Is it Immoral to Earn Attractive Profits from Poor Customers?

 by Paul Polak

There are at least 7 billion different perspectives on morality, but the viewpoint I like best defines sin as the failure to reach your potential.

By this definition we have at least 2.6 billion deep sinners – the 37% of people in the world who live on less than $2 a day. They are the future Steve Jobs’, Mohandas Gandhis, Madame Curies and Pablo Picassos who will instead eke out a living as drug dealers, child soldiers, prostitutes and destitute slum dwellers.

Photos from: http://gulfofmexicooilspillblog.files.wordpress.com/2011/03/ehutd00z.jpg and http://mrbensbr.files.wordpress.com/2011/01/child_soldier1.jpg

The three trillion dollars or more we have wasted in misguided development aid probably represent an even bigger sin. But it seems to me that the worst sin of all is our abject failure to achieve scale for the handful of projects that have produced measurable positive impacts on the lives of poor people.

How can we successfully achieve scale? It takes planning and designing from the very beginning, and the unleashing of powerful positive market forces at the locations where poor people are buyers and sellers. The only way to unleash those forces is to demonstrate to global businesses that they can earn attractive profits selling transformative products to poor customers. This is exactly what I have dedicated the rest of my life to accomplishing.

But, I am not an economist. How do some of the world’s leading economists view the prospect of earning sizeable profits serving poor customers at scale?

 

Is it immoral to earn profits selling to poor customers?

 

No!

Photo from: http://www.nobelprize.org/nobel_prizes/economics/laureates/1976/friedman.jpg  “No!” says Milton Friedman, the celebrated free market economist.

“…there is one and only one social responsibility of business – to use its resources and engage in activities designed to increase its profits so long as it stays within the rules of the game.” Friedman believes that a marketplace of enterprises earning profit within the rules is the most powerful lever to improve society.

Yes!

Photo from: http://www.nobelprize.org/nobel_prizes/economics/laureates/1976/friedman.jpg Herder: http://www.hawar-islands.com/blog/media/blogs/kuwait/2008/Herder_0003.jpg
 “Yes!” says economist and Nobel Prize winner Muhammed Yunus.

“Poverty should be eradicated, not seen as a money-making opportunity.” Yunus believes that investors in social businesses should only get their money back. In my view, that adds up to a sizeable interest-free subsidy, which is a constraint to scale.

Why do I believe that the answer to extreme poverty is to earn attractive profits serving poor customers?

The microfinance movement and the work of iDE combined have probably helped about 50 million extremely poor people move out of poverty. Even if we have helped 100 million poor people move out of poverty, this amounts to less than 4% of the 2.6 billion people in the world who live on less than $2 a day. This is pitiful!

I define meaningful scale as any strategy or initiative capable of helping at least 100 million $2-a-day people move out of poverty by at least doubling their income. We desperately need to find ways to bring to scale the few comparatively successful models for development that are available.

Photos from: http://www.hawar-islands.com/blog/media/blogs/kuwait/2008/Herder_0003.jpg and http://www.vagabondish.com/wp-content/uploads/marketplace-delhi-india-296150321-800x535.jpg

What are the common features of initiatives that have truly helped extremely poor people move out of poverty?

  1. They begin by thoroughly listening to poor customers and thoroughly understanding the specific context of their lives.
  2. They design and implement ruthlessly affordable technologies or business models.
  3. Energizing private sector market forces plays a central role in their implementation.
  4. Radical decentralization is integrated into economically viable last mile distribution.
  5. Design for scale is a central focus of the enterprise from the very beginning.

It is clear that all of these factors are integral components of a business system, but this takes us back to the original question: should it be a business system that enhances the livelihoods of poor people without making a profit for outside investors? Or should it make a profit for investors as well as the poor people who are served by it?

To me the answer is obvious. The only way for a business to help at least 100 million poor people move out of poverty is to follow the laws of basic economics, which means providing an opportunity for both poor and rich investors to earn what they consider to be an attractive profit from their participation.

Photo by Paul Polak

I have no doubt that there are huge profitable virgin markets all over the world serving $2 a day customers waiting to be tapped. By the laws of economics, creating a new market requires taking a very large risk, but the reward should be commensurate to the risk. If the new venture is successful, all the investors – the poor customer who buys the product, the shopkeeper who sells it, the company employee who makes or transports the product or manages the supply chain, and all the financial investors in the company – should make an attractive profit.

