Wharton, University of Pennsylvania

MANAGEMENT

Whartons Jagmohan Singh Raju:

Consumers in Rural Areas Care for Value
More Than Price
May 06, 2010 Asia-Paci c, Europe, India, North America Strategic Management

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 bu er they could bank on. A signi cant part of their sales came from the rural
market.
These companies have been in rural markets for more than 50 years now. Its 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 dont
think of ITC as a multinational today. But at one point in time it was a multinational. Its
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 ip side of the equation multinationals

that have tried to enter the rural market but have failed? Any examples of that sort?

Raju: I wont 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 youre 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 didnt do well? What can we learn from their
experience?

Raju: The rst 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; Ill 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, its value-conscious. The reason its 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 cant a ord to go wrong in whatever
they buy. Thats 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
youre 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 rst 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, lets consider soap. Urban consumers might have one soap [cake] for
bathing and one for something else. But in the rural market, if youre 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 its one soap. And you recognize that
theres 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 theres no power.
Maybe there has to be a ashlight with the phone. So you are observing peoples behavior.
You see what they want, what they dont 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. Theres more heterogeneity. But also
recognize that to understand the consumer, rural is not really where you live. Its more
of a mindset and a way of thinking. Its 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: Whats the di erence 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 oods. There is a more
spirituality in rural India. Theres 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 rst barrier is appropriate product design. We should be willing to design
products to meet peoples needs. If you dont do that, I dont think its going to work.

The second thing you have to recognize is the distribution system. The distribution
systems in rural India are di erent than those that exist in urban India. Rural distribution
outlets are smaller. Thats good news as well as bad news. The bad news is they wont
carry too many things. But the good news is if you succeed, you will be the one theyll
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 whos traveling on a bicycle, going to a village, carrying soap to sell.
Hes going to carry one brand of soap. And which is the one hes going to carry? Hes going
to carry the one that is the most popular brand. Once you capture that, its 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 thats 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, its not just making a cheaper product. Its also recognizing
that products may have to have di erent capabilities. If I am making a television for rural
areas, its not just su cient to say Ill have the cheapest television. Its also important to
recognize that the signal strength may be weaker in the rural areas. So I have to provide
certain unique bene ts. 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 its
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 speci cally for the rural Indian market.

Raju: This is a principle that is not just true for rural India. But I think its often forgotten.
What is remembered is that these people cant pay enough, so lets just give them cheap
products. In fact, this is a part of the mindset. If a person whos value-conscious is given
the cheapest product that says: Look, this is just for you, they will not buy that. In some
sense its a show of disrespect.

India Knowledge@Wharton: To your mind, which company has been most successful in
designing products for the rural Indian market? Whats 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 dont 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 thats 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. Thats not a viable long-term strategy in that market.

India Knowledge@Wharton: I am sure people would say thats not viable in almost any
market.

Raju: Thats 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 theyve 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 nal 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. Its 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, youll be better o .

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