By MARCOS AGUIAR, VIKRAM BHALLA and NIMISHA JAIN
From Boston Consulting Group
They aren't affluent -- they don't even qualify as middle class -- but they aren't the poorest of the poor either. They spend just over $1 trillion a year. Yet they are only beginning to enter traditional consumer markets. They live in Brazil, China and India, but they can also be found in Africa, Central and Eastern Europe, and other parts of Asia. Together they represent the largest untapped consumer segment in the world. They are the next billion.
Already as much as one-third of the next billion's spending goes beyond providing for the subsistence needs of basic food, clothing and housing. They use branded shampoos and detergents regularly. A good number own televisions, refrigerators and DVD players. Many are saving for washing machines and even computers. The next billion are young, with some 40 years of consuming ahead of them. They are also economically active, and their incomes are growing faster than the economies of their countries.
Until recently, however, most companies considered it unprofitable to serve these consumers. Some businesses are beginning to look beyond the stereotypes and are discovering a potentially valuable segment of consumers that has been almost totally neglected by the world's brand marketers.
The next billion's needs are diverse and vary by country and culture, but we have identified six general ways in which the next billion differ from other consumer segments.
They manage fluctuating incomes. Low income is not the biggest limit on the next billion's spending. Rather, what holds these consumers back from purchasing nonessential items is the volatility of their incomes. They are wary of large upfront outlays and of recurring expenses in the form of installments. Companies should look for ways to align their prices and financing with incomes that ebb and flow.
They cope with domestic constraints. The next billion often live in spaces no bigger than a couple of hundred square feet. The top of a refrigerator or washing machine often serves as a table or storage shelf. Utilities that more affluent consumers take for granted -- such as uninterrupted electricity and clean running water -- have yet to reach these households. Therefore, products that conserve floor space and don't require a continuous supply of power and water are greatly appreciated.
They are smart shoppers. Every cent counts for the next billion, but that doesn't mean that they buy the cheapest products or will settle for stripped-down versions of more expensive offerings. They are interested in high-quality products, even if they have to ration the use of these items. Because they cannot afford to make mistakes, the next billion take the time to research products and to carefully compare their functional, technical and emotional benefits.
They are unfamiliar with many products. Although they may be intrigued by advertisements, the next billion consumers will shy away from a product if the ads fail to clearly explain its benefits. And because they are often first-time users, the next billion need comprehensive operating instructions as well. Players should create opportunities to experience their products firsthand through store displays and guided product trials.
They look for trusted advice. Because the next billion are new to many products, they are much more likely than consumers in other segments to rely on the opinions of people they trust. Advocacy networks can be powerful sales tools in this market and should be carefully nurtured.
They demand respect. Companies would do well to understand sensitivities such as the need to be treated with respect, which drive the next billion's desire to trade up. The categories that are ripest for trading up include durables and personal-care products, because the least expensive offerings in these categories tend to look cheap as well. They prefer neighborhood shops over distant supermarkets, where they often find self-service formats intimidating. When fluctuating incomes make it necessary to shop frequently for small amounts, traveling to a supermarket doesn't seem worthwhile, especially if the store feels unwelcoming.
Socially and economically, the next billion are on the move, and the last thing they want is to be approached with the old stereotypes. Despite the limitations on their spending, the next billion are committed to improving their lives.
Our findings raise a number of questions for companies doing business in the next-billion market. How can they ensure product quality at affordable prices? How can they deliver small volumes to far-flung marketplaces in cost-efficient ways? How can they design a marketing program that is equal parts education and sales? The answers will depend on the brand, the product category, and the country. However, we offer five principles that have helped put many of our clients on the path to serving this burgeoning market:
-- Design and develop products with functions and prices that compensate for small living spaces, unreliable utilities, limited budgets and other constraints
-- Leverage "ubiquitous distribution" by partnering with existing networks, such as the postal service, to ensure broad coverage, low cost and reasonable control
-- Design educational marketing programs that explain the importance of a product's benefits and that foster new demand, for example, by communicating the advantages of other products and by leveraging advocacy networks
-- Unleash the organization: establish clear accountability for serving the next billion, encourage growth over short-term profitability, foster innovation and embed low-cost processes
-- Collaborate with companies from other industries (even with competitors, on occasion) to enhance consumer programs (such as easy financing) and improve scale economics (for example, by sharing distribution costs)
We believe that making an early investment in understanding and serving the needs of the next billion will be well worth the effort. The companies that are first to meet the demands of these consumers -- and to serve their evolving tastes -- are likely to become the next global leaders with a sustained competitive advantage.
Marcos Aguiar is a partner in the Sao Paulo office of The Boston Consulting Group. Vikram Bhalla is a partner and Nimisha Jain a principal in the firm's Mumbai office. Michele Pikman, a project leader in BCG's Sao Paulo office, and Arvind Subramanian, a partner in BCG's Mumbai office, contributed to this article.