Wharton marketing professor Jagmohan Singh Raju is an expert on pricing strategy. As a consultant to leading companies around the world, he has considerable expertise in the way multinationals formulate strategy and attempt to enter new markets. In this interview with India Knowledge@Wharton, he spoke about the necessary ingredients of success in this growing market.
An edited transcript of the conversation appears below.
India Knowledge@Wharton: Which multinationals have been most successful in rural India and why?
Jagmohan Singh Raju: We have several recent examples [including] LG, Nokia.... But to look at it from a historical perspective, the ones that have been really successful for many, many years have been companies like Colgate and Philips. These companies invested right from the beginning in rural India, saw the value of the market, developed products that were useful for the rural market, went into the rural markets with their distribution systems, and were very successful. In fact, the rural market always provided them with a nice buffer they could bank on. A significant part of their sales came from the rural market.
These companies have been in rural markets for more than 50 years now. It's becoming more fashionable to talk about it these days, but these people have been doing it for years. I know you are talking about MNCs, but I would consider some Indian companies to be also MNCs who have done very well in the rural market. They are MNCs in their own right.
India Knowledge@Wharton: For example?
Raju: For example, a company like Hero Honda has more than 50% share of the motorcycle market in India. Nearly 40% of their sales come from the rural market. And then you have Godrej which has historically been very strong in rural markets. And, of course, we don't think of ITC as a multinational today. But at one point in time it was a multinational. It's now an Indian company. But it has a very strong presence in rural markets and has done wonders there.
India Knowledge@Wharton: What about the flip side of the equation -- multinationals that have tried to enter the rural market but have failed? Any examples of that sort?
Raju: I won't say failed, but I think they had sort of weak starts -- let me word it that way -- and some of them then probably decided not to pursue that any further. I think Kellogg had a weak start in the rural market. P&G (Procter & Gamble) never really went into the rural markets. This may be hard to accept, but many of the U.S. multinationals -- other than Colgate -- have not done as well in rural markets in India. Most of the successful examples come from the European multinationals. So you're looking at the old ITC, the old Unilever.... Philips, another European multinational, was very successful.
India Knowledge@Wharton: Are there reasons why Colgate did well? And what were some of the reasons why other U.S. multinationals didn't do well? What can we learn from their experience?
Raju: The first lesson is that the rural market requires investment. It is not a dumping ground for things that you cannot sell elsewhere. If you think of this as, 'I have some products; let me take them to the rural market. This is a marginal market; I'll take advantage of it,' such thinking does not work. I think the classic principles of marketing apply just as well there. Try to make what you can sell there, rather than just sell what you already make.
I think another mistake MNCs make is to equate price consciousness and value consciousness. This is a very important distinction. The rural market is not price-conscious, it's value-conscious. The reason it's more value conscious is because spending a dollar for them pinches a lot more than spending a dollar for somebody who earns hundreds of thousands of dollars. In some sense they can't afford to go wrong in whatever they buy. That's an important thing to keep in mind.
The other thing to keep in mind is that the frequency of use in rural India may be a lot lower than the frequency of use for the same product in urban markets. For some of them it may be occasional-use products as opposed to regular-use products. I think another factor that people miss is that the rural consumer is buying many things for emotional value. If you are very rich you show your wealth by giving [money] away to good causes. If you're not, if you are rural poor, you show that you care for your family by buying a branded soap. So there is an emotional value attached to brands that I think MNCs should recognize and take advantage of.
India Knowledge@Wharton: Could you give any examples of the way in which companies like Colgate have analyzed and understood consumers in rural India to build their success?
Raju: The first thing you have to do is actually observe these customers, rather than read statistics and notes from either some UN organization or a consulting company. See what their problems are. See what their challenges are. How do they use their products? How do they work? What are their daily issues? How can you tailor your products to meet their needs? For example, let's consider soap. Urban consumers might have one soap [cake] for bathing and one for something else. But in the rural market, if you're going to buy one soap, you probably want a multi-purpose soap. That multi-purpose soap will be used for bathing, for bathing children as well as adults. You must also recognize that the environment may not be as clean, so it should have some properties that satisfy those needs. So you have a single multi-purpose soap, but it's one soap. And you recognize that there's no place to keep multiple soaps. It has to be one. You build to that need.
You recognize that people carry a cell phone and use it at night when there's no power. Maybe there has to be a flashlight with the phone. So you are observing people's behavior. You see what they want, what they don't want, and then do it better. I think that helps. I would urge all companies to actually visit and see what people do, how they lead their lives and what their challenges are.
India Knowledge@Wharton: How do you suggest multinationals identify new business opportunities in rural India?
