The world's new trillion dollar market

There is a $15 trillion pot of gold in the emerging markets waiting to be unlocked, so long as companies can find the right way to reach the 'bottom of the pyramid' consumers.

by The McKinsey Quarterly

The classic barriers to entry are low-income consumers who cannot afford many products and services, a poor infrastructure which raises the costs of distribution and the difficulty in raising payment. Also, many consumers in the developing countries feel they have a right to connect in to some services such as water and electricity illegally.

These are the well-known principal-agent problem, where the agents (consumers and community leaders) do not act in ways that are in the best interests of the principal (the product and service providers). However, there are clear ways in which companies can show that their interests are mutually compatible with the local communities.

Companies such as Manila Water and Globe Telecom operating in the Philippines have revealed several key lessons.

First, communities are usually in a better position than companies to resolve issues that make it uneconomic to serve poorer consumers. Manila Water, for example, gave consumers a choice of how they could pay for the service including a collective form of payment with a meter for 40 to 50 households. This reduced the connection fees by as much as 60 percent. This was one of the most popular methods of payment and the communities themselves made sure the money was handed over.

The second lesson is that principal-agent problems can be alleviated if the company can show that it brings benefits to the community. Globe Telecom, for example, provided a livelihood for legions of shopkeepers by making them the point of sale for customers who wanted to load over-the-air (OTA) credit onto their mobile phones. This also benefited the consumers as they could now load any amount of credit down to one peso, making it affordable for a much greater number of people.

The final and third lesson is that companies can solidify their role in low-income countries by providing wider economic benefits to the communities. For example, Manila Water provides jobs for more than 10,000 people who act as couriers delivering bills or contractors who lay pipelines.

There are also three distinct business models for companies that want to reach low-income markets: collective accountability (focus on making payment easier or more cost effective); scalable, embedded distribution (using local communities to help offset infrastructure barriers to good distribution); and third, livelihood partnerships (where companies surround a core product or service with additional benefits).  

The McKinsey Quarterly, 2006 Number 4
By Christopher P. Beshouri
Review by Morice Mendoza

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