Yesterday I was at the World Bank/IFC at a panel discussion focused on “The Next 4 Billion”, a new report quantifying the size and composition of the BOP market. The report was a joint effort between the World Resources Institute, the IFC, and the Inter-American Development Bank. It also got sponsorship from some heavy hitters: Visa, Intel, Microsoft and the Shell Foundation.

Allen Hammond, a VP at WRI, summarized the reports findings as follows.

The report takes a deeper look at the BOP using national household survey data from 110 countries. [This data is being made publicly available for the first time]. One major task of the report is the identification of successful business strategies in different sectors [food, energy, health, transportation, water, ICT, housing and financial services] that are creating value for companies as well as BOP producers and consumers. It looks at how the poor are currently spending their money and assesses the size of the BOP markets by region and by sector.

Specifically, they ask these series of rather useful questions about each sector of the 8 sectors described above:

1. How large is the market?
2. How is it segmented?
3. What do households spend? What do they buy?
4. Where is the market?
5. Is there evidence of a BOP penalty?

The BOP market, those persons with annual incomes below $3,000 in local purchasing power, is quantified as 4 billion people, about 72% of the world’s 5.5 billion inhabitants. They are the poor by any measure. The average living on < $3.35/day in Brazil, <$2.11/day in China, <$.189 in Ghana and <$1.56/day in India. People in the BOP markets have unserved or underserved need, are trapped in the informal sector, and are saddled with the BOP penalty. The latter refers to the fact that the poor often pay a larger premium for goods and services than higher income individuals.

The informality trap refers to the fact that being in the informal sector makes it is very hard (sometimes approaching impossible) to scale/grow your business. It also means that you don't have the advantages of legal protections, such as the enforcement of contracts.

According to the report, the poor have a large aggregate purchasing power, particularly if you get above the $1/Day mark. The writers estimate that purchasing power to be ... um ... (5 trillion dollars (add appropriate Dr. Evil impression here).

Broken down by region:

• Africa: $429b
• Asia: 3,470b
• Eastern Europe: $458b
• Latin America and the Caribbean: $509b

African and Asian BOP markets are largely rural. Conversely, Eastern European and Latin American BOP markets are largely urban.

Breakdown in spending by sector:

You could quibble about this perhaps being a vast overestimation of the market. However even if they were completely off the mark and the market was a mere 20% of their prediction, we’re still talking $1 Trillion dollars. You could also ask yourself “What is the point of making such estimations anyway?” Michael Klein, a World Bank/IFC VP and IFC Chief Economist, put it simply in his opening remarks. I paraphrase: If you want business folks to get interested/excited/overtaken by glee about serving the poor, you need to give them concrete numbers showing them why it is worth their while. Nothing does that better than “Get your piece of the $5 trillion pie” and “Look at some of your competitors who are beating you to it”.

Important Business strategies enumerated by Hammond:

• Local value creation (ex. health care franchising, community based water systems)
• Increasing/enabling access (e.g. through cross subsidies, financing, smaller units (sachet marketing)
• BOP focus and innovation
• Unconventional partnering

The report notes that as incomes increase spending in the ICT and transportation sectors rise dramatically, while food and housing increase slightly or remain flat (as a percent of total income).

Hammond wraps things up by saying that the BOP can be served profitably and they have already demonstrated a willingness to pay for good and services. They are already consumers. The trick is increasing the value proposition of products that are offered to them. The private sector can reduce prices, increase quality, increase access and increase jobs.

CK Prahalad spoke about the Democratization of commerce and how this was the challenge for the 21st Century. Up to now, he says, we’ve been asking the wrong question: “Is globalization good or bad for the poor?” The better more constructive question is “How can we make globalization work to benefit all?” He quipped that globalization is like gravity. There is no point in trying to fight against. You need to understand it to create a plane that will fly.

A few of his ideas

• Everyone is a consumer
• Everyone is a producer
  Being wrapped up in this web 2.0 generation, this last one isn’t such a hard sell.
• Improving the nature of consumption can improve livelihoods. Example: the BOP golden child, the cell phone and SMS. In his words, the cell phone industry found the sweet spot. They cracked the BOP code. A side question that I have is what is it about cell phones specifically that made that industry so successful: strong value proposition, cheap unit price for calls, free SMS, companies can move a lot of product with lower distribution costs than other entities. Those are my guesses.
• To rock the BOP market, biz needs to take unorganized/inefficient markets and organize them, develop markets, create breakthrough innovation.

A recurring theme in the talks and panel discussion that followed was that business as usual just wasn’t going to cut it. Breakthrough innovation and design done specifically for the BOP market were needed. It could not just be companies peddling cheaper, lower quality items to the poor. Rather BOP products were going to be different and targeted to suit their needs.

Overall, this report does seem to get past many of the criticisms people have made about Prahalad’s BOP concept in its earlier forms. This report reveals what are the most pressing needs of the world’s poor as determined by their purchasing habits. It serves as a roadmap for businesses who are interested in getting rich by doing good in that it highlights areas where they can add significant value for low-income consumers as well as induce positive social change.

Interestingly enough, quite a few of the examples of organizations working at the BOP were social enterprises who moved from the non-profit to the private sector. After the talk I asked Prahalad if he felt that non-profits ultimately had to become for-profits if operating in this field. He said no, that there is a big place for non-profits/social enterprises. A big issue for achieving growth however was the nature of the non-profit funding stream. Trying to go to scale from donations or foundation grants can be very tricky, especially in situations where shifting foundation/donor desires may lead to program drift. This just reinforces what an important role social venture capital like Echoing Green, Acumen and New Profit play in the social entrepreneurship field.

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For more info + a bit of behind the scenes, see post by Rob Katz (who I finally met in person) here and here.