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Decrypting The Aspiring Indian Low-Income Consumer

March 26, 2015 • GLOBAL ECONOMY, EMERGING TRENDS, CULTURE & LIFESTYLE, Frontier Markets, Editor’s Choice, Asia - Pacific, India, Unprotected Post

By Glyn Atwal, Douglas Bryson and Ambi Parameswaran

In this article, Glyn Atwal, Douglas Bryson and Ambi Parameswaran highlight the common misconceptions held by companies regarding low-income consumer markets in India and suggest the best ways to successfully navigate these emerging markets.

 The increasing attractiveness of emerging markets has driven a realignment of business strategies within many international companies, which are now targeting a new generation of middle class consumers. At one extreme the economic spectrum, the rise of ‘Consumer India’ has created a growing market for luxury goods and services. Bulgari’s recent decision to re-enter the Indian market and the opening of three Michael Kors stores in 2014 suggests that it is the aspirations of India’s expanding upper and middle consumer classes that continue to drive demand. Similarly, it also may be that aspirations fed by rising incomes, albeit on a modest scale, have and will create new markets at the bottom of the income pyramid. Changes in consumer preferences are transforming consumption patterns; a shift from drinking loose milk to packaged milk is just one example. Branded first movers can make a substantial impression, good or bad, based on the quality of their understanding of the evolving low-income consumer market.

According to McKinsey Global Institute,1 the Base of the Pyramid (BoP) will account for 78% of India’s population by 2015. The vast majority of these consumers live in rural India and it is projected that the rural consumer market will be worth a staggering $1.5 trillion by 2020.2 Despite this huge market potential, many international companies remain hesitant to serve the low-income segment or, as we prefer, “the aspiring low-income consumer.” There are notable exceptions such as Danone who launched a BoP Business Unit based in Gurgaon, but senior executives are often challenged to justify a return on their investment. This is understandable from the point of view of informing shareholders, yet these surfacing consumer market opportunities should be regarded with an open mind, long-term vision and clarity.

We provide an overview of seven common misconceptions drawn from our observations that tend to obstruct international companies from gaining realistic insights into marketing to the low-income consumer in India.3

 

Misconception 1: Low-Income Markets are Unprofitable – Period

Profit margins within the low-income segment or market are likely to be relatively low, but unit sales can be extremely high. Profitability will thus depend to a large extent on the successful implementation of a low-cost model by international firms. As we discuss later, low-cost should not equate with inferior performance or quality. The ability for international companies to create and capture value is thus found in striking a balance between product cost, accessibility and performance. This requires a long-term commitment to achieve returns on investment and reach profit targets. Many BoP customers will be entering entirely new product categories for the very first time. Therefore, marketing strategies will often need to be designed to create rather than stimulate consumer demand. If brand owners are able to win the confidence and loyalty of these customers at this early stage, they are likely to reap the benefits in the long-term.

 

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Misconception 2: Distribution Costs Negate Profit Potential

Distribution in a market that is disproportionately rural and highly fragmented challenges even the most experienced marketers. There is no easy-to-use blueprint on how to develop an effective sales and distribution network. Marketers have followed different approaches with varying degrees of success; the key seems to be an inherent commitment to reach and access the low-income segment at a truly local level. For example, Vodafone has opened over 6,000 Associated Distributor Vodafone Mini Stores (ADVMS), commonly known as Laal Dukaan (red stores), which are managed primarily by a member of the local community. This physical store presence, which importantly includes after-sales support, has helped Vodafone become an integral part of the local landscape. Similarly, innovation in distribution has enabled Coca-Cola to strengthen its market presence thanks to its solar-powered “eKOCool” cooler, distributed at no charge to vendors in villages with poor or no electricity supply.4

 

