Second only to the hashtag #nextbillion, which has been in heavy rotation by the folks at PepsiCo. and its Recipe for the Next Billion site, what’s been lighting up the @NextBillion Twitter feed lately are a pair of essays by Erik Simanis.
Simanis is the managing director of Market Creation Strategies at the Center for Sustainable Enterprise at Cornell University’s Johnson School of Management. Long-time NextBillion readers will remember him from the BoP Protocol project as well as an interview he gave to Rob Katz back in 2008.
Simanis has been generating significant buzz with two essays published in the Harvard Business Review: Businesses Serving the Poor Need to Get Over Their Unease About Profit and Reality Check at the Bottom of the Pyramid. In the latter article (subscription required), Simanis questions the BoP orthodoxy of selling large quantities of low-priced products with even lower margins equaling profits. But this equation has a congential "fatal flaw": Unless companies can reach 30 percent of consumers in a given regional target market, profits can’t be realized, Simanis argues.
Simanis illustrates this with the case of DuPont subsidiary Solae, which manufactured and sold protein-dense snack packets in Andhra Pradesh. These snacks could account for half of a woman’s daily protein need. The packets were priced below 30 U.S. cents but sales were inconsistent and well below that of other snack foods. Although the margins on the soy-based snack were on par with other snack products, the retail footprint required to distribute them profitably was simply too large and the pilot project was discontinued.
“Any business that starts off needing a 30% or higher penetration rate is built on a shaky foundation. At the bottom of the pyramid, it’s a losing proposition. Instead, companies seeking to improve the lives of the world’s poor should focus on a more realistic route to profitability: They need to elevate gross margins far above the company average by pushing down variable costs and boosting the price consumers are willing to pay for a unit of product. They also need to raise the price point for a single transaction. This combination of higher margins and higher price points increases the contribution—the amount of money that goes to covering fixed and operating costs—generated from every transaction.”
Simanis isn’t sour on the businesses’ ability to both make profits and social impact. In fact, he presents margin boosting cases and models that are encouraging for double or triple bottom lines.
Readers also should explore “Back to Business Fundamentals: Making Bottom of the Pyramid Relevant to Core Business” which provides a critical appraisal of the BOP field, using the failure of the BOP Protocol as a case study of why interest among corporations is, according to Simanis, in steep decline.
I’m planning to speak with Simanis soon and delve a bit deeper into his research and conclusions. In the meantime, I’m curious what you think. Assuming he is correct in his conclusions, does this truly represent a “fatal flaw?” Or is it simply a necessary evolution on the theory?
If you have a question you would like to ask Simanis, leave it in the comments section, and/or email or Tweet it to me at: email@example.com or @ScotterAnderson or @NextBillion and I'll do my best to ask it when he and I speak.
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