2013-05-08

Co.Exist

How Misinformed Ideas About Profit Are Holding Back The World's Poor

Is it taking advantage of poor people to try to make money from them? And do they even have any money to give?

I run a for-profit business that delivers products and services to customers earning less than $6 a day in West Africa. When I tell people this, I frequently encounter disbelief or concern. The three most common responses I hear are:

Surely you can’t make money working with people who are so poor?

Don’t you feel like you are taking advantage of these people by making money from them?

Wouldn’t charity do a better job of meeting their needs?

While these questions are well-intentioned, I initially found them upsetting because they go far beyond a healthy skepticism about my business model. They made me doubt whether I should be working with poor consumers at all.

While I stayed the course, I fear that many will simply choose a simpler path of building a startup in developed markets. The absolute worst thing that can happen for the poorest people on Earth is that the next generation of superstar entrepreneurs ends up in Silicon Valley making iPhone Apps, rather than trying to address the problems of the 4 billion people who need them the most.

So next time you overhear one of these questions, do the world’s poor a favor and shoot it down. Here’s how:

1: Surely you can’t make money working with people who are so poor?

Even the poorest people are still consumers. Like you and I, they make decisions about what to buy each and every waking hour. Collectively they spend over $5 trillion dollars a year, roughly equal to the GDP of the third largest economy in the world.

There is an obvious market opportunity here and Coca Cola is a great example of a company that has seized it. Coke is the biggest employer in Africa, and you can often find a bottle of Coke in a village where basic medicine is not even available. Coke is hoping to reach 106 million households in Africa by 2014 and plans to spend $12 billion this decade to fuel its growth on the continent.

If Coke can make money selling sugary soda at 40 cents a pop to villagers who don’t need it, there is plenty of room for companies selling much more meaningful products they actually do need.

2: Don’t you feel like you are taking advantage of these people by making money from them?

What most people don’t realize is that the status quo for poor consumers is that they routinely pay a lot more for products and services than anyone else. This is something known as the poverty penalty.

The poverty penalty, as noted by a World Resources Institute report in 2002, means that urban slum dwellers in India without access to municipal water pay anywhere from 4 to 100 times as much for drinking water as do middle and upper class families in the same country. In Lima, Peru, a poor family pays 20 times what the middle class pays. Yet another example is that the cost of credit in Africa can be 100 times more than for poor families who do not have access to formal financial institutions, because loan sharks with usurious terms become the only viable option for borrowed funds. Crazy, isn’t it?

So, the idea that it is morally wrong to make money by delivering better products and services to the world’s poor is simply absurd. The best way to eliminate the poverty penalty is to have companies competing to provide goods and services to these consumers. Competition brings prices down and creates choice.

Wouldn’t charity do a better job of meeting the needs of poor people?

Charity is effective in certain situations. However, when poor consumers are already paying for a service or product and there is already a market established, charity is not the solution. Charity at its worst is a handout that encourages laziness and stymies initiative.

Ingrid Munro has an interesting perspective on this. She founded Jamii Bora, a successful microfinance institution in Kenya which focused on providing the poorest and most disenfranchised with access to credit and housing services. Jamii Bora’s core clients were, in Ingrid’s own words, ‘beggars, prostitutes, and thieves’. Ingrid chose to give her clients a hand up rather than a hand out. She explained her approach in a 2008 interview:

“[The poor] don’t need charity. … If we keep saying, “I feel very sorry for you because you can’t manage this yourself,” the poor start thinking to themselves “I should feel sorry for myself because I can’t manage on my own.” But if we say, “You can make it. You have talents. … And [if] you see that some of your friends who were begging beside you on the same street now walk around in nice dresses, and that their children are in school, they eat three meals a day, and they live in a better house--then you also dare to dream that that is possible for [you too].”

Perhaps the biggest advantage of Jamii Bora’s approach is that it generated profit, and because of this, the organization was able to access investment which allowed it to grow quickly and provide services to ever more people. The problems facing the world’s poorest consumers are big and complex. If we hope to reach 4 billion people and get them things like safe access to water, energy and housing, we need all of the resources we can possibly muster. Charities simply cannot match the growth potential of a business that is able to attract investment.

