rich in opportunity to arbitrage what we call the “BOP Penalty”—higher prices, lower quality, and poor access. These are the very signals of competitive opportunity businesses seek every day for the markets they already serve. Ovviamente, risk—or the perception of risk—is a major inhibition to many companies. In this regard, the lack of accurate and current data is a further deterrent. The published analysis suggests significant opportunities for more inclusive market-based approaches that can better meet the needs of those in the BOP, increase their productivity and incomes, and empower their entry into the formal economy. THE STUDY “The Next 4 Billion: Market Size and Business Strategy at the Base of the Pyramid”1 draws on data from national household surveys in 110 countries and an addition- al standardized set of surveys from 36 countries. Using these data—on incomes, expenditures, and access to services—it characterizes BOP markets regionally and nationally, in urban and rural areas, and by sector and income level. In this paper we briefly summarize the findings; the results are presented in full in a newly pub- lished book from the World Resources Institute and the International Finance Corporation. innovazioni / winter/spring 2007 149 Scaricato da http://direct.mit.edu/itgg/article-pdf/2/1-2/147/704139/itgg.2007.2.1-2.147.pdf by guest on 07 settembre 2023 Hammond, Kramer, Katz, Tran, and Walker Figure 3. Household surveys, while limited from a market research standpoint, provide direct information on the BOP as consumers that is not available from other sources of economic data. The result is the first systematic empirical characteriza- tion of BOP markets. The Next 4 Billion shows emphatically the rich differences among those in the BOP and that the entire market must be analyzed and addressed for private sector strategies to be effective. Ovviamente, there are segments of the BOP for whom market-based solutions are not available or not sufficient. SOME FINDINGS Absent data, it is easy to think about the BOP as a single, undifferentiated mass— “them”—certainly not “us.” We know a good bit about us, the rich citizens of advanced industrial countries. But neither businesses nor governments have gone to much trouble to understand the BOP as consumers, as producers, or as ration- al economic actors. It is not surprising that the data reveal great differences among and within BOP populations—economic choices in expenditures, variations in expenditure patterns across income segments, across sectors, and between coun- tries. The numbers reveal the choices, many of necessity, of the BOP. Logically, food dominates BOP household budgets. (See figure 2.) Food and other sector expenditures are not static, Tuttavia. As incomes rise, the share spent on food declines, while the share for housing remains relatively constant—and the share for transportation and telecommunications grows rapid- 150 innovazioni / winter/spring 2007 Scaricato da http://direct.mit.edu/itgg/article-pdf/2/1-2/147/704139/itgg.2007.2.1-2.147.pdf by guest on 07 settembre 2023 The Next 4 Billion Figure 4 (top) E 5 (bottom). ly. (See figure 3.) These changes in spending preference have real implications for business, and for government policy to encourage competitive and equitable busi- ness engagement with low-income communities. The remarkable preference shown for information and communications (ICT) is discussed separately, below. The composition of BOP markets differs markedly across countries. Some, like Ukraine’s, are concentrated in the upper income segments of the BOP; others, like those in Nigeria, are concentrated in the lower income segments. (See figures 4 E 5.) Regional differences are also apparent. Rural areas dominate most BOP mar- kets in Africa and Asia; urban areas dominate most in Eastern Europe and Latin America and the Caribbean. (See figures 6 E 7.) The research shows that, while the lowest BOP income segment is poor by any standard of measurement, there is a remarkable amount of spending by segments innovations / winter/spring 2007 151 Scaricato da http://direct.mit.edu/itgg/article-pdf/2/1-2/147/704139/itgg.2007.2.1-2.147.pdf by guest on 07 settembre 2023 Hammond, Kramer, Katz, Tran, and Walker Figure 6 (top) E 7 (bottom). of the BOP not very much wealthier. Low income is not “no income,” and given the large numbers of people in the lower BOP income segments, it adds up quickly to create meaningful markets. (See figures 8 E 9.) The available data also allow for a household level look at expenditures, by income segment, and by urban/rural location. INFORMATION AND COMMUNICATIONS TECHNOLOGIES (ICTs): POSTER CHILDREN FOR BOP SUCCESS The strongest and most dramatic BOP business success story—whether measured by market penetration, by the documented benefits to low-income customers, O 152 innovazioni / winter/spring 2007 Scaricato da http://direct.mit.edu/itgg/article-pdf/2/1-2/147/704139/itgg.2007.2.1-2.147.pdf by guest on 07 settembre 2023 The Next 4 Billion Figure 8 (top) E 9 (bottom). by