This study addresses the problem of how private companies can source new supplies from the base of the pyramid in a situation where supply markets are scant and hence price signals highly incomplete. Most of prior research on the Base of the Pyramid (BoP) has addressed the question of how the existing companies can make money by selling to the vast number of poor, estimated to add up to 4 billion people (Prahalad, 2005). However, Karnani (2007a, b) strongly criticized this view by arguing that private enterprise should rather focus on how they can increase the income of the BoP by buying from the BoP. This discussion gave rise to a recent stream of literature that focuses on sourcing from the BoP.

Whilst London, Anupindi, & Sheth (2010) point to productivity and transactional constraints of sourcing from the BoP, Cohen & Winn (2007) suggest that four different sorts of market failures provide entrepreneurial opportunities for firms that have discovered a way how to work around market imperfections. Moreover, prices have been recognized as a problem for BoP producers  (London et al., 2010).  In other words, strategies involving sourcing from the BoP should take into account not only how to create new rents in BoP markets, but also how to adequately share them among disadvantaged target groups.  Pricing will therefore be at the core of how BoP-generated rents will be split between BoP suppliers and their buyers.

However, there is still a lack of understanding on two issues. First, how do buyers and BoP producers find prices for innovative supplies, i.e. for supplies, for which no market and thus no prices a priori exist?  Innovation at the BoP implies that in most circumstances new markets and products are being created. For instance, London et al. (2010) reports on a case in Africa, where Unilever sources Allanblackia nuts, a hitherto ignored raw material. Second, what are the mechanisms that explain how alternative, non-market pricing mechanisms can mitigate precisely those market imperfections that obstruct the discovery and growth of BoP supply markets. For instance, in markets for existing commodities, Vachani & Smith (2008) report how ITC’s commodity procurement system has reduced information asymmetries and thus contributed to higher prices for BoP farmers. Expanding this stream of research, the present study seeks to address pricing mechanisms when commodity markets do not yet exist.

We argue that innovative pricing strategies should take into account externalities and distortions brought by imperfect information in order to procure from and adequately remunerate BoP suppliers. An in-depth case study of Latin American’s largest cosmetics firm, Natura, reveals how such innovative pricing strategies work in practice and under what contextual conditions they may succeed. Our results suggest that, in scant supplier markets, firms can pursue innovative pricing strategies such as the joint “construction of prices” together with BoP supplier communities. Thus, this study intends to advance the scholarly and practitioner conversation on how upstream BoP markets can be further developed.

REFERENCES

Cohen, B., & Winn, M. I. 2007. Market imperfections, opportunity and sustainable entrepreneurship. Journal of Business Venturing, 22(1): 29-49.

Karnani, A. 2007a. Doing well by doing good—case study: ‘Fair & Lovely’ whitening cream. Strategic Management Journal, 28(13): 1351-1357.

Karnani, A. 2007b. The Mirage of Marketing to the Bottom of the Pyramid: How the Private Sector Can Help Alleviate Poverty. California Management Review, 49(4): 90-111.

London, T., Anupindi, R., & Sheth, S. 2010. Creating mutual value: Lessons learned from ventures serving base of the pyramid producers. Journal of Business Research, 63(6): 582-594.

Prahalad, C. K. 2005. The fortune at the bottom of the pyramid. Upper Saddle River, NJ: Wharton School Publishing.

Vachani, S., & Smith, N. C. 2008. Socially Responsible Distribution: Distribution Strategies for Reaching the Bottom of the Pyramid. California Management Review, 50(2): 52-84.