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Rural consumers often shell out more than the maximum retail price for basic necessities and services, according to a study.
This happens due to faulty distribution networks in rural areas, states The Base of Pyramid Distribution Challenge, a study done by Chennai-based Institute of Financial Management and Research (IFMR).
A premium of 25 to 100 per cent is often charged on several products sold in rural areas, states the study. Even healthcare and personal care products such as sanitary napkins or water are sold at more than the maximum retail price. For instance, a packet of salt available in urban areas for Rs 8 may be sold in rural areas for anywhere between Rs 16 and Rs 25.
Poor distribution
“This is the ‘base of pyramid penalty' that rural customers are made to pay for the same products available in cities at lower prices,” says Mr Sachin Shukla, Senior Consultant, Strategy Advisory Group.
The base of pyramid penalty is primarily an outcome of local monopolies, inadequate access, poor distribution and strong traditional intermediaries, according to the study.
“Most manufacturers assume their role to be complete once their products have been pushed to the first link of the distribution chain. It falls on each member in a distribution network to undertake a part of the responsibility and the decision is crucial to successful product adoption,” states the study.
The rural BoP market segment spends close to 78 per cent on food, which is an immediate survival need. This is followed by energy needs that account for 12 per cent of the total expenditure. Next in line are spends on health at 3 per cent, transportation at 2 per cent, housing at 2 per cent and household goods at 2 per cent.
Local partner
For small and medium or big companies aiming to successfully distribute their goods and services in the rural areas, a good local partner is imperative. While microfinance institutions are nowhere close to being the one-stop solution to all rural BoP distribution problems, NGOs, self-help groups and cooperatives are viable partners, recommends the study.
An example of a successful business model is low-cost stove manufacturer First Energy Oorja. Through an NGO-retail channel, it depends on local NGOs to market and distribute its products, ensuring reach to remote locations.
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