Profitably serving the modest-income consumer takes forward, not backward, thinking

Designing profitable businesses for modest-income consumers has been a major challenge for companies for the past thirty years, yet new growth in world consumption will come from this population. The newly risen and still rising economies of the world are large because of their population strength, not their per capita income. China and India, for example, are the world’s 2nd and 6th largest economies, but they are 71st and 139th in the world in terms of per capita income of their average citizen. (Source:IMF data 2017, nominal, USD)

Western or “developed world” companies have found it challenging, in part, because they are used to dealing with much richer consumers. The average German has about 22 times the income of the average Indian and over five times the income of the average Chinese (in terms of per capita nominal GDP). Many companies are also not used to dealing with consumers with low levels of education and infrastructure access.

Domestic companies in emerging markets are facing this challenge, too, because so far, they have focused only on the affluent consumer segments of their market; as those markets saturate, they are forced to increasingly serve modest-income consumers in order to grow.

The needs of modest-income consumers are as, if not more, complex than richer consumers. The products and services designed for them have to be affordably priced and yet they have to get the job done to be desirable. And despite complexity for businesses serving this market, they still need to make a profit! Typically profit comes from the hard work of large volumes and thin margins, and from innovation in all aspects of the business model to keep costs lower than the low prices that consumers are able to pay. Narayana Hrudalaya and Aravind Eye Hospital in India have managed to achieve this for heart bypasses and for cataract surgery where no compromises can be made in ‘getting the job done.’ Uber has managed to ‘get the job done’ at affordable prices and still be profitable – poor consumers who cannot afford to own a car can still use a good car whenever they need to. M-Pesa and other payment pioneers have only partially gotten the job done, because financial inclusion requires more than just the ability to transfer money electronically.  

Genuine customer-centricity means not saying as a supplier “this is the piece I do really well,” but instead saying “this is the consumer problem I really need to solve.” Customer-centricity is not low-cost, high-quality “surgery,” but rather, low-cost, high-quality “making you better.” This perspective necessarily involves before-care designed for the reality of the homes that these customers will go back to after surgery, low-cost after-care, and consideration of the cost of travel to and from the hospital. Similarly, in realm of financial inclusion, it is not “low-cost payments” or “microfinance loans,” but rather “helping you define and meet your financial goals.”

Kaleidofin is a recent start up in India offering financial services to low-income consumers “to propel customers towards meeting their real life goals by providing them intuitive and tailored financial solutions.” One of their products, Ummeed, meaning hope in Hindi, is a solution tailored for those whose household incomes and expenses are volatile, and can only save small amounts. The key objective is to help them get into the discipline of saving, taking into account the exigencies of their situation. Another product, Udaan, meaning flight in Hindi, helps households in the informal sector that have matured to the discipline of making continued contribution for an extended period of time to achieve their long-term life goals. It is a solution that combines the power of long-term investment while protecting the goal from uncertainties of life. In addition, it provides a liquidity facility to tide over short-term uncertainties so that you take the udaan you deserve.

Companies who are born and have grown up in the developed world tend to have a mindset that limits consumer-centricity. They believe, first, that poor is backward (more discussion later); second, that the young, poor consumer of today in India or Kenya is the same as the young, poor consumer of America 30 years ago (before the internet and the cell phone!); and third, that what is currently available in these markets is not “world class” and hence not valued by customers. An interesting Indian entrepreneur who has pioneered low-cost solar energy driven ATMs for villages in India said once that a ‘world class’ metric for an ATM may be how many notes it can count in a minute, but for an illiterate village woman who withdraws very few notes at a time, a better metric might be constant uptime despite electricity outages and iris-scanned biometrics.

Companies coming from developed markets have preferred to take their pre-existing products, services, R&D, and business models and transplant them in new markets with a mindset of “sweat your existing assets through geographic expansion.” They then have complained that it is the customer who needs to evolve and modernize to be ready for them. Combining this mindset with the genuine lack of familiarity with modest-income, low-education consumers living in poor infrastructure, it is not at all hard to see why customer-centricity takes a beating. Instead, they need to, apply their considerable core competence and R & D capability to the needs and buying power limitations of new market consumers and creating FOR them.

What complicates the task of profitably serving modest-income consumers is that in today’s world, poor is not backward. Poor consumers know what is possible and they will not settle for 18th century products in the 21st century. Their embrace and love for technology is just one indicator of this. Poor consumers in India perceive technology to be the great democratizer because machines don’t discriminate based on perception. The bank teller may treat you badly if you don’t speak English or withdraw only a hundred rupees, but the ATM or the telephone helpdesk do not discriminate. They love e-commerce for the “status-blind” service it offers, as well as the information, variety, and lower price. Skype saves travel cost but lets you see your grandchild, and the ability to get information on prices in various markets enables you to sell your farm produce more profitably. Modest-income consumers demand innovative, forward-looking products and services that meet their varying and complex needs.

If you are poor, you necessarily have more complex financial needs as you struggle to make ends meet and have unsteady incomes and uncertain health. The idea of ‘savings’ and even the idea of ‘future’ is fuzzy (see “Poor Economics” by Abhijit Banerjee and Esther Dufflo). You need more frequent deposits and withdrawals. Micro-merchants need different kinds of credit products and settlement mechanisms. Similarly, the bulk of India’s farmers have land holdings of less than two acres. While tractor ownership is not viable, “Uberising” tractors for hire might be. Similar examples can be given in healthcare, and the list goes on in other industries.

The good news is that we now have technology to sharply bring down costs for companies and hence prices for customers and therefore more innovative business models that can make serving modest-income consumers profitable. But this shift is not automatic. We know that low cost solutions do not necessarily equal the right solutions that are ripe for widespread adoption. Technology-led businesses still must focus on customer-centricity to successfully harness the power of tech to solve complicated consumer problems.