By Paul Beckett

The meltdown of the microfinance industry in Andhra Pradesh, as we have noted carries big risks not just for an industry designed to serve the poor but for the entire concept that the poor can be profitable customers.

That has been an emerging trend in management thinking about emerging markets in the last few years, in part because of the success of microfinance. But since these matters tend to be herd-driven, problems in one industry such as lending can quickly cool ardor in other industries for expanding in these markets.

Fortunately, though, there remains at least a robust industry in writing in august journals about the opportunities at what C.K. Prahalad called the “bottom of the pyramid” and others have variously called “the poor” (straightforward but rather predictable) or “the aspiring middle” (it’s optimistic-sounding but rather vague.)

The latest article in the genre is to be found in the January-February edition of the Harvard Business Review by three executives at Innosight, a management consulting and investment firm.

Their basic point: Most multinationals approach emerging markets, including India, in one of two ways. Either they slash costs and pump out low-end goods in high volume then are disappointed when they don’t clean up; or they sell high-end, low-volume goods that are available for the well-off the world over then puzzle over their tiny sales in what they keep being told are vast markets.

It probably doesn’t take a management consultant to tell you that this is, in the authors’ view, wrong on both counts.

Instead, best to target what they call the “vast middle market.” India being India, that middle market can start with people who earn as little as 5,000 rupees ($111) a month.

The next two questions to ask, according to the article, are: “What job needs to be done?” and “Can I find something to do that job at a profit?”

(Rather than, I suppose, the alternative: “How can I foist my cheaply-made tat on this big new market that doesn’t really need it and still make a quick buck?” which we fear is how far too many companies approach it.)

Once again, Godrej & Boyce’s ChotuKool is held up as Exhibit A of how to do this right. If this little refrigerator, which holds just a few products and can run on a battery during power cuts, is half as successful in selling as it is in being held up as an example of how to do business in emerging markets, we should all load up on Godrej stock.

(For the record, the article states that sales of the mini-fridge are expected to reach 10,000 in the first year and 100,000 in the second.)

Another main example is one that Innosight founded under the Chamak brand. It is a Village Laundry Service that is designed to serve those fed up with doing laundry themselves. Their current choices: A cheap but potentially unhygienic dhobi or an unaffordable fancy launderette or dry cleaner. Both take several days.

From an economic standpoint, setting up a chain of self-service laundries was deemed too expensive to make a decent return.

Their solution: Portable, seven-foot-square kiosks with a front-loading washer and dryer, with an independent water supply, placed where there is most foot traffic. Customers drop off their clothes to be washed, dried and ironed in 24 hours.

The company can charge 40 rupees (slightly less than $1) for a kilogram of clothing. The service now has 5,000 customers patronizing 20 booths in Mumbai, Bangalore and Mysore.

Of course, there are many reasons why innovations aimed at this middle market might fail. But at least it’s encouraging to see that companies, and management-thinkers, are still bullish on serving a market that, of late, has had nothing but bad press.

Source: http://blogs.wsj.com/indiarealtime/2011/01/04/harvard-business-review-on-reaching-indias-vast-middle/?KEYWORDS=PAUL+BECKETT