The market creation approach to development combines two aim:
w supply useful and affordable products with a high poverty alleviation impact to poor people
w To create a viable business as a private delivery channel, run by poor people.

Other approaches in development co-operation, also deal with opening markets, but they are quite different. Trade and export promotion seeks to open up markets for existing products in new regions Transportation projects (roads and bridges) aim at stimulating trade and opening up markets - again for existing products - in new regions.

Conventional development program-mes aim at donor partnerships with government departments or NGOs (or a combination of both), with the objective to deliver goods or services to the poor. Very often, this delivery channel is subsidised: the "beneficiaries" may be asked to contribute, but it is often not possible to recover costs from the "target population".

Fortunately, marketing is no longer controversial among enterprise specialists. This has not always been so: in many classical fields of development (such as water supply, forestry, credit delivery), it is still a new dimension. A friend of mine, who is anything but dogmatic, expresses it this way: "most of us in the development field carry a life-long baggage of biases about profit being bad and traders being the villains of society". This heritage is averse to the creation of a private supply chain and requires a shift of mindset. The Indian government, for instance, had set up a state run delivery system for rural credit with targeted subsidised lending to reduce the power of the moneylender. Now, this has changed, and private delivery systems for micro-credit have been allowed - but still do not take savings. In this new delivery channel middlemen (or "middle women") are playing an important role in the form of "self-help groups".

Similarly in water supply, the traditional approach of treating water as a free good which the government has to deliver to everybody like a human right overshadows reality. Until recently, hand pumps have been centrally procured world-wide by an agency of UNICEF in Copenhagen. Many projects still delivers centrally procured handpumps directly to "beneficiaries", thus preventing private pump dealers to emerge - how can one still wonder why nobody is supplying spare parts.

Donors and governments view the growth of small enterprises as critical to coping with the challenges posed by rising unemployment. For at least two decades, therefore, donors have been supporting the provision of non-financial services, or ‘Business Development Services’ (BDS). These services include training and counselling, as well as services to improve access to appropriate technology, information and markets.

The market creation approach

The market creation approach to development observes BDS principles but goes beyond them. Whereas a BDS concept would let the "market" or micro-enterprises choose their products, the market creation approach emphasises specific products which have a high poverty alleviation impact.

One of the weaknesses of small enterprises is the lack of capacity to innovate and the technology dualism of micro-enterprises. The focus of the market creation approach to development is therefore on the following areas:

w Need-based product development, for products with a high impact on poverty alleviation, stress on affordability
   and good returns on investment

w Promotion and Marketing of these products so that the poor can learn about their existence

w Creation of a sustainable market to the extent that it becomes viable for the private sector,
   ideally micro-enterprises, to deliver these products as a business.

Marketing is the key strategy of this approach. It is thus quite logical to follow some basic principles, orientations and experiences from the world of marketing, especially the 4 P’s.

Price : the art of pricing - what price quality?

Pricing is an art and needs a lot of intuition.

For the poor, products are extremely inelastic on price, i.e. a relatively small price increase can have a considerable impact on the reduction of sales. This sensitivity to prices means that quality (connected to higher prices) is not a universal criteria for purchase by the poor. In the case of the treadle pump, farmers often prefer to buy cheaper pumps. Attempts to eliminate the cheap and low quality treadle pumps in Bangladesh have failed: over 50% of the pumps sold were in the lowest category of quality, lasting only 2 years.

In order to make the supply channel profitable, price differentiation is very important : A red micro-concrete tile can fetch 7 $, whereas a grey tile may only be sold at the break-even price of 4$. Increased quality and value addition raise prices considerably.

Place : The supply channel

Even professional marketers sometimes ask themselves why intermediaries are needed. An intermediary is a cost factor and needs a profit margin or a commission. However, sales through a local dealer or representative are often more effective and even more cost-effective than direct sales. A strong supply channel is one of the best assets a company can have, and investing in the loyalty of dealers is a very crucial task of marketing.

