As Janmajeya Sinha begins his presentation on "The Next Billion", the screen behind him fills up with a brown slide. "Get used to this colour," he tells his audience.
"You'll be seeing a lot of it in coming years." It's a dramatic bit of attention-grabbing, but the managing director of The Boston Consulting Group India says it is also a much-needed wake-up call. "Companies should be made aware of what they are missing."
What they are missing is an opportunity to serve "the next billion" consumers. That's BCG's catchy phrase to describe the band of consumers uncomfortably positioned between those who are part of the formal economy and those at the bottom of the pyramid.
These households -- which earn between $63 and $700 a month -- don't show up on the marketing radar of most companies and are beyond the purview of government upliftment programmes. And more than 90 million of these households are in India, earning between Rs 40,000 and Rs 1.8 lakh a year. Hence Sinha's reference to brown.
Why does this next billion (450 million in India) matter so much? Perhaps because it is economically active, spending over a third of its income on non-essential purchases -- across the world, these 200 million households spend over $1 trillion a year.
These consumers like brands and are willing to splurge; their incomes are growing faster than the rest of the economy; and they are young, new consumers. "There is no incumbency in this consumer group," points out Sinha. "Get them now, and you shape their buying behaviour for life."
It won't be easy, of course. The next billion faces constraints that differentiate it from wealthier consumer groups. Perhaps the most critical one is of income -- not so much about the size of the paypacket as about its frequency.
The lack of a steady income makes these consumers hesitate in making big-ticket purchases and, equally, makes banks wary of lending to them.
But being on a tight budget doesn't mean they don't buy expensive goods. Instead, they may ration its use -- an expensive detergent for good clothes and a cheaper variant for other laundry, for instance.
These households also face space and infrastructure constraints -- small homes between 100 and 200 sq ft, no or limited running water and frequent power cuts. They are unfamiliar with many products and are more likely to trust word-of-mouth and recommendations from friends and relatives than mass-media campaigns.
It is also a matter of pride for the next billion to be not considered poor. Which means these consumers will not shop at stores where the staff is condescending and they will not buy cheap knock-offs of expensive brands -- they would rather shop at the neighbourhood store and save, for months if need be, to buy a costly, high-quality product.
Clearly, companies doing business in the next-billion market need to rethink their strategies if they are to serve this consumer group profitably. They will need to design cost-efficient products that match consumers' expectations, create distribution networks that reach the farthest corners of the country and devise marketing and communication programmes that educate the consumer, while prompting him to buy.
Over the past year or so, BCG has studied over 9,000 people across India to understand the needs and behaviour of the next-billion market in the country, especially in three fast-growing and critical areas financial services, telecom and consumer products. Take a look at its recommendations.
Saleable propositions
BCG estimates that the Rs 6 lakh crore (Rs 6 trillion) Indian next-billion households now spend will more than double in the coming years, to cross Rs 13 lakh crore (Rs 13 trillion) by 2015. There is opportunity here, and a great threat as well. The next-billion is a large, untapped market waiting to consume; any company that reaches down to this group will be met more than halfway.
On the other hand, given such high aggregate demand, it is more than possible for an innovative company to succeed by catering to just this market. Some of those ideas could then be used to serve higher-income markets as well, endangering incumbent players there. Either way you look at it, then, Indian companies would do well to reach out to the next billion -- fast.
Here's how they can do it. Provide customised products -- cost-effective and feature rich -- but ensure these are features the consumer wants. Nokia did just that. Its bestselling 1100 handset has an anti-slip grip, is dust-resistant and even has an inbuilt flashlight -- just the features to appeal to lower-income consumers.
Another recent launch caters to the insight that a mobile handset is a family asset for the next billion, rather than a personal possession. Therefore, this handset has five different address books and a prepaid balance tracker.
A wide-reaching but viable distribution network is another imperative. In this, Hindustan Unilever's Project Shakti serves a dual purpose. The rural women who sell products door-to-door in their own and neighbouring villages not only help the consumer goods company reach inaccessible parts of the country, it also creates local advocates who are better positioned than mass media to influence decisions about product purchase.
Another strategy for expanding distribution is to partner with other industries and leverage their existing network coverage -- Corporation Bank and Airtel, for instance, have tied up with Mumbai's dabbawalas to distribute brochures, recharge vouchers and so on.
Finally, remember that trust plays a huge role in the next billion's purchasing decisions. When Titan Industries decided to go after lower-income customers, it stayed away from the Titan brandname -- too uppercrust and expensive for this target group.
