Common sense dictates that if you want to have a successful business, you should sell to customers who can afford to pay you. Typically, the more money customers have, the greater their ability to pay for goods and services. But a number of companies have taken that conventional wisdom and turned it on its head. Selling to the poor may be the greatest untapped business opportunity to date.
Who Exactly is "Poor"?
Poor is a relative term that varies greatly from country to country, even from city to city. The U.S. government defines it through the poverty threshold, which is the level of income needed to pay for basic goods and services like food and shelter. That threshold is currently $23,550 in annual income for a family of four and $11,490 in annual income for a single person. Living on that income might be challenging, but more than 40 million people are doing so.
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Meanwhile, half of U.S. households earn less than the median income, which is $51,404 per year. For anyone who lives in a large or medium-sized city and has to pay a mortgage, taxes, tuition and health insurance, it’s often hard to make ends meet.
Need = Opportunity
To some business owners, this presents a tremendous opportunity. If half the country is having a difficult time making ends meet, it’s a massive multitrillion-dollar opportunity to offer products and services that cater to them.
To access many sectors of our economy, you need to have good credit, a solid income history, money in the bank and limited exposure to large risks. This excludes nearly 70 million families. Individually, they may have limited purchasing power, but in aggregate it’s impressive. While each individual buyer may present a risk of non-payment, properly calculating your risks and taking them into account when you develop your pricing and payment strategies can compensate for those risks.
Businesses Profiting from the Poor
So which small businesses are already taking advantage of this opportunity? Let’s take a closer look at two.
RentNRoll rents tires for your car. This company offers customers the ability to rent tires over a period of time ranging from 26 to 78 weeks, at which point they own what they bought. The model allows for buyers to make affordable payments on a basic need—tires—while the company maintains the underlying collateral and makes a healthy profit margin. Why are people renting tires? Tire prices have skyrocketed nearly 60 percent since 2006, due to factors including recent import tariffs levied on tires from China. This has made the most basic driving necessity too expensive for many. RentNRoll also offers free installation, flat repair and other tire-related maintenance.
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Rent-A-Center is the leader in the “rent-to-own” industry. The company was founded in Kansas in the early 1970s and has grown to over 3,000 locations across the U.S., Canada and Mexico, generating more than $2.8 billion in revenues last year. The company rents furniture, electronics and appliances to consumers, charging them weekly, until the items are paid for, or until the rental is terminated. The company, which rents everything from flat screen televisions to an apartment’s worth of furniture, has been accused of gouging its customers, who can pay up to 300 percent of the retail price of an item in rent over time. Critics contend that the company is really offering customer financing at exorbitant rates instead of being a true “rent-to-own” business. But this is a critique of the overall business model, which is perfectly legal.
This concept, when expanded internationally, represents an immense opportunity. There are over 5 billion poor people in the world. Seven years ago, C. K. Prahalad wrote Fortune at the Bottom of the Pyramid: Eradicating Poverty Through Profits, which shows how this market can benefit from products and services tailored to their economic reality. A simple concept—selling individually packaged servings of everything from soap to snacks—makes products affordable to poor buyers and creates profit opportunities for sellers.
Is this idea of selling to the poor good business or exploitation? Some critics contend that many of the goods and services targeted at poor buyers are “bad buys” with high per unit costs and do little to help poor consumers build a credit record or save money. While it’s true that some businesses, like payday loans, are generally considered exploitative, it doesn't mean every business that caters to this group is. What do you think?
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