Here is an example: Coal contributes 40% of global carbon emissions and releases millions of tons of heavy metals and other pollutants every year, worsening climate change and sickening people around the world. Properly carbonized biomass can be substituted for coal and co-fired alongside it in proportions up to 80%. The world’s farmers produce four billion tons of agricultural waste each year. If 100 million tons of this agricultural waste could be effectively and affordably carbonized in decentralized rural settings, a multinational enterprise finding a cost-effective way to make it happen could reach global sales of $10 billion a year within five to ten years. Such a company would not only provide attractive profits to investors willing to take on the substantial risk involved, but would furthermore double the incomes of at least 100 million $2-a-day enterprise participants in developing countries.

Photo from: http://thaifoodandtravel.com/blog/wp-content/uploads/fs4/threshing-rice.jpg

The only way a company like this can reach scale is with the financial backing of for-profit venture investments. And the only way to justify those comparatively high-risk, early-stage investments is if the company provides the opportunity to make exceptionally good profits if it succeeds.

We have two options. One is to keep hoping that governments will come through with billions of new aid dollars, keep asking individuals to dig deeper for charity dollars, and hope that the low-or-no-profit venture capital space takes off and becomes a truly global phenomenon. We could plod along full of hope but low on results, celebrating increases in impact of fractions of a percentage point.

The other option is to blend the designer’s sensibility, the artist’s creativity, the ground-level aid worker’s understanding of local context, and the entrepreneurs’ dynamism and drive for success, and create profitable global companies that serve poor customers with products and services that help them rise out of poverty. We could unleash the full power of the greatest force in human history – profit – and start ending poverty by the hundreds of millions.

It would be immoral to do anything else.

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Comments

  1. Scott Lizama says:

    I don’t disagree with the idea of profit earning in a social enterprise. It seems to make practical sense to perpetuate the idea of scaling, expanding market for profitability and economic improvement for target consumers. But is it too premature to wonder what happens when competition amongst social enterprises, spurred by desire for profit increases, enters into the business plan? It seems this is a market that can ill afford the corner cutting that seems to come along with such competition. Is it possible to start a social enterprise that makes a profit that solely serves the scaling cycle? A business plan that includes profit margins for it’s employees to work at competitive salary levels but doesn’t allow profits for out of scale management salaries and bonuses. It would allow profits used for research and development, and profits to manage an identifiable need-based scaling (vs. aggressive marketing to create artificial desire and need) or, as Mr. Saurabh has written above, uses the profits to create more solutions. It seems this type of business strategy would eliminate competition factors and promote a social business strategy exchange.

    • I think there is a big difference between existing mature western markets serving richer customers, and the new markets we can create serving $2-a- day customers, where many of the things you are concerned about are less likely to be issues.

      Let’s assume, for instance, that we can create viable new markets for a “green” replacement for charcoal made affordably out of agriculural waste in 100,000 villages. We are right now working on this, and if it works out, it could generate sales of $100,000 or more for each village, and earn enougj to pay attractive market based wages for villagers and generate attractive profits for both village based enterprises and the international company they partner with. As competition comes in some exploitation can come with it, but even if it does the net effect of creating new village jobs and new income streams from agriculural waste will likely be strongly positive

  2. Michael Johnson says:

    I think it’s a bigger question of for whom this wealth is created and to whom the profits are returned that is the real question. I helped create a cocoa cooperative in Haiti during the 80’s. This pooled the cocoa into a scale that could be sold on the world market and returned profits back to the collective. Collectively gaining access to a market that was otherwise closed was transformative. The revolution ended the dream but I believe such mechanisms can be created again.

    • The cocoa coop in Haiti you created sounds like a great example of what I’m talking about. What negative impacts did it have, if any, alongside the positive?

      How could you do the same thing in a hundred cocoa producing areas around the world?

  3. “Poor people”
    Imagine two islands, one full of people and the other full of animals. The humans build their economy and start exploiting their resources. The cost of a resource (say wood) is a little more than the cost of extraction (chopping + transport). The humans will move on to cut the wood from the island with animals. The animals essentially earn $0, and are according to the human value system are worthless and are to be exploited.
    The majority of the humans in this world who fall into the “poor” category are no different from the animals, they will be exploited. By imposition of the value systems of the richer, organised & more powerful (inc. weapons) groups. But the poorer people aren’t necessarily primitive, they have survived on the same lands for generation and are self sustaining even in very small population groups.
    Any product you would want to deliver to the poor is morally right if it is sustainable (based on higher efficiency), or at least put them in equal footing so that they or their resources can not be undervalued and exploited by other groups (things like education, fair access to market, marketing can qualify as morally acceptable products).

    • where the island analagy falls down is that animals don’t buy and sell things, but poor people do. Since poor people already participate in markets, the challenge is to help creaate a level playing field, where poor people and rich people participate in markets. The good news is that this works. In Indian villages, where rich waaterlords could hire poor laborers cheap because they controlled the water they needed, we created a level playing field by providing poor people access to treadle pumps aat a fair market price. Once they had access to their own water and could eearn income from selling vegetables they produced with it, poor villagers still hired out as laborers to the waqterlords- but now they were able to negotiate a fair maarket price for their labor.

