Understanding the Low Income Consumer

The Economic Times - November 2000

It is now well accepted that there are two answers to the question "what is the market size and the appropriate market strategy for the Indian market" One is the low pain - low gain answer and the other is the high pain - high gain answer. The low pain - low gain answer is to size and target the top of the iceberg (from 'tip' of the iceberg many companies have inched their way downwards to the 'top' of the ice berg!) comprising well off consumers (still far poorer than consumers in most other parts of the world). The game can then be played with comfortable cost and price structures, using obvious, familiar, proven business models and product designs. The good news is that unlike a decade ago, this game is reasonably sized and has the assurance of sustained growth.

However, if you have the stomach for it, there is a high pain-high gain opportunity to unlock the potential of the huge base of low income consumers, who have the exposure and aspirations to consume but low purchasing power. The answer lies in using innovation in product and business system to deliver price - performance that both sells and makes a profit. Quite simply, we know that there is a Nirma of every market waiting to be created, whether in video players or e mail, or household painting or farm mechanisation or personal transportation or liquor. Hopefully, instead of centering around what the 'true" size of the middle class is, strategy discussions on the Indian will at least recognise and debate this alternative that management guru C.K. Prahalad calls "Strategies for the bottom of the pyramid". Successful companies in India have already done this - Hindustan Lever calls it the "popular" business model, designed to serve the "belly of the market". Prahalad advocates taking the learnings from here to other markets which house the worlds 4.5 billion poor; Unilever is already doing so. Citibank is testing Suvidha with success, Nirma, the pioneer, the inspiration for Hindustan Lever, has built an impressive empire this way. The retailing industry and all its consultants have climbed down from their high horse of "lets show consumers what modern retailing is" to acknowledge that there is definite merit in the Subhiksha model, the innovative 'popular segment' retail offering in the south.

Successfully marketing to the low income consumer requires far greater levels of knowledge about consumer behaviour and structure than is presently available. Linda Alwitt and Thomas Donley, in their outstanding book "The Low Income Consumer - Adjusting the balance of exchange" (Sage Publications) make a compelling case for marketers to think about the low income consumer as a distinct market, rather than as just one more consumer segment, differentiated from the rest only in terms of income. They suggest that marketers recognise that low income consumers are heterogenous and need to be further segmented, that they view life differently because of their circumstances and hence have different needs, and behave totally differently as consumers. "Affluent consumers worry about size, style, colour and flavour. Poor consumers worry about the basic necessities - 'For which child should I buy shoes'?

The book presents a lot of research on low income consumers in the US, who are a world apart from those here. However some of the suggestions on how to better understand and market to low income consumers struck me as being relevant to the Indian context.

Segmenting low income consumers: Age, education and occupation segments are the most obvious places to start - clearly likely to influence consumption attitudes and values. However, these can be combined into a more interesting segmenting variable - 'spell length in low income' or how long the household or individual is likely to remain in the low income group. They define two low income segments - transitory and persistent. Transitory low income consumers are particularly valuable long term assets for a business, where efforts to build brand equity work better. Sylvester Research Ltd, in their document World Waves, say "the consumer may be poor, but he is living in a society that is growing faster than at any time in its history. At 8% growth, income will double in the next 7 years. They are deciding how to send it now. Decisions made when poor really count". Nirma has successfully targeted the transitory low income consumer, and reaped the benfits, having also had the wisdom to upgrade its offering along with its consumer's economic status in the Indian context, transitory low income could be a low income family unit with young, relatively more educated, just started working sons (maybe in regular jobs, may not be, but beginning to earn). Their disposable income may not immediately change thanks to the several financial responsibilities that have to be discharged - daughters' wedding, house acquisition etc. - but investing in them makes sense since they are clearly transitory. Or older people at the stage when their children are a few years away from being settled, who will then have a sudden increase in disposable income.

Understanding spending power and patterns beyond 'annual income": First, total annual income is not the best measure to use. More variables like per capita income, number of earning members and rules of household spending, especially in joint families etc. need to be factored in. Second, there are swings in income of a given family unit often enough which cause frequent changes in spending patterns. Agricultural income is one such example that we are familiar with. New household unit configurations (example, the earning son who leaves to set up his own home, or an earning daughter getting married) change the spending pattern of the old unit and the new, and neither is "like it was before". The practice of borrowing also stretches income - while formal credit is often not available to this group they are informally borrowing against future income, not in a "plan for the future kind of way" but in a very immediate kind of way. It is either the retailer who captures that value, or the pawn shop owner. Further, given the interdependent nature of our society, there is a lot of borrowing from friends and relatives. There does appear to be a business case for the US type of business of lending to high risk borrowers - but which requires completely different and much sharper credit risk evaluation methods.

Improving the marketing exchange: Existing retail environments extract more from poor customers (poor neighbourhoods have less competitive retail environments pushing up prices, low income consumers are dependant on the retailer for credit, they end up paying more as they buy in small quantities, and getting poorer service). There is a case for opening a set of thrift stores, offering credit and relevant merchandise to lower income consumers, who will reward this empowerment with loyalty. Another interesting suggestion is the creation of 'buying groups', modelled after the borrowing circles set up by Dr Yunus of Grameen bank. Vitual stores!

Understanding value processing and budget balancing: Durables are obviously the far more attractive items for low income consumers than FMCG. The Indian low income consumer is struggling to 'uptrade' on durables and is downtrading on FMCG. While they carefully look at ways to stretch budgets with 'no frills' FMCG products, there is occasional gratification purchases - for children, around festival time, and occasional treats for the family. Sylvester Research says " it isn't practicable [for them] to buy houses and cars [and the big stuff] , so how do you flaunt new disposable income?" Their answer is "labels". Perhaps the low end branding game has latent potential - maybe store brands?

The changing low income consumer: Question assumptions about low income consumers. The traditional view marketers tend to have about the Indian low income consumer is "will settle for less', "technology sceptical", "intimidated by better surroundings". But recent market experiences and consumer research studies suggest that it's time to take a fresh look, especially at the younger lower income consumer. (See Box)