Reaching Deep in Low-Income Markets: What Have We Learned?
Can we provide essential goods and services to low-income populations profitably? Yes, with important caveats.
Fifteen years ago, C.K. Prahalad and Stuart Hart promised we’d find a Fortune at the Bottom of the Pyramid. That promise implied that businesses could operate profitably while serving very low-income populations in developing countries, even those households living on less than a few dollars a day. This was a bold and attention-grabbing assertion, and it helped sparked increased innovation among corporates, social entrepreneurs, and impact investors in pioneering financially sustainable business models for delivering essential goods and services to low-income populations.
But fifteen years on, how much do we know about how deeply down the economic pyramid enterprises can reach — in critical sectors such as agriculture, education, energy, and financial inclusion — while still achieving financial sustainability and scale? As a sector, we have surprisingly little data or evidence to answer this question — which is fundamental to our understanding of impact.
At Omidyar Network, we wanted to see what evidence could be gathered to answer this question, and test the thinking we introduced in Frontier Capital, which outlined the formidable challenges we have observed in what we called the “frontier plus” segment of the market — enterprises pioneering unproven business models in asset-intensive sectors that target low-income consumers. So, along with Rockefeller Foundation, MacArthur Foundation, and Deloitte, we came together on a research effort dubbed Reaching Deep in Low-Income Markets, aimed at gathering data and lessons from the growing ranks of entrepreneurs serving low-income customers.
What we learned confirmed our incoming hypotheses in some areas, and surprised us in others. And most importantly, the research identifies concrete actions we need to take to realize the still unmet potential of scaling solutions that can engage low to lower-middle income customer segments.
Let’s start with the good news: we have a growing number of proof points that entrepreneurs can indeed serve bottom of the pyramid (BOP) populations sustainably. The Deloitte research found 20 companies (after surveying 100+ potential candidates) that were successfully reaching low-income populations with critical goods and services — with some having evidence of reaching quite deeply down the income pyramid to those living on $2.50 a day or less. For example, in microinsurance, the vast majority of MicroEnsure’s customers had incomes below $10 a day, and over 30% were below the $2.50 per day threshold. And BIMA used Grameen’s Poverty Probability Index to determine that 53% of its customers lived on $2.50 a day or less.
In addition, 17 of the 20 companies studied, most of which started between 2006 and 2011, had either reached profitability (6 companies), or were at least achieving sustainable unit economics and continuing to invest in the growth and scale needed to become profitable at an enterprise level (11 companies).
Another encouraging finding was the diversity of companies that were achieving increasing thresholds of financial sustainability while simultaneously reaching deep down the income pyramid. We hypothesized that companies with certain characteristics would have a better shot at reaching the BOP sustainably: those that were asset-light and tech-enabled; that had a “pull” products that consumers readily understood and demanded; and that served mixed income customer bases that included both low and low-to-middle income populations. We indeed saw examples of such businesses — for example, Zoona, a relatively asset-light mobile payments company operating in southern Africa offers a service that reaches and has “pull” from both low and middle income customers, and is investing in further growth.
But the research helped confirm even asset-heavy businesses selling push products can be successful in reaching relatively deeply down the income ladder. For example, Envirofit and Burn offer clean cookstoves that involve capital-intensive manufacturing and distribution, and require up front consumer education. And both are successfully investing in growth and approaching profitability.
For Omidyar Network, this finding challenged some of the assertions implicit in Frontier Capital regarding the financial sustainability potential of asset-heavy, BOP-focused enterprises — and we welcome this new evidence to inform our own future investing.
That said, the case studies also highlight how these companies employ a range of clever tactics to make their business model “lighter” and their products have stronger “pull” from consumers. The research helpfully categorizes the range of business model innovations that companies use to decrease the cost and the asset intensity of their operations; increase product accessibility and attractiveness to consumers to create “pull;” and enable deeper reach on the income pyramid through product segmentation or price discrimination strategies.
We are heartened to see this progress and look forward to even more examples as additional BOP models mature. But beyond this good news, the research also served as a reality check.
Reality Check #1: Data on the customers served by BOP-focused enterprises is really hard to come by. We should start by commending the pioneering enterprises that have invested in deeply understanding their customers, and are using customer data to help them both drive business performance and measure their reach and impact. It’s hard and expensive to do, particularly for young companies already facing the myriad challenges of serving BOP markets. And that’s a key reason why it was quite difficult to gather even 20 case studies — much less a large, robust, comparable data set — of customer reach and income levels across diverse enterprises and industries.
In fact, a core finding of this research is indeed that its findings are insufficient: we have examples of individual companies reaching deeply that provide helpful anecdotal evidence, but we don’t have a sufficient number of comparable data points within or across industries that can enable us to confidently draw broad conclusions about which business models are reaching deeply in a profitable manner.
Reality Check #2: The majority of companies in this sample benefited from grants or subsidized investment capital in the course of their evolution. This type of capital, which came most often at an early stage of their evolution, enabled these companies to test unproven models and grow to a point where they could attract investment capital. In multiple cases, grant funding was significant relative to their size, and lasted over a period of multiple years. Those that did not rely on grants tended to be tech-enabled businesses that could attract venture capital or angel investment even at an early stage.
