Operational Strategies for Distributing Durable Goods in the Base of the Pyramid

Abstract

Problem Definition Novel life-improving products such as solar lanterns and energy-efficient cookstoves address essential needs of consumers in the Base of the Pyramid (BOP). However, the profitable distribution of these products is often difficult since BOP customers are risk-averse, their ability to pay (ATP) is often lower than their willingness to pay (WTP), and they face uncertainty regarding these products’ value.

Academic/Practical Relevance: We examine two strategies commonly used in practice by distributors in the BOP: (1) improving the product's affordability through a discount, and (2) increasing awareness of the product's value. Our results identify BOP-specific operational trade-offs in implementing these strategies. We also propose strategies to manage these trade-offs that can increase consumer surplus in the BOP.

Methodology: We introduce a supply chain model for the BOP and analyze the distributor's pricing problem with refunds, as well as the distributor's optimal budget allocation between strategies (1) and (2).

Results: We find that strategy (1) can only benefit the distributor, while strategy (2) may be detrimental depending on customers' ATP and risk aversion. Additionally, in the BOP, the distributor's profit-maximizing budget allocation often yields the lowest consumer surplus. This misalignment between profits and consumer surplus disappears if customers' ATP is high. Moreover, the misalignment can be resolved if the distributor offers free product returns. Finally, we provide insights into product selection. We confirm the robustness of our results by examining a more general model through numerical simulations.

Implications: Best operations strategy practices in the BOP can differ significantly from developed markets. Furthermore, BOP customers' limited ATP and high risk-aversion generate a BOP-specific misalignment between profits and consumer surplus. Operational commitments such as free returns resolve this misalignment and can serve as a signal to investors of a social enterprise's focus on consumer surplus.

Keywords: Social Entrepreneurship, Base of the Pyramid, After-sales Service, Sustainability