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, their profitable distribution is often difficult because BOP customers are risk-averse, their ability to pay (ATP) is lower than their willingness to pay, and they face uncertainty regarding these products’ value. Academic/practical relevance: We examine two practical strategies from 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, 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 and commits to a maximum retail price. We confirm the robustness of our results through numerical simulations. Managerial 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, reduce this misalignment and can serve as a signal to investors of a social enterprise’s focus on consumer surplus.