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Executive Summary

Today in India, we have two huge but vastly different markets that are growing simultaneously. On
one side, we have Middle Class, which every company is chasing, while on the other hand, we
have Bottom of Pyramid - the market where most of the consumers live on less than $2 a day.

This market was completely ignored till Dr. C. K. Prahlad, a top management thinker all
over the world, and Harvey C. Fruehauf, Professor at University of Michigan Business
School, brought the focus of world on this huge untapped market. They showed the way that
even this market could be hugely profitable. But still, barring a few like LG and HLL, most have
burned their fingers.

The paper deals with understanding the dynamics of growth in Indian market and has tried to
evaluate both of these highly attractive markets in India - the burgeoning Middle Class (MC) and
Bottom of Pyramid (BOP) - on various parameters in terms of challenges, present scenario,
characteristics, and future growth potential. Under the circumstances, where differences exist
between equally lucrative markets, where should companies venture? Which sectors are suitable
to make BOP venture successful, and which are not? One approach is to move along the path
they have followed till now, i.e., cater to middle income group, and the other approach is to cater
BOP and move in un-chartered territory.

In this paper, we have identified each market, its attractiveness, size, potential and challenges,
and mapped the parameters which determine the success and failure of any company in either of
these markets. There cannot be one answer, which is applicable to every company and every
industry. The mantra of success is SWOT analysis, which companies need to do before taking
strategic decisions. Both markets are attractive to bring profits to company provided it ventures
with its core strengths.

Introduction

In India, we have two markets - Middle Class and the Bottom Of Pyramid, people who are at the
bottom of income pyramid. Most of these people earn less than $2 per day. Based on various
segmentation parameters, broadly we can further divide middle class into two segments: -

1. Urban MC
2. Rural MC

Both these segments, as we will see, differ completely in their characteristics, and thus, need to
be treated differently. On similar lines, we can divide BOP class also into two broad segments: -

3. Urban BOP
4. Rural BOP

Properties of Various Segments & Challenges for the Company to Tap Them

Middle Class

Total Population: 216 Million1

Number of Households: 43.2 Million2
Annual Household Income: Rs. 2 Lacs - Rs. 10 Lacs
1. Urban Middle Class
Population: 110 Million1

With the liberalization of economy in 1990-91, this class of consumers has really arrived in the
consumer market. This class of people has now ever-growing aspirations. and subsequently. they
are now looking forward to the best of products available globally for consumption. The common
consumption and buying behavior observed in last few years are: -

They are spending more on lifestyle activities and services.

MC seeks an experience and places a premium on brand, quality, and more importantly, on
personal choice and preference.

Between 1996-97 and 2000-01, per capita income grew by 10% on CAGR3.

They are post-liberalization children, and unlike their parents, have no guilt of consumption.

Better communication and literacy leap has increased the aspirations of Indian consumers.

Most are strivers and try hard to construct a better life.

Comfortable with borrowing to fund consumption.

Challenges Before Companies

This market not only presents the opportunities but also throwing challenges. Most of the global
corporations who have either come or are coming to India are targeting this consumer class. The
competition is becoming intense day-by-day with increasingly segmented demands of consumers
with companies catering to segments based on their USP (Unique Selling Point). In broad terms,
the market can be defined as Highly Segmented, High Growth, High Margins and Low Volumes.

2. Rural Middle Class

Population: 106 Million1

Rural MC is gradually coming up as an independent class coming out of the shadows of their
urban cousins. An important aspect, which has led to the emergence of this class, has been a
definite shift of village economics from agriculture to other economic activities. This is an
important development as this shift makes the whole economy less dependent on monsoons.
There has been mindset shift of Rural MC. They aspire to wear western outfits and cosmetics as
compared to traditional ones. Still differentiating factors to be noted are: -

Rural market is highly segmented based on geography. A farmer in rural Punjab is more
progressive than his counter part in Bihar.

Unlike their urban counterparts, decisions in rural households are taken collectively. The result
is that a complete family clan or even the complete village ends up purchasing only one brand.