Misconception 3: The Low-Income Consumer is Homogeneous

Distribution in a market that is disproportionately rural and highly fragmented challenges even the most experienced marketers.
It is essential for international companies to acknowledge that the low-income consumer is not homogeneous and myriad segments with varying degrees of purchasing power are in fact the norm. An additional two dollars a day can indeed make a significant difference in the ability of low-income consumers to trade up beyond basic needs and purchase branded items such as detergents or savoury snacks. For instance, Hindustan Unilever Limited (HUL) has a portfolio of detergent brands each with a distinct price and aspirational positioning. This also implies that marketing campaigns need to be tailored to meet the requirements of each consumer demographic. For example, first-time customers tend to lack confidence, knowledge and experience when trying new product categories. Coca-Cola addressed this concern when its “Happiness on the Go” vehicles ventured into Indian villages to entice new consumers to sample the brand. Given the social cohesion of community life in rural India, first-time consumers demonstrate strong tendencies to be influenced by word-of-mouth and peer approval. Brand executives should consider a promotional mix that places sufficient weight on these phenomena rather than conventional advertising campaigns.

 

Misconception 4: Partners Compromise Success

International companies are often reluctant to work with partners as doing so is generally seen to compromise control of marketing operations. This is somewhat naïve as many international companies lack the capabilities to operate effectively in uncharted territory. For example, Coca-Cola did not have the technical expertise to develop the previously mentioned “eKOCool,” but collaborated with a Mumbai-based company to create the prototype. Likewise, in rural India, HUL prudently partnered with non-governmental organisations (NGOs) as part of Project Shakti in order to help recruit female Shakti entrepreneurs to act as sales and distribution agents for HUL products, such as soap and toothpaste. Remarkably, 65,000 Shakti entrepreneurs are now employed in more than 165,000 villages and reach over four million rural households.5 Partners may in fact hold the key to success.

 

Misconception 5: Technology is Peripheral to the Low-Income Consumer

Technology is empowering consumerism at both ends of the income pyramid. The digital medium is set to open up previously inaccessible markets from banking, to entertainment (think Bollywood) and ultimately to e-retail. Undeniably, according to Internet and Mobile Association of India (IAMAI) and IMRB International,6 India’s rural Internet penetration (37%) is far lower than in urban India (63%). However, internet penetration is growing faster in rural India and is set to accelerate. This can be partly attributed to an increase in digital literacy and the increasing availability of low-cost smart phones. Snapdeal, one of India’s largest e-tailers has recognised the opportunity to bridge the gap between the demand for e-commerce services and underdeveloped internet accessibility as it launches 5,000 e-commerce kiosks to be managed by small scale entrepreneurs across 65 cities and 70,000 rural areas. Low-income consumers will be able to use the kiosks to shop online that will also serve as collection and delivery points. Interestingly, a pilot program revealed that rural customers’ spending per transaction was in fact comparable to that of urban consumers’.7

 

Misconception 6: Low Price is the Only Salient Choice Criterion

The assumption that low-income consumer purchase behaviour is driven solely by cost is indeed a glaring misunderstanding of consumer sentiment. Products obviously need to be priced at price points that are affordable and smaller portion sizes have been an obvious tactic to address this issue. Small packages of shampoo revolutionised the adoption of shampoo across rural India; even premium brands such as Dove have hopped onto the sachet bandwagon. The launch of Gillette Guard, a 15-rupee razor with 5-rupee blades was also a deliberate attempt to reach out to the mass low-income base. However, our research found that purchase intention amongst low-income consumers is also driven by issues such as perceived usefulness and ease of use. Value propositions that emphasise relative benefits are more likely to lead to product adoption. For example, Proctor & Gamble positioned Tide Naturals in India as a detergent that offers superior cleaning performance and does not lead to skin irritation as a result of hand washing clothes; this is clearly an important point. Moreover, our research interestingly revealed that pride, and in some cases social status, is a basis of personal pleasure. For example, we found that Indian consumers within the broad low-income segment are conscious of their appearance, which helps to explain the success of hair colouring products for both men and women. Crucially, we also found that trust and integrity of the manufacturer is a significantly important predictor of purchase intention. Companies that expect to succeed in serving low-income consumers need to be recognised as a positive part of the local economic community life. Developing relationships, through long-term employment, social projects and visibly responsible business practices, should minimise sentiments that international corporations are only present for the quick rupee.


