• Tuesday, July 23, 2024
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BusinessDay

Firms adopt 1998 strategy to crack world’s poverty capital

Cold Stone

It took less than three minutes for a picture on Twitter showing a tricycle painted in the colours of popular local ice-cream chain, Cold Stone Creamery, to be shared and commented on multiple times.

The image went viral because, on this tricycle, a cup of ice-cream was selling for as little as N500. The idea of selling ice-cream from a tricycle and for as low as N500 would have been improbable for Nigerians who have grown accustomed to Cold Stone’s ice-cream, which is often seen as a high-end product. Before now, the cheapest ice-cream on offer by Cold Stone was N1,000, double the amount of the ice-cream sold from the tricycle.

The change in tack does two things for Cold Stone. First, it improves access to its product as it targets a new range of customers, majority of whom may have been priced out of the more expensive offerings. Second, a cheaper price could drive increased sales in a difficult period in Nigeria where poverty is rife and average incomes are contracting as the economy grows at a rate too slow to absorb a fast-growing population.

Cold Stone is not the only company taking note of Nigeria’s rising poverty rate and constrained incomes by targeting low-income households to drive sales.

Read Also: Facebook pushes further into e-commerce in Nigeria with Marketplace

Several brands of consumables are increasingly doing the same by creating smaller products, often packaged in sachets, in order to appeal to the bottom of the pyramid.

It is a business strategy that dates back to 1998 when management scholar, CK Prahalad, first popularised the idea of the bottom-of-the-pyramid demographic as a profitable consumer base that can be targeted for profit.

For companies operating in Nigeria, which is home to the largest number of poor people, according to the Brookings Institute, Prahalad’s message is golden.

The bottom of the pyramid is where you find the largest, but the poorest socio-economic group, according to Prahalad. In global terms, this is the 2.7 billion people who live on less than $2.50 a day.

In his 2004 book, “The Fortune at the Bottom of the Pyramid, written alongside Stuart Hart, Prahalad identified people living at the bottom of the world’s economic pyramid as a tremendous untapped market with business potential.

The two inventors propose that poor people living with only a few dollars daily should be seen as potential customers with substantial cumulated purchasing power and not as recipients of development aid.

Including these people in formal markets, as entrepreneurs, producers and consumers will generate income and improve living conditions sustainably, according to Prahalad.

There is perhaps no better place in the world to put Prahalad’s bottom-of-the- pyramid strategy to work than in Nigeria. Some 87 million Nigerians live below $2 a day, according to Brookings Institute. That is nearly half of the entire population of the country, and adds up to the population of Spain and Canada combined.

In the thick of Nigeria’s economic recession in 2016, which tipped more Nigerians into the poverty pit, Richard Lesser, the global CEO of the Boston Consulting Group (BCG), an American management consulting firm, also alluded to the opportunity in targeting low-income earners with more affordable products.

“There is a clear opportunity in creating products that meet the needs of the bottom of the pyramid, it is a strategy that can help cushion the economic impact of the recession and drive sustainability,” Lesser said at the time.

Fast forward to 2021 and Nigeria is in another recession and the pressure on household incomes has intensified on the back of the COVID-19 pandemic, which economists say will probably lead to another 5 million Nigerians entering the poverty pit.

To keep up with falling demands, many brands are already choosing the miniaturisation of their products to stay at the level consumers can still have a taste of their favourite products at the very least.

Company profits in Nigeria have been hammered by sluggish economic growth and weak consumer demand. Less than 50 percent of companies listed on the Nigerian stock exchange made a profit in 2020, according to data up to the third quarter of the year.

Critics of the bottom of the pyramid approach note two crucial challenges, governance and sustainability; neither challenge is currently well addressed.

Effective governance mechanisms and bodies are needed to regulate, monitor, and oversee the development of markets and effective competition (as well as police corruption), and like multi-national companies, they must transcend national sovereignties.

Raising the consumption levels of the world’s poor dramatically requires radically new business models and technologies to avoid disastrous impacts on Earth’s ecosystems; governance mechanisms are needed to enforce the adoption of radical resource efficiency measures and clean technologies across a multinational playing field.

Some researchers have suggested, however, that the effects of pollution and other environmental problems worldwide could be lessened by using such underdeveloped countries as inexpensive testing arenas for environmentally sustainable technologies.