A Rural MC is still connected to its rural roots. They may have the capacity to buy a washing
machine worth Rs. 20,000 but would prefer hand-washed clothes.

53% of sales in FMCG markets and 59% sales in consumer durables are in rural India3.
 They are not as inclined towards lifestyle products as compared to Urban MC.

'Word of Mouth' is the most reliable promotion.

Challenges Before Companies

This market presents huge opportunities as well as challenges to a company. The biggest
challenge is the distribution network. We have about 600,000 odd villages in the country. The
market is highly segmented as per the needs. Different regions have different needs, for example;
we have huge market for woollen garments in Northern India while the same product is redundant
in other parts of the country. To be successful in this market, the company should have strong
distribution network and be able to offer 'Value for Money' products based on the needs of the
customers. Once brand is firmly established, it is very difficult to dislodge. Early movers in this
category will have huge competitive advantage over others. There is a strong need to build
reassurance and trust about product quality, service support, and company credentials in the
mind of rural consumers.

Bottom of Pyramid

Population: 756 million1

Number of Households: 151.2 Million2
Annual Income: Upto Rs. 90,000

1. Rural Poor
Population: 610 Million1
Number of Households: 122 Million

Rural Poor represents the largest market for the products. The characteristics of this set of
consumers are similar to the Rural MC. The only difference is the disposable income they have
for consumption. So far the market has been completely neglected by the private sector. These
consumers are still waiting to be served and don't have enough opportunities to consume the
products which offer value to them.

They are open to adoption of technology and entrepreneurship as proved by ITC's 'e-choupal'
and HLL's 'Project Shakti'.

These consumers require products which meet their functional requirements and serve their
needs.

They may not be educated but have plenty of common sense and survival skills.

1. Urban Poor
Population: 146 Million1

Urban poor have marginally higher income than rural poor but cost of living in the city is high too.
The difference comes in aspirations of urban consumer, because they are exposed to urban glitz.
Urban poor are different from rural poor in terms of: -

More exposed to media and promotion

More aspirational as they are exposed to urban rich and try to replicate them

Various Challenges to BOP

 Product Innovation: Companies have to realize that the solutions that work in MC will not
work with BOP. Also product innovation should begin after deep understanding of the functionality
and product gap of BOP.

Modeling Innovations According to Infrastructure: BOP face poor infrastructure like

irregular power supply, unsuitable water (hard water), bad roads, etc. Thus, products designed for
BOP should adequately overcome harsh infrastructure realities.

Deskilling Work and Process: Due to illiteracy, skill levels of BOP towards technology are
low. Thus, solutions offered to BOP should be as deskilled and simplistic as possible.

Analysis

Both markets are lucrative enough for any company. But we need to compare these two markets.

1. Urban MC is segmented based on the age group, preference and income bracket, BOP class
is segmented based region wise differenciation. Profitability is lower in BOP but volumes are high.
On the contrary, due to segmentation profitability is high but volumes are low in MC.

2. Strong competition among the various global companies in MC urban segment. To have
long term growth the company must have either of these as core strengths: -

* Product Leadership
* Cost Leadership
* Niche

BOP markets are untapped. The initial entry to these markets is tough and needs investment for
sustained period requiring companies to have deep pockets and commitment. But once any
company enters the market and establishes its brand value, then returns are higher than that of
MC as established by these simple statistics4: -

Nirma HLL-Wheel HLL-Surf

Sales ($ Million) 150 100 180
Gross Margin (%) 18 18 25
ROCE 121 93 22

BOP, especially rural, needs big trust and assurance about product quality, service and company
credentials. If company is a first mover and establishes trust, it is difficult for subsequent
companies to break. Thus, a first mover reaps more benefits in BOP than in MC. The problem is
that never a sincere effort has been made by private sector to cater to them.

Parameters on which Company Needs to Evaluate Itself Based on the Peculiarities of Each
Market

1. Company strategy vis-à-vis approach towards risk: BOP is more a risk taking venture
which, if successful to its expectation, can reap more benefits than for a company investing in
MC. BOP may look too attractive on surface but companies may still be playing games in a dark
room. Ground realties about BOP, like poor infrastructure, difficult distribution to be established,
are tough tasks to overcome.