  4. There is no doubt that the private sector intervention is required to achieve the desired magnitude of impact in social or BoP sector. I think we can not ignore profit making and social impact going hands in hand at this juncture and thus, we shall let the Impact Investment wave rise to its potential. Also, finally it is how an organization balances between profit making and impact that will dictate morality and ethics.

    • I think we waste far too much energy obsessing about meauring social impacts. Its much more sensible to build social impact into the basic mission of an enterprise, and then focus really hard on becoming profitable, which is challenge enough!

      For example, Spring Health has as its mission selling safe drinking water to millions of poor villagers in Eastern India at a price they find attractive. If we succeed in selling safe drinking water to millions of villagers, and our rrandom tests of waater in their homes indicate it is safe to drink, we have accomplished our mission, and we should focus on energy on making the enterprise profitable, so it can be brought to scale.

  5. Hallelujah!!!!!! I just blogged about the lack of angel investors in Africa. Until we propagate more commercial success, western investment will continue to be risk averse. Unfortunately for those of us working with rural farmers, Agriculture being a dominant part of the economic development within both national and local economies (76% in Kenya), we face even great challenges. How do we scale our operations unless we earn profits to reinvest ? Even in our technical extension program, farmers pay for training classes. Class costs less than $0.20 cents which farmers find desirable and do pay for. We learned that even if you are a business but give away your services for free, it has no value – invalid perception or not.

    More than organizational profits, I am more concerned that supply chains are ethical. Where we buy products, how they impact health / ecology and how we deliver to farmers. I don’t’ want to facilitate cocoa production if I know it enhances child labor and human rights abuses. The cocoa industry committed to impacting this sector more than 10 years ago and has yet to accomplish much as the world demand for cocoa grows.

    • I very much agree with you, Rachel, but I allso haven’t seen a single projects whose impacts are all positive. Every project has both positive and negative impacts To me, a project or an enterprise is successful if its positive impacts significantly out weigh the negaative ones.

  6. “…the misery of being exploited by capitalists is nothing compared to the misery of not being exploited at all.” – Joan Robinson, development economist, Economic Philosophy (1962)

    (I find it interesting that even a Marxian economist, or at least one who was very sympathetic to Marx, could come out with a quote like that.)

    I’m all for cooperatives and trying other alternatives, and I’m all for regulation of big corporations exploiting any markets, including poor markets (I’m thinking especially of infant formula and junk food pretending to be healthy). But restrain the clear abuses, and the market is a powerful force for good.

    Comments and opinions are my own and do not represent any organization I am affiliated with.

  7. Chris, I love your explotation quote, and I very much agree with the need for market regulation. But by far the biggest problem for $2 a day customers right now is the misery of having no marrkets at all, exploitative or not!

  8. Hardik Yogi says:

    Great article Sir Paul. But would like to add one small point – it is very possible today to look at the bottom pyramid initially not as buyers/consumers but as sellers of their own products and technology.

    There is the Grassroots Movement in India started and run by Professor Anil Gupta from IIM(A) that tries to discover and publish innovation BY (not FOR) the rural poor and attempts to diffuse them to other rural communities that might have the same issue. This a a good starting point and there have been a few cases where the technology has been useful even to the Western world – a complete opposite of CK Prahald’s BOP model – where you sell products/services TO the rural poor.

    These 2 models can surely be used together or at least should be more openly discussed. What is important here is to understand with the Grassroots Model is that the rural communities can help EACH other, profit through the new learning which can then lead them to consume other Western products/services at a later stage. Certainly a market place can and should exist that takes into account both these views.
    To quote Professor Anil – “The minds on the margin are not the marginal minds.”

  9. What a great discussion- this is exactly what I dreamt of when I wrote this blog!

    I’ve had plenty of experience with the exploitation and profiteering that can come with creating new markets. When we introduced treadle pumps in eastern India, for example, we learned that one manufacturer in a remote rural area was charging three times the normal price for a treadle pump. I’ve learned again and again
    that you can stimulate and shape markets, but its impossible to control them. What we did in this instance is encourage a competitor across the street from the manufacturer who was charging too much, and that worked fine.

    I have no doubt that profiteering and exploitation often accompany the creation of new markets that serve poor customers, but the transformative imapcts of new markets for mobile phones and microcredit far outweigh the negative impacts that came along with them.

    Dollar-a-day one acre farmers desperately need the creation of new markets for income generating radically affordable small plot irrigation. The introduction of tools like treadle pumps and low cost drip systems have still only scratched the surface of this new market. There are 10 million small farmers in Africa who now irrigate by buckets and sprinkling cans. They are strongly motiviated to invest in radically affordable efficient water lifting and distribution devices.

