Why companies should care about the low-income market

South African companies are increasingly looking at tapping the low-income market, or bottom of the pyramid, as it is sometimes called.

Definitions of the bottom of the pyramid differ widely. There is, however, general consensus that the group has a relatively low income and are underserved by the large, organised private sector.

“The bottom of the pyramid is generally understood to refer to the four to five billion people on the planet earning up to US$3 per day,” says Pierre Coetzer of Reciprocity, a Cape Town-based consultancy that advises large companies on developing strategies to target this market.

Coetzer says that the global economic crisis and the increasing importance of emerging markets are pushing South African companies to take a serious look at the low-income segment. He notes that large firms are also becoming more secretive about their bottom of the pyramid strategies, perhaps a sign that they are beginning to take this market seriously.

“We see a very clear trend that companies are no longer asking what the bottom of the pyramid is. If you look at the upper-income segment in South Africa, those markets are mature, they are growing at perhaps 1% to 2% per year, whereas your low-income segments are growing at anything between 9% and 15% per year. You ignore such trends at your peril,” Coetzer explains.

Catering for the low-income segment often calls for creative business models and product innovation.

One firm that is busy developing a strategy to target South Africans with less disposable income is SodaStream, manufacturer and supplier of home carbonation systems. Users can make their own fizzy drinks at home by combining flavoured syrups and tap water, and then infusing the mixture with carbon dioxide gas via the SodaStream machine. The company positions itself as a more convenient, value-for-money alternative to brands such as Coke and Fanta.

SodaStream’s traditional market in South Africa is the upper-middle and higher classes, but the company is now setting its sights on the low-income clientele. Although making a soft drink with SodaStream is much cheaper than buying one of the well-known brands at a supermarket, the initial cost of machine – retailing at around R399 (US$55) for the cheapest model – puts the system out of reach for the low-income population.

To address this problem, SodaStream carried out a pilot project in Soweto, a predominantly low-income area of Johannesburg, targeting informal retailers or “spaza” stores. The strategy is for spaza shop owners to make their own fizzy drinks using SodaStream’s products and then sell it on to customers, either in cups or bottles, at a cheaper price than what brands such as Coke or Fanta would cost.

Rogers says that the pilot project went well and that the company is now looking at ways to make the machines more affordable to spaza shop owners. “We just need to do the numbers to see what works from a business perspective.”

Strategies and opportunities

Coetzer explains that bottom of the pyramid strategies do not always just comprise of selling products, but also purchasing from the low-income segment. An example of this is Colllect-a-Can, a non-profit but self sustaining recycling business, with steel and tinplate producer ArcelorMittal and beverage can manufacturer Nampak as shareholders. Collect-a-Can pays people cash for collecting used beverage cans and provides tens of thousands of unemployed South Africans with the opportunity to earn a living.

A fact sheet produced by Reciprocity for the University of Stellenbosch Business School’s BOP Learning Lab, notes that in the Cape Town township of Khayelitsha alone, “immediate untapped opportunities are present in the fields of financial services (especially mobile money), home upgrading and repairs (plastering, tiling, electrical installations, insulation, energy‐saving light bulbs, solar panels) as well as the distribution and delivery of goods. In each of these domains, large businesses could harness potential with relatively small capital injections through networks of micro‐franchises, for example.”

An earlier survey by Reciprocity and PlaNet Finance revealed that the majority of informal entrepreneurs in Cape Town townships are looking to grow their businesses, but are unable to do so because the type of credit, insurance, training and financial services available in the formal market are not adapted to their needs.

Coetzer says that the private sector needs to seize the opportunities available to fill the gaps in the low-income market.

Pitfalls and mistakes

Despite its potential, the bottom of the pyramid should, however, not be over-romanticised and a long-term view is essential. “It is not going to turn huge profits instantaneously, but if you look at a 15 to 20 year strategy, this is the market where future growth is going to come from,” notes Coetzer. He says that companies should also experiment with different business models. “You will get it wrong the first couple of times.”

Another common mistake is thinking that the low-income segment is a uniform market. There are areas within South Africa’s traditional townships with middle-class living standards. “There is huge diversity within the bottom of the pyramid. People have different aspirations, different needs, and one of the biggest mistakes for any company would be to think of it as a single market segment. Not bothering to investigate just how diverse this segment is, is something we see quite often as a classical mistake,” says Coetzer.

Targeting the low-income population is an important part of SodaStream’s growth strategy. For Guy Rogers “it is an opportunity that I think most suppliers and manufacturers in this country can’t really afford to ignore.” Reciprocity’s Pierre Coetzer is also witnessing a change in thinking. “In South Africa many companies have grown fat on the traditional mature markets and didn’t really had to look at the bottom of the pyramid that much. That has definitely changed over the last 18 months,” he explains.