I’m no expert in matters of investing at the bottom of the pyramid, but looking at the statistics below, it seems like a no brainer to me.
Half the world ( 3 billion people) live on less than $2.5 a day.
80% of all humanity lives on less than $10 a day.
20% of the richest people account for three quarters of the world income.
I generally don’t get very enthusiastic when I read business plans, or hear about businesses that target the elite in the society. There’s nothing wrong with starting the next Sir Henrys to sell 2,000 bob shirts, or an online business in Kenya. It’s just that for me, it makes sense to be serving a segment of this 3 billion people.
You can’t go wrong at the bottom of they pyramid, and this is why:
- Most items consumed at the bottom are essentials. The people in the low income segment buys what they must, and as such, if they’re buying your commodity/service, you have guaranteed, sustainable market.
- In hard economic times, the higher income segments tend to adjust their spending a step down towards the lower income segment. What would this mean for your business? That in hard times, your business still thrives.
Case in point is the rental market in Nairobi.
A couple of years ago when the housing market was booming, the rents in areas such as Kileleshwa and other up market estates sky rocketed, so did the apartment selling prices. The demand was so high, the apartments would fill up 2 months post completion. Serving the high income segment made sense, because we were in a growing economy, and more people were moving up to the higher income segments and were able to afford the housing.
Then we experienced a decline in the economy. I can spot an apartment in Kileleshwa that has been complete for the last 6 months, and it’s yet to fill up. The rentals in this area are going up, but it’s not demand driven, it’s more of home owners trying to recoup their investment.
On the other hand, try looking for a house in South B or Nairobi West. The decline in the economy hasn’t made a difference. Quite opposite actually, the rents are still going up, house scarcity is worse than ever. South B/C is more middle income, but this example demonstrates the dynamics at the bottom. I doubt houses are more available in Kibera now, than they were 3 years ago.
The disadvantage of investing at the bottom is the service providers are numerous, and therefore innovation is key. For an entrepreneur, one of the quick wins at the bottom is quality. Despite popular belief, quality isn’t expensive. It doesn’t cost significantly more to run a clean restaurant for example, or a nicely tiled house. The bottom is littered with millions of businesses providing bad quality services that this would be a win.
Well, I’m studying more on investing at the bottom of they pyramid and will share my insights as we go, but two areas that are gaping opportunities at the bottom of the pyramid are housing, and food (production, processing, restaurants, fresh produce etc).
Thanks for reading, share your thoughts by commenting below.
{ 8 comments… read them below or add one }
Welcome back!
I totally agree with your point on investing with in the bottom billions. and the good thing about betting on this segment of the market is that they have a very simple taste…like you say housing and food and clothing are in fact the basic needs [at least when i was in primary school]. If you tap into these three with the right quality and pricing, i don’t see why joining the top 20% will be a problem
Wonderfull. It reminds me of my Journey back home every evening. I stay in a low income area east of Nairobi and over the years there are businesses that survive always selling the essentials.
Talk of Guys selling Muturas, the Githeri (Mostly consumed by the bachelors) and The soup along the streets are always doing maximum sales (even though little).
By the way its not easy to get a house in the area. Rent is average 2500 Ksh for a 10 by 12 maximum but the are always booked.
I could say the same apply to the transport business. At times I do pay 20 instead of 40/50 peak hours just to stand in the bus getting home every evening and I guess this is an extra income for the owners of the bus
I also agree with you on the merits of investing in the bottom. The tricky thing is the quality.
For goods, its relatively simple to improve quality. The improvements are tangible and most often readily measurable against competing offerings. But it does have a definite cost implication.
Services are tricky because of the human element. Take the example of the restaurant you used. Asking your existing employees to clean it up more frequently is unlikely to cost you a great deal more. But the staff may be demoralised and that could affect the customer experience.
That said I believe services are the way to go for entrepreneurs. Customer care is sorely lacking in this country
That’s the thing. If you’re right by your staff, why should your employees be demoralised about what they should be doing? I’ll do a post on how to do things right by your employees
Interesting points you make there. Part of where we’re at. Hoping we can make an impact and carve out (something you didn’t mention, but I’m sure you know about) a niche in the market!
Good reading.
Very intrigued to see where your experiment goes. The current business I am working in caters to the middle to lower segment of society i.e. folks looking for minimum wage jobs and one of my focuses is actually to move in the opposite direction because once quality has been proven to higher income folks, you can charge more and expect more money long term.
So I would be intrigued to see your experiment in the opposite direction and exchange notes…….
Btw how is Mo doing?
Nice approach. There’s a lot of money to be made. Care sharing what you’re reading?
Great topic and food for thought. While I appreciate the volume of trade in the lower income segments, I wonder if you can offer good quality at the same price as the numerous service providers? Quality is always an additional expense to the business.
Nice case study is our own “big boys”. Safaricom makes the most amount of money from sale of scratch cards of 50/- and below.Why?Kenyans survive in economies of scale,we buy small kiwi or a bamba 20 so that we dont see that we are spending but in real sense we are.And middle to low income earners love the small things due to their earnings.Hence,blueband ya 10/- doesnt stick in those kiosks.Sells like hot cake. TRue we should invest in the middle to low income earners as thats where people like Equity grew from.