    There is a market for 10 million hectares of low cost drip irrigation in the world waiting to be filled.

    There is a vast new global market waiting to be developed for creating green coal out of agricultural waste.

    There are huge global market demand for affordable schools and health clinics, and photovoltaic electricity that sells for less than 50 cents a watt.

    To create new markets like this will change the world, and transform the environmental balance of the planet.

    But it will do no good to try and accomplish it piecemeal.

    It has to be accomplished at scale, and the only way to reach scale is to demonstrate attractive profitability serving poor customers a 100 million customers at a time.

    paul polak

  10. Paul – I think there is a balance to be found – which I thinks is what Social Enterprise is all about (when done well). Profit is needed to attract investors, but if its the motivation for the enterprise then its unlikely to create much impact.

    I’d switch it around ….
    1: The Mission is to create impact, solve a problem, at scale.
    2: Where can I get the money to do this – to solve a problem at scale it has to be unsubsidised at the operational level e.g. I saw a recent Huffington Post article about cookstoves, appealing for $20 per stove in donations … $20 * 600million households breathing wood emissions = 1.2 billion, so its not going to happen. Any scalable solution is going to require commercially viable operations.
    3: Where can I get the money to develop the solution and scale it – if its philanthropic then great – and an appropriate way for philanthropists to act. But too many are risk averse and prefer to fund on a small scale #2 … so the solution has to be commercial or Impact investors.
    4: How much profit do I need to generate to attract investment, and can I build that into my business model.

    I believe if you start off with profit as the motivation (as in “Fortune at the Bottom of the Pyramid”) then you won’t achieve impact, but if you start off with Impact as the motivation, and follow logical processes, you might generate enough profit to attract investors.

    – Mitra
    (www.naturalinnovation.org)

    • hi mitra

      I’m in London on the way to India

      I very much agree with you. I think that much of the debate about social impact vs profit is misguided. If a business incorporates social impact into its basic mission, the next practical step is to focus entirely on profit, because that is what will accomplish scale. For example, the mission of Spring Health, the Indian company I have started, is to sell safe drinking water to $2 a day customers in small villages in eastern india. If we can do this at a price that is attractive to village customers, the social mission will be achieved. But the real challenge is to earn an attracive profit doing it, and that is what we are focussing onl

      Paul Polak

  11. Aniruddha Brahmachar (@AniruddhaBrahma) says:

    I don’t think profit is moral or immoral. It is critical to have profit for an operation/business to be successful even in donor supported program we talk of cost benefit. I think its the expansion of the definition of benefit- profits can be calculated. Without profits you don’t have sustainability in the true sense of the word.

    The critical question is what is quantum of profit so that its just and fair for the promoter of the operation and the recipient of the service/product. For that answer lies in the market….if its overpriced it will not sell ….and if not priced properly it will not be there in the market for along time,irrespective of the people’s need for the product/service.The size of market for product /service will determine a lot of things.

  12. Reading along in this incredible conversation
    Hardik Yogi inspired a thought; I’d like to see examples of this movement in action. Links to groups run by Anil Gupta, for example, posted in the twitter feed would be a great way to share ideas of this revolutionary model working, or not working, to end poverty.
    If you have a link you’d like to share with Paul Polak’s team. Please tweet us the link @outofpoverty.
    I’ll make sure to pass it on.
    Thanks,

  13. If you’re able to build a business up big enough, it’s respectable.
    Corporation: A nifty little device for obtaining profit without individual responsibility.

  14. I don’t think it’s immoral to make a profit by selling to poor customers, but it’s not necessarily the most responsible business model. In knowing that your primary income source is those that are not as fortunate, it would be nice to make the company profitable while giving back something to the community that creates your income. It may be idealistic, but it would be the best of all worlds and everyone still benefits.

  15. Hi Paul Sir,

    It was inspiring to read all the discussions. It cannot be denied that the People Who have made it to the top from the BOP is due to the fact that they had Some Knowledge which they Could barter with the system to create Wealth ..
    So one thing is definite.. For SPRING to work, The Impact must be HUGE, On a Large Scale , With a Proper Medium of MArketing across Villages(word of mouth), And it must Scale on a very very Rapid Basis.

    Only then I believe we could be Able to make an Impact And also make it look like a profitable venture with minimum amount of deviation in terms of Exploitation.!

  16. Wow, this is a great article that’s made me think. I’ve often struggled with the concept of how to take these 2.6b people out of their poverty. You make some good comments about microfinance – yes, it’s effective but it is on such a small scale. I hadn’t thought about that aspect of it before.

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    I personallydefinitely enjoyed it! Thanks for the post ,Felipa

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