Lucrative Profits: Where? BOP!

In The Power of Unreasonable People, authors John Elkington and Pamela Hartigan discuss the BOP: Base Of the (economic) Pyramid. The authors state that the BOP consists of 4 billion low-income consumers. What if you could generate $1 of profit from 10% of that market in a year? I’m not a natural at math so correct me if I’m wrong, but I expect that you’d make $400,000,000 in a year. That would be a good living for a small company or an attractive division in a multinational corporation. It may be possible to pull from more than 10% of that market, or to generate a larger profit from the 10%. Bottom line: we’re talking about lucrative potential here.

For those who are not inclined towards the language and methods of Capitalism, allow me to add a disclaimer here. I am not talking about exploiting poor people and robbing them of the little wealth they may hold. That is what we expect from Check Cashing companies and liquor stores. Through the magic of the internet, free markets and trade agreements, and a growing global market, the BOP is beginning to receive a trickle-down of profits. The BOP in Brazil, Russia, India, and China (also known as the “BRIC”) for instance, are receiving orders for their lower labor costs. In exchange, they receive wages in place of government handouts or agrarian/village life. In other words, billions of people now have or will soon have spending money and will participate in the global market where they once were non-existent. These people will increasingly demand to exchange their wages for products and services that were once surplus supply and/or undemanded. Bottom line: new profit potential for the global market.

Allow me to make one more thing clear, and forgive me if you are up to speed on macroeconomics. You have heard of the law of supply and demand, I assume. Basically, if supply (goods/services offered for sale) is higher than the demand (the number of people willing to buy) then prices are lowered to a point where people start buying. If demand is higher than supply, then you have a group of people with money to spend who are competing to buy products, and that is the reality we are facing if 4 billion people are beginning to spend money in the global market for the first time.

When demand goes up, everyone wins. Prices naturally rise because people are competing for scarce supply. That may not seem like a good thing for the low-income consumers, but I see an opportunity and many other capitalists will too. By using the Wal-Mart model of low margin and high volume, many enterprises will be able to undercut their competitors and prevent prices from rising too high. Therefore, business will customize themselves to reach the BOP and keep prices low enough for the low income consumers to raise their quality of life.

Low prices are only half the win, though. If demand is greater than supply, then intelligent enterprises will raise their production, creating more jobs. Simultaneously, entrepreneurs who may have been prevented from competing previously will now have a chance to meet the high demand. Entrepreneurs create new wealth, make new demands on the economy to spend that wealth, and create jobs both directly through their enterprise and indirectly through their increased demand.

In a nutshell, an increase in consumers leads to increased demand. More demand leads to increased opportunities and profits. More profits/opportunities leads to more demand. Point to the loser in this equation. I can’t find one.