MNCs see fortune at bottom of the income pyramid

When General Electric engineers here wanted to develop a more affordable baby warmer for India’s small, private hospitals, they initially replaced the fat, rubberized wheels standard on high-end models with smaller metal ones. They figured it was a quick, easy way to cut costs.

But the wheels failed the field test. They caught on the uneven floors in rural health centers, toppling baby and mattress to the floor. Luckily, the baby was a doll.

“You can’t take a product and simply strip it down and replace expensive parts with cheaper ones,” said Vikram Damodaran, director of health care innovations at Wipro GE Healthcare, which is based here. “It has to come from the ground up, with a lot of input from the people who might actually use it.”

That is Lesson No.1 in developing products for consumers who live on pennies a day in places like India.

For years, multinational companies had little interest in lower-end consumers, figuring no money was to be made. Now, they are increasingly attractive to all types of industries, from consumer product makers to technology businesses. Google just announced plans to sell a stripped-down, cheaper version of its Android phone in India.

A decade ago, C K Prahalad, a University of Michigan business professor, in his book “The Fortune at the Bottom of the Pyramid,” detailed the potential, contending that such households were every bit as discriminating and aspirational as their counterparts at the other end of the income spectrum.

Prahalad, now dead, estimated there were 4 billion such consumers in a market worth $13 trillion.

“People were saying, 'There’s a fortune to be made. Let’s go,'” said Mark B Milstein, director of the Center for Sustainable Global Enterprise at Cornell University. But many of the first efforts failed. “There was not much thinking about what those consumers needed or wanted or how they might be different from consumers with more disposable income,” Milstein said.

For years, Procter & Gamble tried to sell a water purification system - a small packet of powder that is mixed in water, which is then strained through a cloth. While it cost pennies, consumers had no idea how to use it. P&G decided educating consumers about the product would be too expensive, and the system, Pur, became a wholly philanthropic effort.

“A lot of times a product we take for granted may be wholly unknown to consumers in this market,” Milstein said. “If a housewife has never used a water purification system before, she may ask herself why she needs it.”

The challenges proved many. Distributing goods to the many tiny shops that serve poor Indian consumers, for instance, is vastly different from getting products into Wal-Mart or convenience stores that use technology and warehouses to manage inventory. The average Indian shopkeeper has no storage space and is lucky if he has a working calculator.

The practicality principle

Companies often forget to consider whether consumers want or need a product with too many bells or whistles. A phone with a built-in camera, for example, makes little sense if a family does not have access to the Internet and cannot share photos. 

“Where we might use 8 grams of tea to make four cups, a poor person will use it to make seven or eight cups,” said D Shivakumar, chief executive of PepsiCo’s India business. “If you don’t understand that, your projections for profits and losses will be way off.”Shivakumar said companies often focused too much on how little poor consumers had to spend and then developed products to fit that budget. Instead, he said, it is important to determine how to give them the sizzle at a price they can afford.

“They don’t have a cash problem - they have a cash-flow problem,” said Shivakumar, who ran Nokia’s India, Middle East and Africa businesses before joining PepsiCo. 

The cheapest version of Pureit, a water purification system, sells for $25, or as much as a month’s income for a person living below the poverty line in India. Yet the product has been a success because the manufacturer, Hindustan Unilever, realized that it could join with nonprofit groups and microfinance institutions interested in water and sanitation to develop installment plans that would enable families to pay off their Pureit purchase over six months or so. “It gives consumers the ability to pay for something they want and need at a price that is not high but is yet aspirational,” said Yuri Jain, vice president for Hindustan Unilever’s water business.

It took five years to get the product right. The device had to produce water that could meet the United States’ Environmental Protection Agency standards. It had to work without electricity or water pressure. And it had to be as simple to use as possible. Building off its success in the market, Unilever developed a more expensive version of Pureit to sell to well-heeled consumers in nine countries. The top of the line sells for roughly $340.

‘Jugaad’ with an eye on India

Many products are transcending their original markets and appealing to a more affluent consumer. PepsiCo, for instance, just began selling Kurkure, an inexpensive line of Indian-style snacks, in Canada and the Middle East. It is the first time the company has sold a purely Indian innovation outside India.

For Nokia, the trick was persuading component suppliers to cut prices. “In order to do business in phones priced below $40, you have to have a scale that’s powerful enough to negotiate component prices to match those prices,” said Sami Ranta, vice president for affordable phones at Microsoft, which owns Nokia. “You also have to sell a lot of phones.”

So was born the Nokia 105, the tiny mobile phone used by Rajesh Gupta, a taxi driver in Varanasi, and legions of other Indians living in slums. The phone, which Gupta bought for about $20, roughly a week’s income for him, has a dust- and splash-proof keyboard, flashlight, alarm clock and FM radio.

The phone’s battery charge lasts 35 days on standby and supports more than 12 hours of talk time, which means he usually needs to pay for a charge just once a month. Service is provided via a prepaid SIM card.

“I make more money because of this phone,” Gupta said, explaining that foreign tourists can call him when they need him.

Now Nokia is selling the 105 in Austria, Britain, Denmark, Switzerland and other developed countries, as well as across Africa and Asia.

“Those phones are having more and more appeal as a secondary phone in big, advanced markets,” Ranta said.

GE realized more than a decade ago that products devised for the Indian market might appeal to more developed markets, and planted the company’s largest and first international research and development center here. The lab has 4,500 engineers, 1,600 of whom work on health care innovations. 

“There has been a shift,” said Shyam Rajan, chief technology officer at Wipro GE Healthcare. “Before, it was in India for India. Today, it is in India for the world.”The MAC 400, an electrocardiograph machine, was the first product GE moved from here to the rest of the world. About one-third the price of the company’s higher-end EKG machines, it is battery-operated and portable. It also is made of parts that can be bought in local electric and home supply shops, rather than the proprietary components GE typically uses. Of the 15,000 Mac 400s that GE has sold, 60 per cent were sold outside India.

The Lullaby baby warmer, now used in Europe, was built with feedback from Indian doctors and nurses in the field.

Reducing costs and complexity

Engineers had to return to the drawing board repeatedly. A hand crank used on higher-end warmers to lift a baby’s head, for instance, added cost and complexity. It was replaced by a simple plastic triangle that fits under the Lullaby’s mattress.

The mattress is covered in Kevlar and sealed around the edges, replacing a more pliant covering that tore more easily. And last year, GE developed an LED device for the Lullaby that is more energy-efficient and whose operation costs a quarter of the amount required by the fluorescent bulbs used in most warmers.

“It will last longer than the metal in the frame,” Rajan said.

Since the Lullaby was introduced in 2012, GE has sold close to 1,000 in India and some 3,000 internationally. And the company will soon unveil a new, low-cost PET/CT scanner called the Discovery

Is GE sacrificing sales of its Cadillac baby warmer, the Giraffe, to the Lullaby?“It’s better to cannibalize yourself than let someone else do so — and that was going to happen with these products,” he said. “Anyway, the amount of market we created that was not there before more than makes up for it.”