The economic turbulence in developed economies like the United States, Germany and Japan is driving multinational firms to explore emerging market economies like Brazil, Russia, India and China. According to the 2018 International Monetary Fund (IMF) economic growth statistics1, the economic growth in United States, Germany and Japan, was less than 3% while emerging economies like India, China and Vietnam saw their economies grow by around 7%. Despite the growth, more than 50% of the population suffers from some degree of exclusion and the juxtaposition of high-income consumers and low-income consumers is hard to ignore.
Multinational firms, especially those in the Consumer-Packaged Goods (CPG) category have long used disruptive and radical business models to tap into and reach over a billion Low-Income Consumers (LIC) that exist in these emerging economies. For example, Unilever India had enlisted the help of women’s Self-Help Groups (SHGs) and established ‘Project Shakti’ a door-to-door sales force for its personal care products, such as soaps, lotions and detergent and had thus created a distribution presence across thousands of villages. Significant growth opportunities exist in emerging market economies forcing multinational firms to rethink how to design products and services to reach them. However, multinational firms do not seem to be capitalising on any strategic or tactical guidance when it comes to introducing new products to low-income consumers. There is an extant and fallacious view among multinational firms that low-income consumers look for inexpensive products and offering a cheap, generic version of the product already being sold in other markets will help them conquer this segment of the market.
To offer insights that can help multinational firms focus on new product introductions targeted at low-income consumers, Professors S Arunachalam, S Cem Bahadir, Sundar Bharadwaj and Rodrigo Guesalaga systematically investigate the consumer, intermediary, firm, category and country-level factors that affect the acceptability, awareness, availability and affordability of new products for low-income consumers in emerging markets.
Supply-Side and Demand-Side Factors
Managers in multinational firms often face challenges when estimating the demand for products or services in emerging markets. These markets are not only complex but also have unique environmental and cultural factors. Multinational firms often lack the expertise or knowledge in understanding the unique preferences and buying behaviours of these low-income consumers and end up focusing on creating a stripped down version of their products rather than creating aspirational value among low-income consumers so that they adopt the firm’s offerings.
The researchers offer their insights and explain some very distinctive characteristics about low-income consumers gained through in-depth interviews with low-income consumers and managers at multinational firms in India and Chile to understand the dynamics of new product introductions. The researchers also empirically tested an integrated model built from insights gathered through in-depth interviews using a unique twelve-year longitudinal panel dataset that comprised of nine CPG product categories across twenty-seven emerging markets.
According to the researchers, low-income consumers value premiumisation; even though they are unable to afford the standard or the full size of the product they aspire to buy a branded product rather than a local brand. One way the multinational CPG firms attempt to cater to the customers’ motivation to purchase premium and branded products is by making unit sized packets – like a sachet – available at an affordable price point. The availability of unit-sized product of branded and premium new products increase the motivation to buy these products which usually would not have been bought due to their budgetary constraints.
Low-income consumers are also value conscious consumers. Products that appeal to the entire family increase the motivation of low-income consumers to purchase a new product. Beyond affordable pricing and unit-sized offerings, low-income consumers prefer to choose a product with a greater number of servings or units in the pack. For a given price point, higher the number of units in a pack, the greater its appeal and higher the motivation of low-income consumers to purchase the new products. Multinational firms can customise their new product offerings to suit family-wide preferences and offer more units in a pack. If the product is only available in standard or regular size packs and price points, low-income consumers cannot make a frequent purchase or try new products in order to make a choice. The researchers find that low-income consumers prefer packaging that make the product visible and recognisable from their low-quality counterfeits available in the market.
A significant challenge in serving low-income consumers lies in creating awareness of the product. The researchers find that multinational firms that use the local language in their brand communication reach a large number of consumers. Multinational firms that are able to customise their product attributes or brand communication based on regional understanding of the diverse cultural norms have a higher product/ brand awareness. A rather unusual and indirect route to product awareness comes in through urban migrants, a younger generation of the rural population who move to nearby larger cities, who not only bring in their earnings from the city as additional sources of income for their family but also facilitate the exposure to branded products.
Creating consumer awareness and building product knowledge among low-income consumers require multinational firms to adopt the novel methods such as use of roadshows and product demonstrations to educate on the benefits, usage and application of their products in rural marketplaces. For example, to promote the use of a hair oil or a shampoo – a CPG firm might need to conduct a product demonstration with the rural women not just to show how to oil their hair or how to shampoo right but also provide advice on personal hygiene and how to groom themselves.
The researchers also find that community networks, word of mouth and local influencers play crucial role in developing brand awareness and acceptability. Purchase decisions among low-income consumers are based on the recommendations from friends, relatives, colleagues and other opinion leaders in their community. While most multinational firms focus on improving their brand presence and product availability, the guarantee for increased sales comes from leveraging the ‘kirana’ store sponsorship. Individuals who run the kirana stores act as ‘voice of the brand’ and provide product recommendations to low-income consumers. Some kirana stores extend micro-credit for purchases and also provide an after-sales experience to low-income consumers.
Country Level Factors and Government Policy
The researchers find country-level macro factors influence the level of diffusion of new products. The deficiencies in regulatory, socio-economic, socio-political, infrastructure, technology and cultural system of a country affect the diffusion of new products introduced for low-income consumers. In the context of low-income consumers, the level of purchasing power is an important factor in purchase of new products given the strict budget constraints these consumers face. The presence of strong infrastructure, such as a well-connected road network, makes it less challenging and less expensive for multinational firms to deliver and make products available to rural markets where the majority of low-income consumers reside. Governance instability impedes the willingness of multinational firms to introduce products for the low-income consumers. The stability of governance mechanisms is important to the investments targeted at low-income consumers because serving these segments requires significant amount of cooperation of local and state governments and non-governmental organisations.
Reaching the Next Billion Consumers
The researchers recommend multinational firms should focus on understanding low-income consumers, treat them as a separate consumer segment, capitalise by offering branded products at acceptable price points and allow them to transition away from unbranded products. Consumer aspirations, region-based customisation, visible packaging and product demonstrations influence the acceptability, awareness, availability and affordability of new products developed for the low-income consumers. These four characteristics in turn enhance the motivation and the ability to purchase new products introduced for them.
Multinational firms can boost their brand awareness by investing in training individuals from the rural and low-income communities as brand advocates. These individuals can help the firm disseminate product knowledge, connect and influence consumers within their community. One of the major challenges in emerging markets is the lack of reliable and sustainable distribution channels. Partnering with the friendly neighbourhood kirana store becomes essential for the distribution of new products to low-income consumers. Merely focusing on distribution through modern retail formats makes it impossible for multinational firms to reach the low-income consumer segments because these consumers either do not have access to such stores or even refrain from shopping at modern retail stores. Once multinational firms start reimagining these factors low-income consumers are happy to splurge!
About the Research:
Arunachalam, S., Bahadir, S. C., Bharadwaj, S. G., and Guesalaga, R., 2019. New product introductions for low-income consumers in emerging markets. Journal of the Academy of Marketing Science, 1-27.
About the Writer:
Glory George is a Research Associate at ISB.