The Problem with the "Poverty Premium"

An interesting article from this month's HBR.  It reports on results from a couple of experiments in India to test if the commonly held assumption of the "Poverty Premium" still holds.  They found that, in the places they tested, it doesn't, at least in the form of a price premium.  However, people at the BOP do "pay" a premium in two other ways: 1) the products/services they buy have, in general, lower quality, an inferior user experience and/or are more difficult to access than similar ones available at a higher price (in different areas/outlets); and 2) because they largely participate in an informal economy, which doesn't ensure safe working conditions, reasonable wages, product quality controls, etc.  Furthermore, since this informal economy/black market, for the most part, does not pay taxes to the government, the BOP receives less benefits from government funds as well.

The corollary for multinationals trying to do business with the BOP, is that competing in price could be even harder than previously thought.  Therefore, innovation (rooted in in-depth knowledge of local market & consumers), and providing holistic value to individuals and their communities (e.g. filling institutional voids) should play a key role in developing business propositions for the BOP.

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