This is consistent with learnings going back to 2012’s Blueprint to Scale. BOP-focused investors such as Shell Foundation, Acumen, and others have long emphasized the importance of philanthropic patient capital. Reaching Deep in Low-Income Markets reinforces that grants and subsidy are at minimum helpful, and in some cases essential, in enabling pioneering BOP business models.
Looking to the future, a more refined understanding of where and when to most effectively target subsidy — and if in fact subsidy enables deeper reach — will help the industry maximize its catalytic effects and limit its distortive ones.
Reality Check #3: Although patient, flexible capital is essential for many BOP models, it remains scarce. The research focused on financial sustainability and break-even economics at the enterprise level — and did not look at returns to investors. Were the bar for financial sustainability defined as investors achieving return expectations or equity holders realizing IRR through some form of exit, the threshold for declaring success would be significantly higher, and fewer of these companies would have met it. This reinforces the need for flexible, patient capital, and capital across the returns continuum to fund businesses that are pioneering new markets, the scarcity of which continues to be among the biggest challenges in the impact investing industry.
Reality Check #4: It remains a long journey for entrepreneurial BOP models to reach scale. We’ve seen impressive growth over time in some BOP-focused industries reaching scale — notably microfinance and financial inclusion. However, most of the early stage companies in this study remained in the single digit millions in revenues. And the broader inclusive industries these companies are part of remain small relative to the size of the addressable market of BOP consumers. So while it’s encouraging that we have more proof points of progress, this reinforces the need for investors and funders to support not only individual pioneering enterprises, but also to take a sector building approach that seeks to address market level barriers that can help entire industries grow. Industry building efforts in financial inclusion, household solar, and clean cookstoves have all helped contribute to scale, and we see the value of continued investment in industry infrastructure.
So, what does this mean for the field? For Omidyar Network, this research reinforces a couple of key priorities for our own work, as well as for wider field-building efforts.
1. Invest more in customer insight. A number of the leading BOP-focused entrepreneurs interviewed for this research felt they had limited and insufficient knowledge of their customers, their needs, and their buying behaviors. These entrepreneurs see real business value in customer insight data yet rarely have the capacity to conduct in-depth customer research on their own. We think there’s a case for funders of various stripes to invest in BOP customer insight and data collection, both to add value to their own portfolio companies, and to contribute to the public good (through appropriately anonymized data). Better customer data would also help address challenges funders face in appropriately targeting their resources to reach populations in greatest need, as well as in assessing development outcomes.
Omidyar Network is working on a number of efforts to increase customer insight in markets where we operate. For example, we worked with Acumen to conduct Lean Data sprints with over 30 of our investee companies to better understand customer reach and feedback. And we see customer insight as a ripe area for further collaboration among like-minded institutions.
2. Get smarter about subsidy. Once we have better customer data regarding BOP reach, we can better understand what segments a given business model can reach and still be sustainable. This in turn can inform how and when to target grants and other forms of concessionary capital, either in an upfront, one-time basis (e.g., pioneering a new business model), on an ongoing basis to reach lower down the income scale than otherwise possible) or to fund public goods that can accelerate the growth of an entire sector (e.g., public awareness campaigns). Or indeed, whether to subsidize at all.
In Across the Returns Continuum, Omidyar Network shared our approach in targeting market-rate financial returns, including under what conditions we are willing to consider lower returns. We consider more flexible capital in cases where pioneering firms serving lower income markets can achieve market level impact by proving out new business models for reaching previously excluded populations. And we’re seeing more impact investors develop their own methodologies for thoughtfully targeting flexible capital in instances where it can be catalytic.
We’re also encouraged by efforts in specific industries to provide more transparency on clarity on how targeted subsidy can enable markets to “reach deeper.” For example, the Initiative for Smallholder Finance has provided a thoughtful framework for diagnosing where subsidy may be appropriate in financing smallholder farmers, and the types of subsidy tools most appropriate to address specific constraints and risks. And Root Capital’s Efficient Impact Frontier methodology serves as a powerful example of an organization gathering robust data on its customer base, making transparent the economics of serving different segments, using that data to help determine where subsidy is needed, and what impact the subsidy can “buy.”
Could we gather comparable data to understand sustainability and impact in other sectors? It’s not easy, but we think it should be on the agenda of inclusive industries that are reaching a sufficient level of maturity.
This research adds important new findings to growing evidence across sectors and geographies that market-based solutions for the BOP can reach low-income populations, and generate a significant degree of financial sustainability. Are these enterprises delivering the elusive risk-adjusted market rates of return to investors? In most cases, we suspect, not yet.
But in the context of reaching deeply into BOP markets, perhaps that’s the wrong question, or at least not the only one. Perhaps a more constructive one is: do these entrepreneurial business models constitute the most cost-effective, scalable solution for achieving a given outcome for specific BOP populations?
That’s a question we think the field should strive to answer in the next phase of this journey. It’s a tall order, but we think there’s an exciting opportunity to harvest data and learnings from the growing number of pioneering BOP models that are now reaching maturity. This can give us more clear-eyed expectations on their reach, and their limitations — and thus enable us to more effectively channel our collective energy to push the frontier further.