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This blog explores insights for multinational corporations, NGOs, academics, social entrepreneurs and others working at the Base of the Pyramid.

Thursday, January 27, 2011

Small is Beautiful, Small is Cheap, But Do the Poor Care?

By Martin Herrndorf

Single or sachet-sized shampoo offered in India

Sachet marketing - selling products in small amounts - has provoked much attention in the early days of BoP. While the poor cannot afford products in large containers that would last weeks to finish, marketers found that they would buy them in small, single-serve sizes. But does sachet marketing really work for the poor? Do they care? And should companies care?

Sachets are cheaper...

One key reason why sachet could work is that they are both more affordable (per package) and cheaper (per unit).

First, small package sizes translate in lower costs per purchase and less "capital" bound in the storage rooms of poor households. With households struggling to manage their cash flow on a daily basis, these factors could make sachets attractive for poor customers, allowing them to purchase quality products normally out of reach.

But there is a second factor: Sachets are actually cheaper on a per-unit (read: per-gram, or per-liter) basis as products sold in larger packs. A 2009 study by Ramendra Singh, Indian Institute of Management Ahmedabad, et al, (see below) finds shampoo in India to be up to 50 percent cheaper per ml when sold in sachets. The finding is most prominent for India, but seems to hold across countries in tendency: P&G Shampoo in both the Philippines and Vietnam is about 7 percent cheaper when sold in sachets, while only in Indonesia, sachets come at a hefty mark-up of 30 percent.

That sachets are cheaper than large packages on a unit-basis is actually counter-intuitive: Large packages should lead to cost savings. But Singh et al. cite technical and logistical innovations that led to cost savings in sachets. Products in temper-proof and standardized packages can be easily handled in the long supply chains reaching out into rural areas in developing countries. This allows companies to price them low, lower than larger packages, for end-consumers. The authors stress that the pervasiveness and success of sachet market in India may also be due to the "Nation of Retailers" ethos and the prevalence of small stores over large chains, a perfect breeding ground for a sachet revolution.

...and more convenient...

Customers could also prefer sachets because they are more convenient. Sachets are easier transport (if you don't have access to a car), easier to store (important when you're living in a small house) and don't get wasted if you want to use only small amounts over a longer period (which cash-strapped households might prefer). They even reduce risks for poor households. New brands and new products can be tried out more safely compared to getting a big package. Exactly this "sampling" function has been one reason for innovating sachet distribution, before benefits for reaching the poor were talked about.

...but do they matter for the poor?

Overall, sachet marketing has been a success for companies. The lower price for sachets can explain why they dominate bottled sales in key product categories. When Sachets are considerably cheaper than full-size bottles, as in India, they tend to make up a significant proportion of sales. But taking the sales of shampoo reported by Singh et al., companies have been much more successful selling sachets to the rich (or middle-class) customers than to the poor. Singh et al. report that while product awareness does not differ between rural and urban areas, it's (relatively rich) urban customers that purchase four in five sachets.

Poor households are more reluctant. If they're not accustomed to shampoo and have access to reasonable alternatives (such as normal detergent), they don't seem to buy the product. And while giving consumers "choice" may be a development goal as such, this choice could very well include consumers opting to not purchase a product for which they do not see a need.

Can we make sachets relevant for the poor?

Are sachets thus overrated?

While some products sold in 'visible' sachets might have failed in reaching the poor, Singh et al. propose that the principle can be applied much beyond shampoo and tea bags. With products that are more useful and relevant for the poor? Both micro-credits and mobile phone offerings - pervasive success stories at the BoP - work 'sachet-style'. They are standardized, available in small denominations: As a credit that allows purchasing one farm animal, or a phone card that enable making a critical call.

Where are frontiers for innovation? Can companies sell 'improved seeds' in sachets, allowing farmers to purchase a small pack on the go and try them out? Can companies provide insurance coverage in standardized, miniature form? What's the smallest size you can build an irrigation system in? Can you sell learning material for adult education 'one page at a time' for cents - with each page containing something that immediately useful?

Do you know of more examples where the 'sachet-principle' works?

Or where it should?

Find more details about the state of sachet marketing in Indian and other Indian markets in Singh, Ramendra, Rodolfo Ang, and Joseph Sy-Changco. 2009. "Buying Less, More Often: An Evaluation of Sachet Marketing Strategy in an Emerging Market," Marketing Review 9:3-17.

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