Selling to the poor and why businesses fail

Written by Kelly the intern

Is it exploitative or unethical to profit from selling to the poor? — John L., Moncton, N.B.

Although it might sound counter intuitive to some, the world’s poor indeed represent a massive market and a huge opportunity for small and large companies alike. According to The Next Four Billion, a massive study produced jointly by the World Resources Institute and International Finance Corp. in 2007, the four billion people who live on less than US$3,000 a year in local purchasing power constitute a US$5-trillion market.

But would it be ethical to make a profit from them? I asked the thought leader in this area, C.K. Prahalad, a University of Michigan strategy guru and author of The Fortune at the Bottom of the Pyramid. You’ll be happy to hear that he says it’s absolutely ethical. In fact, he strongly believes that it’s elitist and condescending to believe that poor people aren’t smart enough to choose what they want to buy and what they don’t. They should have the freedom and choice to make purchasing decisions for themselves, just as we do. As Prahalad puts it: “Those who argue that consumerism is not good for the poor wouldn’t want to live without shampoo themselves.”

For a Canadian perspective, I called up a couple of Canuck business ethicists, and both basically agree with Prahalad. They said selling to the poor is perfectly acceptable — as long as you follow a few basic principles. For example, don’t try to sell them minimally useful items. As one professor of business ethics told me: “Marketing anti-malarial pills to the poor is ethically safe; marketing Viagra to people who are having trouble making ends meet is suspect.” Both ethicists also warned that although North Americans are pretty much immune to hard-sell, over-the-top advertisements — such as the ones that claim that drinking Cola X will have you dating supermodels, or that driving a certain SUV will allow you to climb mountains — people in developing nations may be more suceptible due to their lack of education and exposure to this type of marketing. Ultimately, if you’re selling a useful product and you make no false or grandiose claims in your marketing messages, then you’re probably on the good end of the ethical spectrum.

The stats show that something like two-thirds of small businesses don’t make it to their fifth anniversary. Do they fail for a variety of reasons, or is there a common thread? — Aaron W., Kamloops, B.C.

From Statistics Canada to Dun & Bradstreet, plenty of organizations track and analyze business failure in Canada. What I found was this: there really is a variety of reasons for small-business failure. But perhaps the single biggest factor is managerial inexperience or incompetence. An example of this is when a business fails due to excessive expenses or undercapitalization. It’s basically Business 101: don’t spend more than you need to, and be sure you have enough cash to meet projected needs as well as contingencies. Other common failure-inducing goofs include mismanaging receivables, such as allowing too liberal credit and being careless with collections; acquiring excessive fixed assets (you’ve barely made any sales; do you really need that Aeron chair?); and building too much inventory, especially due to overly optimistic sales projections. Avoid all these mistakes, and you’ll be more likely one day to blow out five candles on your company’s birthday cake.

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