Editor's Choice, April 2013: Why low prices and adverts don't win BOP customers
Why are price-cutting and radio adverts NOT a good investment for companies selling innovative products to BOP consumers? Why throw your solar lantern on the floor to encourage sales ? Why are unsatisfied customers the key to market growth? And a better bet than donor-funded marketing campaigns?
These questions are all answered in an excellent new guide to ►Marketing Innovative Devices for the Base of the Pyramid, published by Hystra in March. It challenges some platitudes, turns upside down some standard business principles, pin-points the best tips for selling to BOP consumers and draws on experience of 15 companies that already have sold to hundreds of thousands.
'The company realised their customers were not interested in buying cement, but in building a room'. This sentence captures the common theme of this document: a genuine understanding of BOP markets. This is what has enabled the case study companies to succeed, and the report converts this into guidance for others.
Low-cost small bags of cement did not sell. Instead Patrimonia Hoy offered a full service for home improvement, including architect advice, fixed price materials, fixed weekly payments, all of which lower risk and boost quality. The result is 350,000 families served and one of the most profitable sales channels of Cemex.
That BOP consumers care more about quality than price, is illustrated in many ways. They dare not take a risk on an unproven product, irrespective of the marketing hype. It is neighbours' experience that will convince them of quality. This sounds obvious so it should not be surprising (but is still well worth remembering) that:
- 'the successful organisations studied here were all focused not on reducing their price as much as possible, but rather on offering their clients the best possible value for their money (meaning a risk-free good quality comprehensive solution at a price comparable to alternatives) (pp6)'
- 'in our sample of 15 organisations, the six largest (in yearly sales) were not spending any money on above the line marketing (they never had, even in their earlier years)... most of the organisation studied here focus most- if not all- of their efforts on excelling at village-level tactics.' pp 9-10
So why throw your lantern on the floor at a sales demo? To demonstrate it's durability. Why target unsatisfied customers? Because word-of-mouth is the most important marketing channel. Bad feedback will kill sales. Useful feedback will improve the product, and the customer whose problem was addressed will become a champion.
Some findings seem initially challenging, but make perfect sense:
- Radio ads and marketing raise awareness but do not convert into sales. The sales figures - a 2% increase in sales of stoves, a 5% increase in sales of irrigation pumps - are convincing.
- Customers attracted via a 'big push' are less likely to still be using the product in years to come. This is why donor funding, with any short-term sales target, can lead attention away from the slower burn of satisfying customers. Over time, the latter leads to higher ongoing usage and better word-of-mouth.
- Families buying innovative devices such as cookstoves and water filters, can generate an internal rate of return on their investment of over 100% or even 5000%. That is why they will afford the right product given the right financing option.
- Relatively high gross-margins are needed if the business is ever to be sustainable: 35-45% for distributors of single products for example.
- Financing is best done in-house, even though it may seem simpler to partner with an external institution that operates finance. In-house financing can reduce both risks and costs. Even micro-finance institutions are limited as a channel, reaching only 10% of the poorest by 2010
The core of the report is 20 pages, grouped around 10 key findings, nicely summarised in a pyramid:
The appendix describes all 15 case study companies, with welcome added detail.
There is a growing range of reports published on marketing to the BOP - and indeed analysis from experience of BIF and IAP projects is underway. But this really is one of the best and crispest that I have seen. It focuses only on sales of consumer durables, not fast moving consumer goods. But to be honest, for anyone interested in attracting BOP customers, this is a Must Read.
A full listing of each monthly Editor's Choice since December 2010 is here.
An Inside Inclusive Business report on distribution networks to reach BOP consumers will be published by the Business Innovation Facility later this month.