As we have frequently discussed here on RisingPyramid, there is a growing belief that it is not only possible to create businesses that help the poor at the BoP (bottom of the economic pyramid), but that it is possible to make a profit while doing so. Making a profit off of the world’s poorest is certainly a controversial activity and it has created a significant divide amongst the social enterprise community. As someone who is pro-profit, let me be clear; I don’t advocate thinking of doing business with the BoP as an untapped source of wealth, rather, I support the profit motive because I believe it can be harnessed to actually raise people out of poverty. Let me dare to explain: With the recent IPO of SKS some have expressed concern that introducing shareholders puts microfinance one step away from being a loan shark business. Though there is merit to the concern, it’s also true that in an efficient market, if one MFI (microfinance institution) begins to act like a loan shark by upping rates, not only will they be going against their mission statement – they will also sabotage their own business as their clients will either switch providers or become too indebted to be profitable. Let me draw an analogy to the current boom in ‘green’ companies. A number of businesses have recognized that taking action now to protect the environment (by improving sustainability) is necessary in order to ensure that their business can continue to generate profits in the future. Similarly, companies that target the BoP consumer must take care to ensure that their business is sustainable for the world’s poor, else in the future the business will no longer be profitable. In other words, the poor, just like the environment, are in a fragile state; only companies that handle them with care can expect to succeed in the long run. Therefore, making a profit off the poor isn’t necessarily a bad thing, presuming that the company treats their customers in a sustainable fashion (and effectively leaves them better off). No one is forcing the poor to make purchase decisions and therefore if a company is not creating a value proposition for the poor, then the poor won’t buy their products and there won’t be any profit anyways. Thus, anyone who is making a profit off the poor must be providing them with value (with the exception of companies that take advantage of a forced purchase decision) and value is certainly not a bad thing. In addition to profit not necessarily being a bad thing, it provides two distinct upsides: profits can be used by the company to scale and reach more of the poor and profits encourage investors to inject capital into the field (as discussed in this post).
Though I have my own personal opinions about the question of profit, they are not set in stone and I am constantly looking to have my perspective be challenged and stretched. I recently came across an article by Aneel Karnani published by the Harvard Business Review entitled “Misfortune at the Bottom of the Pyramid”, which I found to be quite intriguing. In the article, Karnani challenges the findings of C.K Prahalad that there is a fortune to be made selling goods and services to the poor. He argues that the effective market size of the poor is much smaller than Prahalad suggests and that it is extremely difficult to make a profit selling to the poor. He further points out that since the poor are often uneducated and illiterate, they may make irrational decisions and therefore selling the poor products may reduce the money they have left over to spend on more essential items. Karnani advocates creating businesses that treat the BoP as suppliers and producers rather than as customers, which I would agree is a very valid way to reduce poverty.
While I agree with many of Karnani’s conclusions, I still believe that there is plenty of room for companies to target the poor as consumers without damaging their welfare. Whether or not said companies will be able to find unique ways to operate at a profit will depend on how cost effective they can be. In order to ensure that companies aren’t providing nonessential alternative spending options for the poor, they should focus on important needs such as improved healthcare, education opportunities (see Akilah), water, energy, housing, nutrition and agriculture to name a few. These are broad areas in which poor consumers currently have very limited options. Companies that provide viable solutions in these areas will surely be adding to the welfare of the poor. As Karnani points out, obtaining a profit while doing so could be quite difficult, which is why many of these needs remain unmet. As Social Entrepreneurs, I believe it is our task to find ways to meet these needs and experiment with ways to make a profit doing so. Social Entrepreneurs alone won’t cure poverty, but perhaps if we can demonstrate to investors a profitable way of meeting the poor’s most pressing needs, then we might have a chance.