Whether Poverty Premium or Poverty Discount – Entrepreneurship and Innovation is the key

Recently Vijay Govindrajan, Professor of strategy at Dartmouth College, USA was asked – ‘While Innovating, whom should companies target – local consumers or global ones?’ His reply was: ‘The focus has to be Indian consumers, especially Indian non-consumers.’ He divided India into three categories, namely ‘Developed India’ (100 million people living in 15 major Indian cities), ‘Developing India’ (300 million people living in 6,000 small towns), and ‘Underdeveloped India’ (700 million living in the 600,000 villages). He combined developing and underdeveloped India into one group of customers as non-consumers. The needs of these non-consumers have to be addressed in order to capitalize on the opportunity that India provides and it is possible through developing innovative products and services which cater to their pockets.

These non-consumers pose a greater challenge for the corporate houses to attract their attention. More than a decade ago, in 2002, CK Prahalad and Allen Hammond wrote a paper in the Harvard Business Review entitled ‘Serving the World’s Poor, Profitably’ where social deprivation and poverty was projected as a business opportunity for the corporate which was to be capitalized in order to create wealth through serving the poor. The underdeveloped India was the target for experimenting with new products/services. The concept of the Bottom of the Pyramid (BOP) became the catchword for market seeking entrepreneurs. The premise of the BOP was driven with an intention to have inclusive capitalism so that the win-win position is targeted both for the profit seeking business organizations and for the underdeveloped population. It was for democratizing commerce in a given globalised environment where every person was to have access to the benefits of the global economy, every person as a consumer was seen to afford world-class products and services and every person was seen as a producer, an entrepreneur who have access to global markets. This is how win-win for all was proposed through BOP model.

It was also expressed by Prahalad that since the poor pay ‘poverty premium’, there is a business opportunity for big companies. Poverty Premium was the term used for the difference (more) in prices that poor people were paying as compared to middle-class people for the similar products and services and this is what worried him as well as what drove him to think of a proposition in which poverty premium is avoided and the poor gets the products at the same or less prices, if the issue is addressed through innovation and operating with the framework of economy of scale and strong supply chaining.  It really made lot of sense and many companies that were studied by Prahalad like HUL (for Lifebuoy Soap and Iodized salt), ICICI (for financial services to the poor), ITC (for e-Chaupal), SKS Finance (for microfinance), Aravind Eye Care (for eye care products and services), etc made a difference and resulted in win-win for all as poor people did not need to pay poverty premium in these cases.  It taught lessons for others and paved path for developing related products.

This is what Peter F Drucker had suggested in 1984 for organizational response and sustainability in order to provide new meaning to Corporate Social Responsibility (CSR) tracing back through the history of responding to social responsibility in America through the eye of Carnegie (business as ownership) and Rosenwald (business as trust). He had strong farsightedness and a sense of enterprise when he foresaw a business opportunity in the social problem and sounded that wealth could be created through responding to this market, much different from the traditional concept of CSR where it was viewed as a practice to share the burden of the state through sharing a part of the profit for social welfare and upliftment.

In the April 2013 issue of Harvard Business Review, Ethan Kay and Woody Lewenstein questioned the thesis of Prahalad and concluded that poor do not really pay poverty premium rather enjoy poverty discount. This view is the result of their study carried out at Dharavi (one of the world’s largest slum with median income of around $100 a month) and 9 kms away Warden Road (both in Mumbai) in January 2013. They compared the prices of some 40 products/services at 17 stores each at both locations. The services and products included, price for electricity, movie ticket, doctor’s appointment, haircut, price for banana, comb, soap, sandals, sugar, dress, rice, cooking oil etc. Through the comparison of the prices consumers pay and failure of products like soya protein by Solae and PUR by P&G (both the products targeting BOP population), they say that poverty premium often seems illusory, rather people residing in Dharavi are enjoying poverty discount as they are paying much less for the same product/service as compared to their counterparts buying from Warden Road outlets.

This work has raised many questions as to the generalization of two locations in Mumbai to the whole population, quality and delivery platform differences and practices for these products/services, and many other issues as well. There is discussion on this issue and it is becoming difficult to draw a line anywhere.

The journey of thirty years (1984-2013) has been a great learning experience for the corporate houses operating specially in India, housing a huge size of non-consumers. Of course much has happened precisely after the opening up of Indian economy in 1991. These years have seen many young entrepreneurs benefiting from the globalization at one hand and responding to non-consumers at the other end.  It is reported by the NSSO that poverty is declining and the levels have reached to 25%. The purchasing power of the rural population is showing an uptrend.

Whatever be the case as to Poverty Premium or Poverty Discount, what is very clear is that there is huge business opportunity lying untapped and business organizations have greater challenge to respond. The irony is that much of this opportunity is used by the big business houses and there is strong wave of consolidation happening. This is where young entrepreneurs have to play a role and develop innovative products, through support of the government, in case required. There are many schemes and programs of the government which make things easier for them. We need to create that awareness and develop educational system which provides an opportunity for budding entrepreneurs to incubate their ideas and convert them into innovative and salable products and services.