Economists and non-profits have posited, and sometimes documented, that those living in poverty may pay higher prices than others for the same goods or services, including public services like power and water. For example, a 2007 report from Save the Children documented how poor families paid more for common items like appliances or electricity.
This “poverty premium” hardly seems fair, and fairness is one of the cornerstones of public services. Charging the poor more is terribly ironic, but is it always the case?
No doubt that the poor, in some cases, do pay more for identical goods and services. There may be valid marketing reasons for this, too, due to differences in packaging, pricing and payment methods, distribution methods, and other marketing concerns.
Companies being what they are, some of them heard the possibility of premium prices and decided to pursue the opportunity. For instance Proctor & Gamble introduced PUR water filtration sachets for low-income household in developing countries (as described in their 2004 sustainability report). Clean water is a problem in many developing countries, and the poor supposedly pay a premium for products, so this seemed like a good idea.
The PUR sachets did not do well in the marketplace and are no longer listed on the P&G website. What P&G failed to notice was that many of their target customers simply boiled their water to purify it, using pots they already owned and fires fueled by wood that they collected for free. It’s hard to beat free, especially when you’re poor.
The article authors performed on-the-ground comparisons between Dharavi, a slum section of Mumbai with 600,000 people, and Warden Road, an upmarket part of Mumbai about 6 miles distance from Dharavi. They compared prices for 40 common products between the two areas, plus looked at services like electricity, water, and cellular phone service.
They found no poverty premium. In fact, they found substantial discounts up to 98 percent. A plastic comb that sold for 83 cents in Warden Road was just 4 cents in Dharavi.
The example of P&G and the article in HBR show that the poverty premium doesn’t always exist, and that people are serving the poor at price points they can afford.
A major mistake the P&G made with PUR sachets was designing a product for, and not with, their target customers. If they were designing with their target customers, they would have seen that their true competition was purification through boiling using free fuel.
Also, P&G and others forget that the poor are not stupid and will find substitute goods and services that met their needs and budgets. Substitutes are one of the major competitive forces in marketing. For instance, a haircut from an unlicensed barber in Dharavi may be a perfectly suitable substitute for service from a licensed barber in Warden Road, and cost 90 percent less.
The world’s poor have legitimate needs. Legitimate needs translate into legitimate market opportunities. But the poor aren’t dumb, and those seeking to serve them shouldn’t be dumb either.