the financial success of the companies—comes from mobile telephony. A decade ago phone service in most developing countries was poor, and few BOP communities had access to phone service or could afford it on the terms offered. The entry of mobile phone companies transformed this picture. The num- ber of mobile subscribers in developing countries grew more than fivefold between 2000 E 2005 to reach nearly 1.4 billion. Growth was rapid in all regions, but fastest in Sub-Saharan Africa: Nigeria’s subscriber base grew from 370,000 A 16.8 million in just four years. Nel frattempo, the Philippines’ grew six-fold to 40 million.3 Wireless subscribers in China, India, and Brazil together now outnumber those in either the United States or the European Union.4 innovations / winter/spring 2007 153 Scaricato da http://direct.mit.edu/itgg/article-pdf/2/1-2/147/704139/itgg.2007.2.1-2.147.pdf by guest on 07 settembre 2023 Hammond, Kramer, Katz, Tran, and Walker Comparison of these numbers with the size of BOP populations suggests sub- stantial and growing penetration of mobile phone use in the BOP, confirmed by the household surveys analyzed in this report. Industry analysts expect more than 1 billion additional mobile subscribers worldwide by 2010, con 80% of the growth in developing countries, almost entirely in BOP markets.5 Low-income populations have clearly benefited from access to mobile phones, which ease access to jobs, to medical care, to market prices, to family members working away from home and the remittances they can send, E, increasingly, to financial services.6 All this depends on the affordability of mobile services, and a critical factor in this has been innovative business models such as prepaid voice and prepaid text-messaging services, available in ever-smaller units. Per esempio, the Philippines’ Smart Communications has a growing, profitable business with more than 20 million BOP customers, virtually all of whom use prepaid text-mes- saging services bought in units as small as US$0.03.7
MARKET APPROACH VS. TRADITIONAL DEVELOPMENT
WRI research on the BOP is founded on a non-traditional understanding of how
to do development. Traditional approaches are top-down, and often proceed from
an assumption that low-income individuals are unable to help themselves and thus
require charity or public assistance. In contrast, a market-based approach starts
from the recognition that being poor does not eliminate commerce and market
processes: virtually all poor households trade cash or labor to meet a significant
part of their basic needs. A market-based approach therefore focuses on people as
consumers and producers, and on solutions that can make BOP markets more effi-
cient, competitivo, and inclusive—so that the BOP can benefit from them.
Traditional approaches also tend to address unmet needs for health care, clean
water, or other basic necessities by setting targets for meeting those needs through
direct public investments, subsidies, or other handouts. The goals may be worthy,
but the results have not been strikingly successful. A market-based approach rec-
ognizes that it is not just the very poor who have unmet needs and asks about the
willingness to pay of different market segments. It looks for solutions in the form
of new products and new business models that can provide goods and services at
affordable prices.
Those solutions may involve market development efforts that include elements
similar to traditional development tools—hybrid business strategies that incorpo-
rate consumer education or other forms of capacity building; micro-loans, con-
sumer finance, or cross-subsidies among different income groups; franchise or
retail agent strategies that create jobs and raise incomes; and partnerships with the
public sector or with nongovernmental organizations (NGOs). Many successful
companies are adopting such innovative strategies, as this report illustrates, some-
times even co-creating solutions with community groups and civil society.8 But the
solutions ultimately are market-oriented and demand-driven.
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The Next 4 Billion
Perhaps most important, traditional approaches do not point toward sustain-
able solutions, while a market-oriented approach recognizes that only sustainable
solutions can scale to meet the needs of 4 billion people.
An emphasis on market-based approaches does not mean that the public sec-
tor is now irrelevant. Far from it. Primo, it is clear that all markets require regulation
and the rule of law for proper functioning, and to ensure equity; these are tasks of
the public sector. Secondo, the research we have undertaken, we believe, helps
instead better to define the fault lines between the “development” that the private
sector can accomplish, and the economic development that must be empowered
by significant intervention from the public sector. Profound market failures litter
the landscape of the developing world. Government has a leading role to play in
enabling the business environment.
