C.K. Prahalad’s book, The Fortune at the Bottom of the Pyramid, argued that poor people constitute a large market opportunity for global companies. We have always been uncomfortable with the idea, and decided to examine Prahalad’s numbers.
Prahalad says that 4 billion of the world’s almost 6 billion people had an income of less than PPP$ 1,500 per year at the time of writing (2004), and thus were poor. It is unclear which base year he used but the surrounding text seems to suggest 2000. It is also unclear why he uses PPP$ 1,500. His source was the UN Human Development Report, but the poverty line in this report was PPP$ 2.15 per day (constant 1993 values), or PPP$ 785 per year.
First, we find that the poor population in the world in 2000 was around 1.8 billion, not 4 billion. To start, we use C-GIDD, convert its constant 2005 values to constant 1993 values (as used by Prahalad), and sum up the population with income below PPP$ 1,500. This is around 3.1 billion people. Given that his PPP$ 1,500 cutoff seems arbitrary, we then change the cutoff to the UN’s definition of PPP$ 785. This gives a poor population of 1.8 billion people.
Second, we calculate the total income of those 1.8 billion people. It is only PPP$ 860 billion, or 3% of the world total. Prahalad does not make this calculation at all.
Third, markets for global companies should, arguably, grow. Between 2000 and 2014, the bottom-of-the-pyramid market declined 6% per year in population terms, and 5% in income terms. The bottom of the pyramid is shrinking.
In sum, the bottom of the pyramid is much smaller than Prahalad had claimed, and declines rapidly. Today–14 years later–there are only 1 billion people at the bottom, and the decline over the next 10 years will possibly be a bit over 3% per year. We do not see a fortune.
Beyond these market sizing numbers, academics and business executives have criticized the idea as being difficult to implement for global companies. An example is Erik Simanis. We agree with his argument. The market for the poor is typically captured by local companies who have a better understanding of the dynamics in this part of the market. Occasionally, global companies can make a meaningful contribution, but this is the exception.
Note: Poverty statistics are often exaggerated. This may in part be due to self-interest among groups working on poverty issues. It is also because of a long-standing paradox: When income is measured bottom up through so-called Household Income and Expenditure Surveys (HIES), it is far lower than the national accounts show. This is because of under-reporting and other factors. See our FAQ on the topic.