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Theory driving Practice

December 8, 2010 Leave a comment

Often we hear that things in life are very different from what’s taught in theory. However, every activity or behavior in practice can be attributed to a theory. One such example is CK Prahlad’s idea of emerging markets.

In his thought provoking book ‘The Fortune at the Bottom of the Pyramid’ Prahlad predicted that there is great scope for retail sector in the lower middle class and poor masses. He referred these masses as Bottom of Pyramid (BOP). He advocated poverty alleviation by tapping BOP market and involving BOP in the economic activity.

He proved that the MNC strategy of focusing on middle and higher income group is self defeating. He also demonstrated that the profit margins at BOP are very high. Example- money credit is offered at annual interest of 600% (2% per day) compared to bank interest rates of 12% -15%. Same goes for oil, grocery and water.

And it seems that companies have taken his advice seriously (at least for tapping the BOP market).

Single serve packs for premium brands are now available at roadside shops and the sale from these shops makes a significant proportion of total sales volume. Branded hair oil is available in 1 Rs sachet and even a domestic maid living in Dharavi can buy it every day. She would not have even thought of buying a 200 ml bottle for 40 Rs.

Profit margins for many FMCG companies are now driven by small value items like Rs.1 hair oil, Rs.2 biscuit pack or Rs.5 mobile recharge. Here Prahlad’s theory actually showed direction to companies to build their marketing practices.

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