THE ENABLING ENVIRONMENT FOR BUSINESS
That the private sector can meet the needs of the BOP is not a given. The operat-
ing and regulatory environments in developing countries can be challenging, start-
ing with basic security and stability. But beyond that, micro and small businesses
especially face disadvantages. If they are informal (and most businesses are), Essi
cannot get investment finance, participate in value chains of larger companies, O
sometimes even legally receive services from utilities. Condemned to remain small,
they cannot generate wealth or large numbers of jobs. Nor do they contribute to
the broader economy by paying taxes.
Most face significant barriers to joining the formal economy in the form of
antiquated regulations and prohibitive requirements—dozens of steps, delays of
many months, capital requirements beyond attainment for most of the BOP. In El
Salvador, Per esempio, it used to take 115 days and many separate procedures to
start a legitimate business—until recent reforms reduced the effort to 26 days and
allowed registration with four separate agencies in a single visit.9 Even for legiti-
mate small businesses, investment capital is generally unavailable and supporting
services scarce.
Fortunately, there is growing recognition of the importance of removing bar-
riers to small and medium-size businesses and a growing toolbox for moving firms
into the formal economy and creating more efficient markets. These tools, E
country ratings of progress on reform, are available in the World Bank and
International Finance Corporation’s (IFC) annual Doing Business report, along
with growing evidence that the tools work. In El Salvador, five times as many busi-
nesses register annually since its reforms. Many countries, including China, Avere
dropped minimum capital requirements. The pace of reform is accelerating, con
more than 40 countries making changes in the most recent year surveyed.10
Accelerated formation of legitimate small businesses creates benefits for individu-
COME (owners, workers, customers), the enterprises, and the larger economy.
Coupled with reform is growing attention to enterprise development initia-
tives focused on BOP markets and investment capital for small and medium-size
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Hammond, Kramer, Katz, Tran, and Walker
enterprises. The Inter-American Development Bank, as part of its Opportunity for
the Majority program, is committing US$1 billion over five years to new invest-
ments to support private sector efforts for the BOP, including small and medium-
size enterprises. The Asian Development Bank is launching several new investment
funds for the same purpose. The Japan Bank for International Cooperation aims
to increase its funds for African private sector development including small and
medium enterprises. IFC is expanding its technical assistance and investment
activities for small and medium-size enterprises.
These efforts, and the growing private sector interest in investing in small and
medium-size enterprises in developing countries, explicitly recognize that an
expanded private sector role and a bottom-up market approach are essential devel-
opment strategies.
IMPLICATIONS OF THE RESEARCH FOR BUSINESS & THE PUBLIC
SECTOR BUSINESS
The type of market analysis represented by The Next 4 Billion study may allow
businesses and governments think more creatively about new products and serv-
ices that meet BOP needs and about opportunities for market-based solutions to
achieve them. For businesses, characterizing the market in empirical terms is an
important first step toward identifying business opportunities, considering busi-
ness models, developing products, and expanding investment in BOP markets. Put
simply, while an analysis of the depth of poverty does not generate private sector
enthusiasm for investment, an analysis of BOP market size and willingness-to-pay
might—and is thus a critical step toward market-based solutions.
Any enterprise operating in the developing world that seeks to be “sustainable”
must serve the BOP to earn that label. The BOP exists at the intersection of natu-
ral resources and enterprise, since most of the BOP, especially the rural BOP,
depends on ecosystems for jobs and wealth. A “triple-bottom-line” approach,
encompassing environmental, social, as well as financial returns, cannot be mean-
ingful without understanding who the BOP are, and how those in the BOP behave
as rational economic actors, not as helpless dependents.
Models that seem to be working well for enterprises in reaching and serving
the BOP show evidence of four major characteristics, singly, and in combination:
• First, businesses learn to focus on the BOP, delivering unique products or serv-
ices, or emloying technologies in novel ways, but always understanding and
respecting the BOP as its own market, with particular needs and interests.
• Second, enterprises learn to localize the value creation of their interventions;
questo è, they do not simply exploit the BOP, but they add value to BOP commu-
nities using franchises or local vendor ecosystems. This may involve reframing
the very notion of who is the customer, and treating the entire community as
the customer, not individuals or families. Finalmente, selling isn’t the whole story
for the company; more often than not, the very act of business engagement
creates opportunities for skills development within the BOP.
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The Next 4 Billion
• Third, serving the BOP always demands that businesses enable access, whether
through size/cost calculations (sachet products, Per esempio), or financing
schemes (through micro-loans, Per esempio), or reduction of the time-cost of
acquisition (by bringing the product to the customer, not the other way
around).