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32 Comments

  • AliveMind

    Profit when described and seen in these manners causes disarray : Excessive , not in moderation , non creative, taking from other resources. 

    Profit which causes Happiness, Satisfaction and Pride, Allowing right services to right clients. Offers benefits which keeps on giving, Balance in individual and Organization. Motivates and empowers is Solutions for Humanity.

  • ajlovesya

    Thanks for this thoughtful article. I would push this further and argue that the resistance you face goes beyond views of profit and is also rooted in a problematic view of what doing good should like overall: martyrdom. I face it all the time in my work in the nonprofit sector. Demands for better pay are met with suspicion; people who happily work for pennies or who simply sacrifice all of their time to a cause are celebrated as saviors (or mocked as fools). 

    Elevating the concept of service to something that's not a sacrifice, but something that's integrated into our society as something worth doing and can be done in a variety of ways, is new. 

  • kevinleversee

    Bravo.  I really liked how you are looking to solve the issue itself - why the problem exists in the first place- and it is the way we think.

    As a man thinks so he is, as a population believes so they are. bravo.
     

  • PromoteCommonSense

    I find it interesting about the comment about wouldn't a charity be better suited to this. There is this notion that charities and non-profits don't make any profit. They do in fact make a profit and must bring in more money than they pay out, just like any other  business. Of course, a lot of their funding comes from contributions and grants, but that is besides the point.

    The real difference between a for-profit and a non-profit organization is what they do with the profit. Non-profits role the excess back into the organization to further their mission. For-profits usually pay it out to shareholders. Hospitals are an easy example. There are non-profit hospitals and there are for profit hospitals. Both must make a profit to stay in business.

    So to answer the question of whether or not it would be better for a charity to take this activity on, would depend on what the non-charity was doing.

  • ajlovesya

    I would also add that there is a tendency to assume that nonprofits operate solely off of donations. While philanthropy has always played a powerful and unique role in the growth of many social services in this country (I recommend The Greater Good: How Philanthropy Drives the American Economy and Can Save Capitalism for more on this), the truth is most nonprofits gain money from earned income: the fees they charge for their services. So the idea that nonprofits don't charge the people they serve isn't entirely true. 

    Some charge out of necessity to help them stay afloat (think of tuition, museum fees, hospital costs, etc) and, in my experience, some charge because they too believe payment is a form of investment from the person receiving the service. I recall, for example, my time working with a Catholic organization who believed that everyone should have to contribute *something* for that very reason.

    I also wish we would drop the word charity. It seems to conjure up images of sad little shops filled with martyrs with no sense of direction, focus, or plans for impact which really isn't the case. 

  • CarbonaNotGlue

    Wealth is built by trade, not by charity.  To deny trade to a population is to ensure their poverty.  Humanity in general rose from hunter/gatherers into mighty wealth generating civilizations only after it discovered trade and then commerce.  Or rather discovered that, unlike charity, trade is not a zero sum game.  Trade actually creates wealth.  That does not sound intuitive (how does trading items back and forth create new wealth? Yet it does) and it is the fact that is hard to grasp that explains why it took so long for humanity to change its behavior from charity (or more commonly, simply pillaging and taking) to trade.  Goose and golden eggs, etc.

  • WBHobbs

    True, charities and non-profits must bring in more money and goods than they pay out. They must have cash flow to support their operations. But they don't make a profit. They must have some source of funds to continue to operate... Quite often that source is gifts from donors. Our local food bank is a charity.  It would be incorrect to say that this charity makes a profit by "selling" $100 worth of food for $0.00 to a hundred poor families each week.  It would be correct to say that contributions of food and cash to the charity must at least equal expenses and gifts from the charity over the long term.

  • Connect

    If it is to be...it is upto me. How do teach this to populace, who has no concept of their of value of me ?