Thus, if a company looks for assured returns than going for a risky approach, it should
concentrate on MC and current brand portfolio rather than going BOP.
2. Growth opportunities in target sector: Product penetration of FMCG goods, consumer
durables in MC are high. Growth rates in future due to segmentation and competition will be
under strain. On the contrary, BOP offers high growth opportunity in these segments. Another
such segment will be scooters. Gradually, MC market has shifted from scooters towards
motorbikes. Clearly, BOP offers more opportunity in such segments than MC. Similarly, food retail
at this moment doesn't offer any opportunity in BOP because of lack of affordability and BOP
psyche to prefer homemade food. LG 'Sampoorna' is a famous example where BOP was tapped
and affordable TV was made available. Thus, companies need to see whether its product portfolio
matches the current or future requirement of the BOP.

3. Financial strength: Cost of capital, cash flow and financial stability are three major pillars of
financial strength of a company. The BOP market needs sustainable investment at initial phase at
least for few initial years to start giving returns. Huge investments are required to put necessary
infrastructure, product innovation and for opening new channels of communication before the
actual revenues start pouring. Thus, company should have deep pockets and financial muscle to
enter into the BOP market.

4. Competition: MC markets today are very competitive and increasingly becoming more
competitive with global players entering the arena. Gradually, market will become further
consolidated with limited players existing in market with a definite USP associated with each. A
company should carefully take note of competition and examine its position.

If it finds that in coming scenario, it will not be competitive enough, then it should focus
towards the untapped BOP market where not many players exist, and try to attain
leadership there.

5. Distribution strength and geographical coverage: India is a vast country having 600,000
odd villages. But before getting bogged down by numbers, the company should identify the
market for its products. For example, take the case of consumer durables, 90% of durables are
purchased from the 2300 odd 20,000+ towns as per IMRB study. Direct supply up to 20,000+
population feeder towns should be enough as each distributor will have its own 100+ outlets in 50
odd locations, which can cover all villages up to 2000+ population category. These 85000 larger
villages are home account for over 60% consumption.

6. Company culture: The culture of the organization is another important parameter needed to
be evaluated before moving to BOP. Most of the organizations have so far limited themselves to
urban MC. While managers are well geared to understand and satisfy the needs for urban MC,
they are completely ignorant about the BOP. To work in a market efficiently and give some value
products, we need managers who are well-versed with it and understand the consumer there. It
holds true for the BOP market too. If a company's leaders and other senior marketing managers
are uncomfortable understanding the gap and needs of their target customers, it's difficult for the
company to grow in that segment. Thus, the decision to serve the market (MC/BOP) is also
dependent on the fact whether the company's human resources are aligned and willing to work in
that market or not. Whether a company has the right set of people with the skills required to serve
the market also decides whether the company should concentrate on MC or BOP.

7. Innovation effectiveness: How comfortable is the R&D division of a company producing

technologies which suit a particular market? Can Mercedes venture into a car R&D producing it
for Rs..1 lac like Tata Motors? As been mentioned above, going BOP doesn't mean same
solutions as that to MC at lower prices. BOP needs superior technology at affordable prices.

Is the company's R&D capable of producing such solutions is the key. We may have Sony
investing money on the next generation technology, but do they have the same skills
required as that by LG when they made 'Sampoorna' range of TVs. Thus, a decision of which
market to cater to has to be mapped with the R&D strength of the company, and is decided which
market a company is suitable for.

Conclusion

Under above circumstances where differences exist between equally lucrative markets and
evaluation of both markets, we came to a conclusion that due to inherent differences in the
competencies required for success in the two vastly different markets, there cannot be one
answer, which is applicable to every company and every industry. Both markets are attractive to
bring profits to company. Companies have to take a strategic decision to enter either of the
markets, based on their core competencies and appetite for investment and risk.