Quite often, a dealer provides additional services to the customer such as after sales service, stocking of spare parts, etc. Sometimes, dealers also provide credit to their customers because they know the people in the village.

Promotion: Creating awareness about the product

Promotion is more than advertising, it implies a two-way communication with customers. Rural customers, especially, need to see what they want to buy. They never buy anything which they have not seen in operation, or - even better - which their neighbour has not yet already bought. For this reason, demonstrations represent the most important tool for promotion. Promotion is however very difficult in rural areas: on the one hand, attending a farmers’ fair ("mela") may reach ten thousand farmers, on the other hand, geographical distance and low population density make it a costly affair.

Development co-operation can and should support good promotional efforts with mass media, films, posters, etc. It is difficult to sustain. Coca Cola is known to everybody, but if it were not continuously advertised, customers would forget Coca Cola and remember the brand of its competitors better.

Development co-operation should therefore, seek links to the corporate sector and tie up products to their supply channel: These companies may have a long-term interest in promotion if they can sell small amounts on a regular basis to new customers (like cement companies with roofing tiles, agro-input companies with micro-irrigation, etc).

Market creation and donor funding

There are several obstacles which make market development in favour of the poor a tricky and cumbersome task:

w The poor are not attractive customers in the short run: they turn their penny many times before  they spend it.

w Poor customers are very conservative. A market is created only after early adopters have tried a product and many followers have seen and tested it.

w Cultural and other barriers hamper the development of markets for innovative products. For example, it is not accepted that women would use bicycles or go to the market. Or, the absence of regular electricity supply is a constraint for marketing electric appliances.

w The urban bias of many marketing efforts. Marketing managers prefer to live in an environment which they know, where they can send their children to good schools, etc. There are strong biases towards "marketing to the affluent": One can find several best-sellers with this title, but I could not trace a single book about "marketing to the poor".

w  The poor cannot afford to buy big quantities. The most revolutionary marketing idea for rural markets is a tiny portion packaging, which allows selling small quantities for an affordable price. a rural retail shop will sell cigarettes by the piece, shampoo by the "sachet" and beer by the glass.

Why does the private sector not create the markets on their own?

Market creation is a typical task of marketing, and the corporate sector does it all the time. However, the small private sector does not invest in activities such as:

w research and product development;

w setting - up of marketing and supply channels

w large-scale promotion activities leading to the creation of a market

The reason is that the small private sector cannot recover these costs, because it is difficult to defend the exclusivity of the product.

The private sector will only step in, if the volume of goods sold allow a profitable supply chain. Initially, it is therefore justified to subsidise market development. Market development is even a good investment for development co-operation agencies, provided they do it correctly.

The problem of cost recovery is especially difficult if we talk about investment goods or durable goods, because they may be immediately copied by others. The market provides little protection against copying: patent protection is not effective and the brand protection may not be existent either. The conventional strategy against copying is to distinguish the product from others by branding, but also by applying high-tech features. In our cases, this is neither possible nor desirable. Success in development terms, comes from their being copied and from giving opportunities to small enterprises to produce and sell them.

A good example is the promotion of gas and/or electric stoves in Europe and America: both were heavily promoted by the gas and the electricity companies, not by the stove-makers. The gas company is interested in promotion of a gas stove, because once a household switches to gas, it will remain a customer for many years. Till today, the gas and electricity companies offer very good cooking classes in Switzerland, free of cost. A single household converting to either one of the fuels pays every month a tiny little fee back to the company for this training course. But how could one do this for the promotion of energy saving wood-stoves?