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Misconception 7: Innovation is not Critical to Low-Income Consumers

We set out the argument that international marketers need to follow a low-cost model. Nevertheless, marketers need to consider redesigning the business model beyond just developing a cheaper version of a global product: low income consumers do not desire inferior products, but demand smart products adapted to their living conditions. The involvement and integration of local managers in this innovation process is of paramount importance. For example, the launch of Gillette Guard was based on local insight. Shaving in India is not always a straightforward task. Men in India shave under less than ideal conditions, such as poor lighting and tepid water, and are therefore more about safety, i.e. no cuts to the face, and less concerned about closeness compared to developed markets. Gillette therefore developed Gillette Guard with fewer parts and eliminated the lubrication strip, but included features in order to enhance safety performance, such as a comb in front of the blade to make the shave smoother. These innovations made it possible for the product to hold a tangible advantage over competing shaving methods.

 

Challenging, but Promising…

Low income consumers do not desire inferior products, but demand smart products adapted to their living conditions.
The challenge of marketing to the low-income consumer in India is certainly not trivial. Various constraints can hinder market development strategies and are at times quite unpredictable. Moreover, international companies face competition from local companies who already have local knowledge in marketing to the low-income consumer. For example, global players in the smartphone segment in India are competing against local players like Micromax, Karbon, Spice and Lava. However, international companies that wisely invest in low-income markets come to the table with other strengths: deeper pockets, wide experience with technology, capability to innovate, not to mention an ingrained ‘marketing culture’ are arguably sufficient assets to tackle most challenges… And local knowledge can be learnt.

However, it would be myopic and even cruel to consider the Indian low-income consumer only in terms of the economic potential for international companies. There is a very strong argument suggesting that resource rich firms have what it takes to invest over the long-term, and such investment could bring the know-how, jobs and innovations that may improve the quality of life for millions of people. As populations expand in many areas of the planet, low-income consumers should not be disconnected or disengaged from products and services, such as banking, education and healthcare. ‘Consumer India’ continues to grow. Brands will become ever more important. There is an opportunity to create virtuous circles at the low-income level of the wealth pyramid.

About the Authors

Glyn Atwal is Associate Professor of Marketing at the Burgundy School of Business, an international Graduate School of the French network of Grandes Ecoles. His teaching, research, and consultancy expertise focuses on marketing and strategy in emerging markets. He has presented at leading universities worldwide, including Harvard Business School, and is co-editor of The Luxury Market in India: Maharajas to Masses (Palgrave Macmillan).

Douglas Bryson is Professor (Titulaire 1) at the ESC Rennes School of Business, France. His recent research is a mosaic of applied social psychology and consumer behaviour topics, including international new product adoption and antecedents and consequences of brand image. Douglas is co-editor of Luxury Brands in Emerging Markets (Palgrave Macmillan).

M.G. ‘Ambi’ Parameswaran is Executive Director of FCB Ulka Advertising, a member of India’s third largest marketing communication organisation, FCB Ulka Group. Ambi is a regular speaker at international forums including the Kellogg India Summit at Northwestern University and Cornell University, and has six books to his credit ranging from Brand Building and Advertising, to Consumer Behaviour including his latest, For God’s Sake – An Adman on the Business of Religion, (Penguin India).

 

References

1. 2007.

2. Silverstein, M.J., Singhi, A., Lio, C. and Michael, D. (2012), The $10 Trillion Prize: Captivating the Newly Affluent in China and India, Boston, Massachusetts: Harvard Business Review Press.

3. We have defined the low-income consumer as an individual with an income of USD $2-5/day.

4. Moye, J. (2013), Coca-Cola India Develops Solar-Powered Coolers for Rural Areas, http://www.coca-colacompany.com/stories/coca-cola-india-develops-solar-powered-coolers-for-rural-areas.

5. HUL (2014), Project Shakti, http://www.hul.co.in/sustainable-living-2014/casestudies/Casecategory/Project-Shakti.aspx.

6. 2014.

7. Sarkar, J. (2014), “Snapdeal logs onto rural India”, The Times of India, 14 November, http://timesofindia.indiatimes.com/tech/tech-news/Snapdeal-logs-onto-rural-India/articleshow/45142533.cms.

 

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