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Bottom of The Pyramid or Bottom Line

According to wikipedia, Bottom of the Pyramid is the largest, but poorest socio-economic group. According to Marketer, Bottom of the Pyramid is the only key to success. The enabler for this thought process is Economic Recession.

Bottom of the Pyramid is one of most favorite topic for Corporates, Business Newspapers or Business Magazines.  In my opinion, except FMCG companies no other industry has cracked this domain. FMCG companies are riding on the depth of their distribution channel to succeed.

Typically, the Marketer job is to show top line growth (Gross Revenue) and they are not concerned about Bottom line (This is Finance’s job). From here problem start and there is a disconnect regarding Bottom of the Pyramid.

Its a fact that Net Realized Gains from Bottom of the Pyramid is inversely proportional to Bottom Line. Reason, the cost of providing service to Bottom of the Pyramid is very high compared to Top of the Pyramid. It squeezes the profit margin and in many cases it kills the organization if cost goes beyond control. The organizations don’t realize this and live happily with the Top line growth. In most of Board Meetings, the only point of discussion is top line growth. Corporate remain hopeful that if Top line is achieved then definitely in some time, bottom line will also improve. It’s like following Mirage, which never exists. In short, “Future is always bright”

Typical case study is of Reliance and Tata in Telecom Sector, The cost of providing service to Bottom of the Pyramid was high. only hope was high volumes through high subscriber base but with anticipated low revenue per sub. This strategy didn’t pay and it became difficult to recover the cost. End result these companies are under pile of debt and desperately looking to exit the business. Its better to have 100 Customers giving 500 Rs Revenue each rather 1000 Customers giving 50 Rs each, reason cost of servicing 900 customers will be manifold compared to cost of servicing 100 customers.

Basically Bottom of the Pyramid is a vicious circle. Corporate invest huge amount to service bottom of the Pyramid, without any concrete Return on Investment plan. In all probability, ROI will fell short of target then more investment will be required to recover previous investment and this cycle continues till the company is on a verge of collapse.

Bottom of the Pyramid approach is normally adopted by new entrants and the Marketers of these entrants want to “tap new markets“. They not only kill the profitability of their organization but are also responsible for collapse of business Eco-system e.g. Tata DoCoMo introduced per sec billing to tap new markets but after 4 years the company think tank realized that it was a blunder as cost of providing telecom service is high compared to realized gains. Their move to introduce per sec billing killed entire telecom sector. Gaining market share through Price cut is foolishness unless organization has cost leadership. Best example to quote is Chinese goods. In China, 1st the manufacturers attain Cost Leadership though best practices and economies of scale then they drop the price. Have you heard any Chinese manufacture incurring loss, i bet answer is NO. Indian product are almost 8-10 times the cost of Chinese product & it shows cost leadership of Chinese manufacturers.

In future, volumes will not drive the business but the cost optimization will keep organizations competitive. Before spending an additional penny, Marketer should ask What, Why, When, How & Where. The new age Marketer should also wear the Finance hat to take care of bottom line e.g. if company is generating X revenue by spending A and would like to penetrate so called bottom of the pyramid then rather starting from Top Line. It is critical to take bottoms up approach and understand, how this strategy will impact bottom line. It is important to note cost involved and net realized gains. Assuming extra cost is B and incremental net revenue is Y then following calculations will help to take decision.

Considering X-A = P & (X+Y) -( A+B) = Q

If Q > P then go ahead with decision else drop the plan to tap bottom of the pyramid.

Now, you must be wondering it is not rocket science and very basic stuff. Trust me, The big organizations collapse when they deviate from basics & try to implement rocket science. Remember “Future is not always Bright”.

Hope you liked the article…Feel free to share your feedback, comments and inputs.

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