Phases of the product-cycle

In marketing theory it is well known that all products undergo four different phases:

w In the R&D phase sales are zero, and only prototypes are produced and tested. Feedback from test marketing feeds R&D efforts and many products need considerable adaptation.

wIn the introduction phase the product needs to be test marketed. Even a corporate sector
company makes losses in the R&D and introductory phases that last between 5 and 10 years. 

wThe losses incurred in this phase may not be recovered as it is difficult to achieve exclusivity like in a product developed by the corporate sector. The R&D costs may be borne by development agencies or donors. Some poverty alleviation is already taking place with every product sold.

wIn the maturation phase, the market takes off and demonstration effects lead to higher sales and higher profits; if the market pioneers can recover the introduction cost from the channel, more and more units join the channel; The poverty alleviation effect reaches its peak.

The channel development is linked to micro-enterprise promotion, and it is often worth including poor people with entrepreneurial spirit into the channel.

w In the saturation phase, the sales of the promoted product decline, profits too, and some units even withdraw. The withdrawal strategy should now define how to sustain the channel, by introducing new products or moving to new markets. The poverty alleviation effect remains at the same high level thanks to the cumulative adopters.

The time lag of a market creation approach can be extremely long, and sometimes, success occurs long after one has withdrawn. In Honduras, I met a hardware shop-owner who supplies chimneys for the "Lorena stove" in the Yoro region. Apparently, a market has been created for such chimneys, as they are sold by the thousands. How has this happened? I learnt that the "Lorena stoves" had been introduced by SDC’s "integrated rural development project" which closed 8 years ago. I then met a lady who had rebuilt a Lorena stove in her house, just two months ago, and she had learnt the technique in this project.

The big kick

In the initial phase, market creation may need a kick to bring it into a more dynamic gear. Without such a "kick", the channel may well remain "lethargic". Research on the new product diffusion process based on a study of consumer electronics retailers found that there are two types of retailers: scouts (innovators) and troops (followers). The classification is based on the extent to which one retailer influences others. Scouts are the first retailers to adopt a new product. They are likely to commit themselves to a new product, through a small order. On the other hand, troops purchase a product only when scouts experience satisfactory sales levels.

In the case of the treadle pump, the product received a "big kick" from the "Bangladesh Tobacco Company" in Rangpur, which sold the pump to their contract farmers on a loan basis and recovered the money though the purchase of tobacco. In the case of the latrines in Bangladesh, it was the "social mobilisation campaign" which led to the critical mass which is necessary for troops to join the market channel.

Impact and reach-out of the market creation approach

Market creation programmes can have a very high impact and reach-out to an impressive number of beneficiaries or - more precisely- clients. The ultimate success of a market creation approach is a new constellation in the market, which gives room for a viable supply channel for new products and thus creates both employment on the supply side and consumer satisfaction on the demand side – if the product really meets the needs of the people. 

One of the best examples of a market creation approach with a very large development impact is the AMUL experience in India: the setting up of milk co-operatives. "Operation Flood" started in 1970 and had the specific target to organise 10 million farmers in 30,000 villages and bring them into the supply channel for milk products which were marketed by AMUL throughout the country. The charismatic leader behind this landmark programme, Dr. V.Kurien, has pursued market creation with a lot of ingenuity, with the help of a conducive policy environment.

The marketing approach is also relatively cost-effective, since the delivery channel is private and profitable, it is sustainable and does not need direct support. The Village Forestry Programme in Bangladesh will perform better every year, provided there is no sudden demand saturation for trees occurring. Each of the 6 projects has a reachout of at least one million people; one million dollars from donors can generate an output of up to 100 million dollars per year.

The above table shows - in a condensed form - the key performance indicators : the input in terms of donor funds, the output in terms of economic performance at the level of the "client" (beneficiary), and the reachout, the number of beneficiaries.

Reasons to scale up and bring the approach into the mainstream  

The above examples are still marginal projects or programmes, they are not as well known to the development community as the "Grameen Bank", despite the fact that they have somehow a comparable impact. The Grameen Bank has 2 million customers, and has received over 100 million dollars donor input, each of these projects has an impact on a constituency of roughly one million "beneficiaries" or more, whereas the investment into these projects has been much lower, to the tune of 7-12 million dollars. 

