It is perhaps time to take stock of all that we have learnt in these past six or seven years about the nature of the Indian market, now that it has emerged from its shackles of socialism, monopolies and hardly visible income growths.

Lesson 1: First and foremost, a generic model of market structure has emerged, with five tiers of demand, ranging from “anywhere in the world consumers who just happen to be in India” to “just escaped from poverty and entering the arena of consumption”. In order to fully exploit the potential of this multi tiered consumer base, there is no escape from a multi pronged product strategy, ranging from “as good as anywhere in the world quality at world prices”, all the way to “adequate quality at affordable prices”. The slight diversion that we took in the recent past, in believing that there was a huge and homogenous middle class that could be targeted with a “one size fits all” strategy, is now well behind us.

I call this a generic model of market structure, because it seems to apply to most products in India, be it perfumes or computers or management consultancy or financial investments or cars or process control equipment. The specific consumer / customer profile will vary across product – markets, as will the size of each tier, but the conceptual structure is pretty much identical. Tier 1, right at the top, is a small and easy to reach amount of demand generated by customers who will pay dollar prices multiplied by forty two to have the latest in the world. It is of course ironic that in many non consumer goods situations, this dollar price for the best is cheaper than the price of inferior indigenous products. Tier 2 is a much larger volume and value of demand, generated by a larger number of consumers who will judiciously balance benefit and price and buy what we typically label as premium or high end popular products. All the new consumer goods MNCs who came in with products at prices catering only to the top tier have been forced to move to this next tier of consumers, to make some money – most visible being the liquor majors, sports shoe world leaders and branded apparel makers. Below them is Tier 3 of consumers who have a definite ceiling on how much they can spend, and are looking at the best available benefits at that price. The grey market for computers and watches, the small, low priced, boxes that crank out a reasonable but not superb quality of music all find patronage here. And finally, Tier 4, the most populated tier, generates demand from people who are just entering the arena of consumption – first time consumers, their needs and wants are very minimalist, as are their purses, and their benchmark of quality and price is what they were doing earlier. They are infrequent consumers, and could be consuming without owning, as in the case of custom hirers of tractors, or users of STD / ISD booths, or cyber cafes.

Lesson 2 : There is greater value in terms of potential demand in the lower tiers of the market than in the top tiers, as has been experienced by those who have determinedly developed the cost capability and the appropriate products to appeal to the lower tiers. If you get your costs right, then there is far more potential to make money by exploring the lower tiers of demand, than by restricting to the top. The large and lowest tier of rural consumers accounts for an FMCG market several times that of the top urban tier, which shows up in the relentless effort that Hindustan Lever puts in to be accessible, affordable and acceptable to such customers, and its results show that the strategy is clearly paying off. Prof. C.K.Prahalad said, at the CII Western region seminar earlier this year, that the challenge for India is to bring in the lower tier consumers into the market economy.

Lesson 3 : Given the structure of the market as we now know it, this should come as no surprise. The characteristic of the Indian market that makes it different from many other markets is that it is all about a lot of people consuming a little rather than a few people consuming a lot. Most business plans of new entrants into the country go awry, not so much because they misjudged the penetration levels, but because they applied USA per capita consumption standards to it. So the only way to quick and explosive growth is to widen the customer base through some or all of these methods – play in as many product segments as you can, widen distribution relentlessly, and drop unit price as much as you can, so that everyone who might want to buy you, actually can.

Lesson 4 : If there are a lot of people consuming a little bit regularly or occasionally, then to tap them requires a ‘community consumption’ strategy. The Indian market has always embraced this – well before television sets were affordable, the community TV set was the first introduction to media consumption without ownership. The readership to circulation ratio reported for most magazines makes me often wonder if there are any pages left in readable condition. And the latest NASSCOM study shows that access to the internet is four times the number of connections, a multiplier that can only increase given the success that we are seeing of cyber cafes (and the product for the lower tier consumer – the cyber dhaba). The cable operator will be a larger market than DTH, and the STD / ISD booths, the job shops for photo copying thrive. A few telephone owners consuming a little is not as attractive as many call booths catering to a lot of people consuming a little. Another model to tap the large potential of occasional consumers is the small pack low unit price, characterised by the sachet success.

Lesson 5 : If it isn’t value right compared to existing alternatives, it doesn’t work, no matter how world class the quality is or compelling the need is. The ‘below expectations’ performance of many recent entrants into the market is not because of lack of consumer desire but because of poor accessibility and affordability. The explosive growths of categories where the price threshold has been lowered or where distribution has been hugely increased are testimony to this.