Raju: I think what I said would help. Observe -- but also recognize that not all rural people are the same. There are very rich people in rural areas who live the same lives as people in New York. But there are also very poor people. There's more heterogeneity. But also recognize that to understand the consumer, rural is not really where you live. It's more of a mindset and a way of thinking. It's the way of approaching problems. Many have argued that there are as many rural people in cities as there are in rural areas.
India Knowledge@Wharton: What's the difference between the urban and the rural mindset?
Raju: Well, I think a rural mindset would be one that is a little more appreciative as well as fearful of nature. A lot of rural life in India still depends on rain. So you respect it as well as fear it. You love water but you fear it too, because there are floods. There is a more spirituality in rural India. There's a little bit more concern for family. The fraction spent on education is very high.... If we recognize that, there will be similar people in urban areas too. And some urban mindsets exist in rural India.
India Knowledge@Wharton: Obviously not recognizing this distinction would be a major barrier for multinationals trying to enter rural India. What you would say are some of the principal barriers that multinationals should expect to face? How can they overcome them?
Raju: The first barrier is appropriate product design. We should be willing to design products to meet people's needs. If you don't do that, I don't think it's going to work.
The second thing you have to recognize is the distribution system. The distribution systems in rural India are different than those that exist in urban India. Rural distribution outlets are smaller. That's good news as well as bad news. The bad news is they won't carry too many things. But the good news is if you succeed, you will be the one they'll carry.
As marketing professionals, we always study the relationship between market share and distribution share. If you look at the large outlets in the Westernized world, your distribution share is pretty much proportionate to your market share. So, if you have 50% of the market, the person gives you 50% shelf space. If you have 20% share you get 20%. If you get one more than 20% you pay for it. In rural areas, the person who has the highest market share gets 100% distribution share.
Think of a person who's traveling on a bicycle, going to a village, carrying soap to sell. He's going to carry one brand of soap. And which is the one he's going to carry? He's going to carry the one that is the most popular brand. Once you capture that, it's yours. So there is a clear barrier to entry. So you invest in your brand, try to build market share -- or popularity -- so that they carry your brand. So that's the second [barrier].
The third is frequency of use. You have to recognize that frequency of use may vary quite a bit across urban and rural areas. Some products that are regularly used in urban areas are infrequently used in rural areas. One strategy that some companies have adopted is to go for smaller sizes. Another strategy is to try to increase frequency of use. Try to make one product the product of choice. And there are other issues also. For example, because of location, because of distances, it's not just making a cheaper product. It's also recognizing that products may have to have different capabilities. If I am making a television for rural areas, it's not just sufficient to say I'll have the cheapest television. It's also important to recognize that the signal strength may be weaker in the rural areas. So I have to provide certain unique benefits. These may be totally irrelevant in cities. When you connect a cable to a TV, the signal strength is determined by the wire. If you are in a far away location it's mostly through the air. You need to recognize that.
India Knowledge@Wharton: This goes back to the point you made earlier about designing your products specifically for the rural Indian market.
Raju: This is a principle that is not just true for rural India. But I think it's often forgotten. What is remembered is that these people can't pay enough, so let's just give them cheap products. In fact, this is a part of the mindset. If a person who's value-conscious is given the cheapest product that says: Look, this is just for you, they will not buy that. In some sense it's a show of disrespect.
India Knowledge@Wharton: To your mind, which company has been most successful in designing products for the rural Indian market? What's the most striking example that comes to your mind?
Raju: I think Unilever would probably be at the forefront of the multinationals. It has been there a long time.
India Knowledge@Wharton: What was their strategy?
Raju: Take, for example, soap. They have a simple carbolic soap that works across many applications -- bathing, washing... They realized that. I think it did well. This is a good example of a company recognizing that need. [It is also a good example] of a company recognizing that to sell you also need to create buying power. So, if you want to sell your products among people, why don't we create some incomes there? Create jobs for women. Bring them into the distribution system. It increases the family income and it increases their purchasing power. I think that you grow with them, rather than you grow at their expense.
I think people respect that. And that's a better long-term strategy -- be a part of the milieu as opposed to trying to extract consumer surplus as quickly as you can and then get out. That's not a viable long-term strategy in that market.
India Knowledge@Wharton: I am sure people would say that's not viable in almost any market.
Raju: That's true. But in rural India you should create wealth as you try to absorb wealth. It has to happen simultaneously. Companies that have become a part of the society have done better. Unilever is a good example of that, where they've integrated themselves well into the system and have gained from it. More recently, LG is doing a good job with their phones in India. They have taken great care to develop phones that are suitable for the rural market, inexpensive and with certain characteristics that are needed there.
India Knowledge@Wharton: Any final words of advice for CEOs of multinationals that want to enter rural India?
Raju: I would say two things. Distinguish between value-consciousness and price-consciousness. It's important to remember that consumers in rural areas care about value more than price. Second, grow with them rather than grow at their expense. I think if you keep these two things in mind, you'll be better off.