  • JaneDoe20

    I don't understand. I think you're denigrating poor people but I'm not sure because your comment is so poorly written.

  • Segun Adaju

    Social enterprise, and not charity holds the solution to the challenges of people at the base of the pyramid. My organization is replacing kerosene lamps with solar portable lanterns in Nigeria through a business model that is sustainable rather than distributing for free. This ensures the market is not distorted and also clients are able to repay from cost of buying kerosene even at a savings.

  • Molie Mo

    segun this sounds amazing! I'm a nigerian studying in czech republic. would love to hear more about this. molie.mo@gmail.com

  • alexs@upfromnothing.com

     I think that local resources can only produce so much in the first place. Outside investment is ultimately needed. The old joke of: "which came first the chicken or the egg comes to mind." 

     I am ultimately in agreement. Governments need to apply the money that they give out in international aid, to causes back home. 

    Market solutions are often given third rate treatment by traditional left leaning intellectuals. They view interactions between consumers and producers as being inherently opportunistic in nature. The truth is that they may be closer to symbiotic than was previously thought. Developing countries with growing middle classes, create new markets. These markets introduce competition which makes accessibility to services more possible than before.  

  • CarbonaNotGlue

    Oh, and the fact that each of the 3 new workers in China are paid less than the one in Detroit does not change the fact that many more human beings are now fed, housed and clothed with those lower wages than the supposedly 'higher' wages had been able to do in Detroit.  Money is not real, it is just a number . what is important is what it can purchase.

  • CarbonaNotGlue

    Rhoppin .. what do you mean by "their" economy?  The world is one economy.  I have no problem giving up one auto-worker job in Detroit that fed a family of four in order to gain auto building jobs in China that feeds a clan of 20. 

  • Rhoppin

     The growing middle classes can't grow when the funds they spend end up going outside their own economy. On the other hand, their own cheap labor is  used to undercut labor costs for the middle
    and lower income workers in the west. Workers are competing with each other to provide the cheapest labor which drags down the standard of living for workers both in the west and the third world. And the plutocrats just get richer.

  • Fwscottjr

    It should be blindingly apparent that this idea needs to start at home where millions are unemployed and underemployed and need help from the Government because they don't have work. Your business model works in Africa and India because their labor rates can be so low. This robs Americans of jobs they need to be productive citizens. Don't get Africans and Indians drinking CocaCola and leave our American poor unable to compete with dirt cheap imports because there aren't any safegards, health care, retirement savings or a living wage. Make sure any imports to America are charged for the difference in labor costs and put America's poor back to work. Now list all the reasons that you don't actually know how to employ poor people in America. Accomplishing this employment would increase tax revenues, reduce the need for the safety net programs and radically reduce the drop out rate from high schools thus providing a better educated workforce.
    Frank Scott

  • Andrew Barson

    Great article, responding to some common questions that stem from the snapshot of African and other developing countries in the media that are often depicted through a lens tinted towards raising money for charities.
     I'm fully convinced that a business approach focused on the bottom part of the economic pyramid has the potential to distribute the much needed enabling products and services that help save the customer's money and improve their lives.
    The solar lighting products your company Impact Energies distributes provide a clear example of how business can make a profit by providing people in these countries with choices they can afford that can improve their lives (light to study, work and cook with) and save them money (compared to the cost of kerosene lighting or torches with disposable batteries).The other benefit that businesses have compared to charities is that if businesses are profitably providing products and services to those that need it they can focus 100% on this, instead of continually needing to look for donations.  

  • Paul Polak and Team

    Thank you for this incredibly useful post that we resonate with on every level.
     Paul Polak spoke his views on this topic in this blog post, Is It Immoral To Earn Attractive Profits From Poor Customers? http://blog.paulpolak.com/?p=1...

  • albeit

    The notion that trading with people who are poorer than you is an absurd one.  If you were to take the poorest and prevent others from trading with them, it would be even even more deadly than absurd.

    What people lack in countries where most people are poor is freedom and property rights.  They need the right to trade with the world and keep what they earn.  They need rule of law and enforcement of contracts.