Efficiency: very high returns on donor money

The ratio between input and output is very good in all the examples. The reason for this high efficiency is that the donor has only to invest in the creation of a space for the private sector to operate. The delivery channel works on its own initiative, once it is profitable.

Small and micro-enterprises are very cost-effective for all "local" tasks in the delivery channel, such as manufacturing, selling and installing simple goods. As long as the supply channel makes profit - even modest profit-the activity can go on, after withdrawal of donor support as well.

Effectiveness : Can some products make difference to the poor?

Useful products for the poor can change their lives. Poor rural women, especially, have not even been considered to be consumers: whereas, for the work of men a lot of technologies have been introduced, such as tractors, ox-carts, bicycles, scooters, diesel pumps, women still carry buckets, walk on their own feet, use sickles and other hand-tools which have very low productivity. With the introduction of least-cost drip irrigation in the form of "bucket Kits" in India, women can grow vegetables worth 3,000 Rupees out of an investment of less than 1,000 rupees. Nirmala, a woman from Indore (see photo) and her neighbour, Sampat Bai, have told me that "the drum kit has changed their lives!."

An impact study on the treadle pump in Bangladesh, Nepal and India clearly shows that the owners of a treadle pump make at least 100 $ net income per year, and 20% of the farmers make 500-600$ per year. There are concrete examples of families who, thanks to the use of a treadle pump, have been able to "pedal out of poverty", and thus could offer a better education to their children and experience other forms of social development. 

Market creation approach and poverty alleviation

The key condition in a market creation approach, aimed ultimately at reducing poverty, is to have a market. The early adopters are not the poorest, but the village elite, the rich consumers, the rural middle-class, etc. The treadle pump story has confirmed this: it has a very sufficient and large scale poverty alleviation impact, although the first buyers are not the poor.

Many mistakes have been made by targeting "useful" products too closely to the poor alone: so many roofing tile workshops have been supported by NGOs in areas where there are simply not enough roofs to be built. It may also happen that the products get an attribute of being a "product for the poor" which is often translated then as a "poor product" that nobody wants to buy, and certainly not the poor.

Sustainability and promotion: Partnerships with the corporate sector

Sustained promotion for a development agency or for small enterprises is not possible. Co-operation with the corporate sector seems to be an important aspect. Such models of cooperation should be based on synergies and should provide a win-win situation: it should be more cost-effective to use an existing marketing channel (for instance agro-input dealers or cement distributors) rather than building up a separate channel. For the corporate sector, such a co-operation should bring a long-term benefit such as more loyalities from the dealers, a better marketing mix and new clients to the company. A corporate sector company can develop new markets: for instance the small and marginal farmers, self-constructors in the low-cost housing market. On its own, the company would not have naturally targetted these markets nor would it have had the knowledge - or sometimes the vision - to develop them.

Such partnerships are a new field for development co-operation as well as for the corporate sector. The World Bank is emphasising such public-private partnerships as a new form of development.

It seems very interesting and promising to involve the corporate sector and to seek new synergies through their presence on the market. Three reasons are:

w the high frustration connected to "state-driven" delivery approaches and the failure to eradicate    
   poverty through public sector programmes.

w the growing scarcity of available public funds, and

w the need for the corporate sector- in its own long-term interest - to contribute
   actively to large scale poverty eradication.

The market creation approach to development - as I see it - is a method to use a profitable delivery channel - preferably run by micro-enterprises - to supply large quantities of products which have a high poverty alleviation impact or ecological advantages, or both together. It is justified to look at the market creation approach to development as a mainstream development approach and bring the method and its effects to the notice of a broader public. q

Dr. Urs Heierli, the author, has been coordinator of 
SDC in Bangladesh and India from 1987-1999 
and is now at the SDC head-office in Berne, Switzerland. 
This article is summarised from his study conducted 
during a sabbatical period between his two postings. 
Email:urs.heierli@deza.admin.ch