Targeting Low-Income Markets: Opportunities and Challenges for Businesses

Emerging opportunities for businesses in low-income markets

Senior managers generally face two different reasons for entering emerging markets. As mainstream markets become saturated and competitive strategies focused on differentiation start running up against limited returns, senior managers find themselves looking at the relatively untouched and sizable emerging markets.1 Also, new calls for enhanced corporate citizen responsibility by both customers and shareholders add new incentives to serve these markets in order to avoid negative press and the attendant revenue and share price erosion.2 Since the 1980s, managers have shown awareness that low-income ethnic markets and markets in emerging regions are quite large. Mexico, for instance, has a population of more than 45 million, still targeted primarily by potato chip and soft drink makers.

Such low-income markets are ripe for new product infiltration, but most people in these markets earn less than $200 per month. Worldwide, there are roughly four billion people who earn less than $1,500 per year. Ethnic marketers speak about the rise in the number of Latinos in the United States. This market is over 35.3 million (larger than Canada) with a buying power of $400 billion.3 Again, how-ever, mostly consumer products companies like Coca-Cola have succeeded in penetrating these low-income markets. Companies that sell higher-end products such as financial services or computers—products that require dipping into savings and thereby causing customers to stop and think before purchasing—have been especially shy about targeting low-income markets. Can companies that sell higher priced consumer products expand the market for their products by targeting low-income customers?

For high-tech companies like Gateway, high cost companies like GM, or professional service companies like Smith Barney,successful entry into financially constrained markets has traditionally entailed selling at a slashed price a less-sophisticated, lower-cost product that still has appeal. Indeed, taking away a few of the product features of a sophisticated product or service to bring its cost in line with the anticipated purchasing power of the market has sometimes worked. Consider the success of H&R Block’s tax business.4

However, simply subtracting product features and raising advertising budgets to appeal to a low-income market is generally insufficient. AT&T and others failed to attract a large market for telephones in China. Rather than purchasing many phones and the switching systems to serve them, the Chinese purchased a few phones and rented them out to others.5 Likewise, using the lower-cost strategy, GM failed to build a market for its cars in Asia.6 Closer to home, high-tech companies have a tradition of failure in seeking those 50% of U.S. households (mostly low-income) without PCs. Intel discontinued its Dot.Station Web appliance, which like the iOpener by Netpliance and a host of others failed to spark enthusiasm in this target market. Back in 1996, marketers and venture capitalists were predicting that by 2000 there would be 22 million household Internet appliances in use.7 Similarly, in 1984, Yugo Cars of Sun Valley, California, started importing and selling Yugos to give the new-car purchasing experience to low income families. However, by 1992 the venture was abandoned.