Instead, it launched Sonata -- affordable watches that came with a warranty and offered enormous choice (300 to 400 models). A wide distribution network ensured that consumers who were making do with cheap, Chinese imports were now spoilt for choice.
The clincher, though, was the brand -- Sonata called itself "a Tata product".
Banking on inclusion
About 135 million households do not own a savings account, making India the country with the second-highest number of financially-excluded households in the world.
The rate of inclusion is twice as bad in rural areas -- 24 per cent, compared to 56 per cent for urban households. A look at the numbers explains the imperative for bringing these households into the fold. As income grows, the momentum will bring in an extra 17 million households into the formal banking sector by 2010.
BCG estimates that if banks and financial institutions were to actually work towards financial inclusion, by 2010 they could expand the formal sector by 30 million additional households. That would expand the revenue pool by Rs 10,000 crore (Rs 100 billion) for banks and Rs 20,000 crore (Rs 200 billion) for insurance companies, says the report.
Granted, regulatory reform will play a huge role in financial inclusion among the next billion. But there's still a lot companies can do to serve this consumer group. Resizing and restructuring products to suit the next billion is one option -- for instance, banks could consider lending to pools of consumers to lower its operating costs and risks.
Tying up with microfinance institutions and empowerment groups can help banks mitigate their risks -- these institutions are likely to be better acquainted with individual credit histories and can even assume the liability of the loan.
In fact, partnerships are the way forward. Then, banks can also reduce customer-acquisition costs by tying up with retailers for, say, a loyalty programme that converts points earned on retail purchaser into discounts on financial products.
Mobile banking is another huge opportunity, once regulations permit it: there are already more mobile phone connections than bank accounts and mobile banking will offer lower costs and greater convenience. Banks that tie up with telecom companies early can take advantage of the boom rather than find themselves in competition.
Banks also need to think like retailers when it comes to rural branches -- they need to make every sq ft of space pay its way. Offering pay phone, fax and Internet services at the branch is one way of attracting more footfalls and making it a viable proposition.
Another option could be to replace brick-and-mortar rural branches with vans that visit villages and small towns twice weekly, in the evening -- when daily-wage consumers can bank without fear of loss of income.
That will also help put banks on a more equal footing with moneylenders, whose USP is flexibility and convenience.
Offering features like low monthly repayments on loans and the option of delaying or consolidating installments on loans as well as insurance products are also strategies that can work to banks' advantage.
A phone call away
Of the first two billion mobile subscribers, only one in 20 lives in India. That's set to change. BCG estimates that one in six of the next billion mobile subscribers will be Indian.
Like the financial sector, Indian telecom, too, is chugging along nicely -- even without any push from operators, there are likely to be an extra 217 million mobile subscribers by 2010, taking the total to 377 million.
If, however, operators were to work towards bringing in subscribers from the next billion, they could easily serve another 144 million, which would take the total subscriber base to 521 million by 2010. If the volume growth isn't reason enough to go after the next-billion market, consider this -- the 361 million new consumers represent additional revenues of more than Rs 85,000 crore (Rs 850 billion) for telecom operators.
What stops the next billion from becoming mobile subscribers? They haven't still grasped the economic benefits of handset ownership, focusing instead on the personal and aspirational needs a mobile phone serves. Educating consumers on the practical advantages, then, is an imperative.
Of course, handset price and service costs are also enormous hurdles. BCG's research indicates that a Rs 1,000-handset and monthly usage charges of about Rs 150 are ideal for increasing penetration and usage dramatically. The challenge for telecom operators, then, is to create profitable business models while offering such rock-bottom prices.
One obvious strategy is to improve operator economics by increasing base capacity and cell radius, boosting antenna performance, outsourcing local maintenance and so on. A game-changing strategy, though, involves developing life-enhancing products.
Keep in mind that the next billion lacks a steady income and offer flexible terms, free trials and lower minimum recharge amounts -- BCG research suggests that consumers are likely to purchase more airtime if they can lower the minimum recharge amount, even if a higher per-minute charge is applied.
Also keep in mind that the next billion consumer doesn't want stripped-down handsets -- but visible features like colour screens, camera phones and ringtone downloads are more important status symbols than sophisticated software inside the phone.
Attendants at recharge kiosks who help first-timers purchase minutes, arrangements with supermarkets that allow customers to buy minutes with change from their weekly shopping trips and roping in the postal service to deliver recharge vouchers are some ways telecom operators can extend their distribution to reach out to the next billion.
Then there's mobile banking -- played right, the huge next-billion market in India offers telecom players a chance to create scale and learnings that can be exported to other markets as well.
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