• Fourth, success almost invariably demands that companies learn from, E
engage with, the community, and that usually requires unconventional part-
ners. Partnerships may be with public entities, non-profit organizations, com-
munity groups, or combinations thereof; successful partnerships seem to build
around real business opportunities—to build and manage distribution net-
works, Per esempio.
THE DEVELOPMENT COMMUNITY
For governments, better understanding of the BOP can help focus attention on
needed reforms in the operating and regulatory environment to allow a larger role
for the private sector. It frames the conversation about poverty reduction more in
terms of enabling opportunity and less in terms of aid. A successful market-based
approach would bring significant new private sector resources into play, allowing
development assistance to be sharply targeted to the segments and sectors for
which no viable market solutions can presently be found. Market-based approach-
es and smart development policies are synergistic strategies.
While a significant part of this type of market research naturally falls to the
private sector, it is clear that the public sector, and the multilateral development
banks in particular, can play a critical role in the process. Household surveys, it was
already noted, are not designed as market tools, but they can be made more useful
in several ways. Primo, surveys should better define some sectors, Per esempio, finan-
cial services. Household surveys today rarely tease out what an individual or
household is paying for financial services, as the costs are hidden, even from the
consumer. Secondo, surveys must ask more questions about unit costs. Third, sur-
veys need to better calculate quality issues, Per esempio, the quality of basic servic-
es such as water, sanitation, and electricity.
CHANGING THE NATURE OF THE CONVERSATION
Four billion is a big number, and it will take the efforts of millions of entrepre-
neurs; hundreds of thousands of enterprises, large and small; and the collective
efforts of bilateral and multilateral aid agencies, and non-governmental organiza-
tions to make headway in alleviating poverty. The tools employed in the initial
effort described in this paper are not purpose-built, and much new market
research can, and should, be done both by private sector companies and market
research firms. National household surveys can, and should, be amended to
improve data collection that will better inform our understanding of the “BOP
penalty.” All this knowledge will, in turn, catalyze further private sector activity
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Hammond, Kramer, Katz, Tran, and Walker
that benefits the majority of the world’s population that comprises the base of its
economic pyramid.
1. In the report current U.S. dollars means 2005 dollars. Unless otherwise noted, Tuttavia, market
information is given in 2005 international dollars adjusted for purchasing power parity; for con-
venience, BOP and mid-market income cutoffs are given in international dollars for 2002 (IL
base year to which household surveys used in this analysis have been normalized).
2. The high-income population segment is approximately 0.3 billion worldwide. But neither its size
nor its very large aggregate income can be reliably measured by household surveys, because the
sample of such households in national surveys, especially in developing countries, is too small.
3. Allen L. Hammond, William J. Kramer, Robert S. Katz, Julia T. Tran, and Courtland Walker (2007).
The Next 4 Billion: Market Size and Business Strategy at the Base of the Pyramid. (Washington:
World Resources Institute/International Finance Corporation).
Vedere
4. While household surveys are regarded by economists as a source of reliable economic data, here
they are applied as market research tools in ways for which they were not designed. Di conseguenza,
some limitations apply: household surveys rarely capture unit prices for commodities purchased,
Per esempio, and are not standardized across countries or over time. For rapidly developing sec-
tori, such as mobile communications, even relatively recent surveys can markedly understate use
rates and expenditure.
5. Country data tables are available in printed form, in the book, as well as in “analysis-ready”
spreadsheet format. Contact the authors for additional details.
6. World Bank (2006). Information and Communications for Development 2006: Global Trends and
Policies. Washington, DC: World Bank.
7. ITU (International Telecommunication Union) (2006). “Cellular Subscribers.”
8. Wireless Intelligence (2005). “Worldwide Cellular Connections Exceeds 2 Billion.” Press release,
GSM World News, settembre 15.
9. Vodafone. (2005). Africa: The Impact of Mobile Phones. London: Vodafone.
10. Smith, Sharon. (2004). Smart Communications: Expanding Networks, Expanding Profits.
Washington, DC: World Resources Institute.
11. Brugmann, Jeb and C. K. Prahalad. (2007), “Cocreating Business’s New Social Compact.”
Harvard Business Review (Febbraio): 80-90.
12. World Bank and IFC (International Finance Corporation). (2006). Doing Business 2007: How to
Reform. Washington, DC: World Bank and IFC.
13. Ibid.
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