Source: Wired Sept 27th 2010
The Tata Group, India’s version of Acme and maker of the supercheap Nano automobile, recently introduced a $22 water purifier that works without electricity or running water. (Every few months it needs a new $6 filter.) A big-hearted, philanthropic, and important effort? You bet—cue the somber stats about preventable waterborne diseases. But check out the size of the market for a product like that: Some 900 million people worldwide lack access to clean water, 200 million of them in India alone. Tata is saving lives and making a killing.
That’s why, at next year’s G-whatever meeting in France, world leaders would do well to rip up those big checks to tin-pot autocrats and channel the cash to startup companies instead. Help those companies make cheap, useful products to sell to the world’s poor, who will use them to become less poor, and everybody wins. Management guru C. K. Prahalad advocated this very idea six years ago in The Fortune at the Bottom of the Pyramid: Eradicating Poverty Through Profits, and now a few companies like Tata are putting it into action.
D.Light Design is a case in point. After witnessing the inefficiencies and harmful health effects of kerosene lamps as a Peace Corps volunteer in Benin, Sam Goldman returned to the US to earn an MBA and pursue a very specific agenda: Replace kerosene lighting, everywhere, with inexpensive solar-powered LED lamps. Three years ago, he launched D.light to produce such lamps and has already sold 250,000* to customers throughout the developing world at an average price of $20 apiece. The company hopes to light the homes of 50 million people by 2015.
Another example: Forty percent of humanity gets by on less than $2 a day, and most of those people are rural farmers. Efficient drip irrigation systems could triple or quadruple their yields while reducing their costs, but manufacturers haven’t bothered making drip systems for tiny farms. In 2004, a company called Global Easy Water Product began selling a setup that can be used for small plots. The price: $32.50 per quarter acre. In just two years as a for-profit venture, it has sold more than 250,000 units in India.
“Conventional development economics was always about increasing per capita income to a certain level before people become consumers,” says Vijay Govindarajan, a professor at Dartmouth’s Tuck School of Business. The new view flips that logic on its head: Providing access to modern technologies by creating supercheap products may, in fact, be the best way to improve economic well-being. For entrepreneurs, the race is on to tap that massive population of penny-wielding consumers-in-waiting. Put another way, if Coke and Marlboro can sell to the world’s poor, companies whose products are actually useful should be able to do it, too.
But selling to subsistence farmers takes some reshuffled thinking. To simplify a bit, companies in traditional markets design a product, figure out what it costs to make, and then select a profit-maximizing price. That approach assumes, of course, that your market exists in the first place. When doing business in Burundi, you’re trying to conjure buyers out of thin air. To do that, you start by committing to a price as close as possible to nothing. The task, then, is to design a product that costs even less to make. Only with what Govindarajan calls “frugal engineering” can companies gain access to the masses at the bottom of the pyramid.
Of course, that’s easier said than done, especially for big firms that are already hardwired for other priorities (Tata is the exception here). But nimble startups can have a real advantage in this new environment because they aren’t trying to satisfy the tastes of existing first-world customers.
The trick is balancing affordability and quality. In a Harvard Business Review article last year, Govindarajan, together with Tuck colleague Chris Trimble and General Electric CEO Jeffrey Immelt, wrote that people in emerging markets “are more than happy with high-tech solutions that deliver decent performance at an ultralow cost—a 50 percent solution at a 15 percent price.” That’s not a green light for lame products, though. As in any market, what’s being sold has to fill an unmet need. The poor may be poor, but they’re not stupid.