When you’re commercializing a clean energy technology, the received wisdom is that you start by finding the largest viable market segment, the one that has both the need for your product and the ability to pay for it. It’s a tried and true method that’s been followed by the biofuels, solar and electric vehicle industries in recent years. Listed biofuel manufacturer Solazyme partially attributes its success to its strategy of targeting high-margin niche beauty and nutrition markets while it works on its algae-based process for commodity fuels markets. Similarly, electric vehicles may be hitting the mainstream with the introduction of the Nissan Leaf, but its $35,200 sticker price is above that of an entry level BMW 3 series. Eventually – the argument goes – the cost of production falls to the price at which the mass market can afford the product; it’s a strategy that’s worked a little too well for solar panel manufacturers as panel prices are forecast to be half of their 2009 levels by 2013.
Despite the myriad buzzwords that accompany clean energy development, it’s pretty rare to hear talk of ‘base of the pyramid’ markets. It’s a term that was popularized by academics CK Prahalad and Stuart Hart in the late 90s to describe the 4 million impoverished around the world. At a time when many were frustrated by the failure of international aid to significantly raise living standards in the poorest countries, Prahalad and Hart proposed that the world’s poor should instead be viewed as potential consumers of products designed specifically to meet their needs. The ‘base of the pyramid’ is typically underserved, and must pay substantial premiums for products that are all too often inferior or inadequate to their requirements; there was consequently a large potential to meet their needs. The concept was so successful that an entire industry grew up around it. Suddenly, every smart entrepreneur with a new water pump, generator or mobile phone idea was making a beeline for Africa.
More than a decade on, Hart addressed an audience of investors and entrepreneurs at the annual Cleantech Summit last week. He lamented the bifurcated world that he now sees in entrepreneurialism; developed world entrepreneurs attack the clean energy challenge by focusing on ‘top of the pyramid’ markets first, while their emerging market brethren focus on cheap over sustainable products. At the same time, clean energy entrepreneurs are struggling to introduce disruptive technologies in the face of incumbent markets. He argued that ‘green giant’ strategies work well for incumbents working on grid scale projects, such as solar and wind farms, who are able to assemble the policy changes, public investments and large scale deployment strategies required to erect such large scale projects. On the other end of the scale, ‘green sprout’ companies have a tougher challenge as these startups have disruptive technologies but must face much larger competitors from their first day in business. In other words, clean energy technologies and base of the pyramid businesses have developed independent of one another.
Hart’s solution is that clean energy entrepreneurs instead partner with ‘base of the pyramid’ communities to develop and road test their products. The communities receive products designed specifically for them, and the entrepreneur develops a sustainable business out of sight of incumbent competitors and can always add incremental features to accommodate more affluent markets if needs be. It’s always easier to scale up a cheap solution with incremental features than it is to scale down an expensive one. He calls this approach ‘green leap’, and suggests that we prioritize numerous small market experiments (‘fail small, learn big’) in underserved populations over incremental technology development. In this regard, Hart is right in line with the current commercialization trend of testing the market early and often.
Hart’s focus is mostly on emerging markets, but his approach is relevant to the ‘base of the pyramid’ in the US as well; the US poverty rate is just under 14% in urban areas, 11% in rural ones and this is a market that is rarely targeted for new products. America’s post-industrial cities are dotted with vacant brownfield sites, many of which would be ideal sites for pilot and manufacturing plants. As Hart concludes in his new book: “we have to learn a new approach to innovation: an approach based on humility and partnership.”