Optimal Pricing and Advertising Policies for Bottom of Pyramid Markets: An Analytical Approach
We propose a model for developing optimal decisions and normative policies for pricing and advertising of products/services to markets at the 'bottom of pyramid (BOP).' This concept has been popularized in the recent times by Prahalad (2006). Our model considers two types of market segments. The first type is the bottom of pyramid market, which is large in size, but has limited ability to pay. The second type of the market is smaller in size, but can pay higher prices. The product/service offered to the two markets is differentiated in such a way that the base product (of appropriate quality) is available to the BOP market, while the premium product at a higher price is available to the higher-end market. The two markets are linked to each other such that there is a positive effect of customer base in the BOP market on the diffusion of product in the premium market. Successful practices of such kind of models have been reported in widely documented healthcare case studies such as Aravind Eye Care (Rangan 1993). The product diffusion in the two markets is modeled using a pure innovation model by Fourt and Woodlock (1960). Using optimal control methodology, we derive pricing and advertising policies for two types of organizations - for-profit organization (FPO) and non-profit organization (NPO). Thus, our analytical research design follows a 2x 2 x 2 x 2 (markets - BOP vs. Premium, strategies - pricing and advertising, organizations - FPO vs. NPO, and modeling - static vs. dynamic) design.