Research finds 'poverty premium' on important products in developing countries

NRC

Unilever and other food producers are trying to do their part by offering extra small packages in developing countries. This would make important products affordable to poorer consumers. However, new research by Ajay Bhaskarabhatla, Associate Professor in the Department of Applied Economics at Erasmus School of Economics, questions this policy. He finds that companies are charging a significantly higher kilogram price for small disposable packages.

'Poverty premium'

Bhaskarabhatla focuses in his research on sales figures of detergents in three African countries. Disposable packaging companies are found to charge a significantly higher kilo price for their packages of up to 50 grams than for larger packages of the same product intended for the middle class. The difference is 25% on average. Economists also refer to this as the 'poverty premium'.

According to Bhaskarabhatla, this price difference is incomparable with the advantage that Western consumers enjoy when they buy a larger pack. 'Mini packs like those available in emerging markets do not exist here. Figures show that the smallest packs are proportionally the most expensive in African markets, and that with larger sizes, the price per kilo hardly fluctuates, whether you buy a pack of 100 grams or 2 kilos.'

Interesting market

The economic underclass constitutes an interesting market for companies, because in many countries they number in the tens of millions. In Ghana and Côte d'Ivoire they account for about 20% of detergent purchases, and in Cameroon as much as 70%. The sale of mini-packs also has the advantage of largely eliminating the informal sector. Market traders used to buy large packs of detergent or other products, which they divided into many small bags and resold at a premium. 'Multinationals saw that as a risk to the quality and reputation of their product,' Bhaskarabhatla explains. 'They now do it themselves, while retaining this premium, which eliminated the need for the intermediary trade.'

Between 5 and 25% additional income

According to Bhaskarabhatla, poverty premiums provide a company with 5 to 25% additional revenue. According to Unilever, the prices of their products depend on several factors, such as ingredients, packaging, innovation and distribution. Unilever refuses to provide specific details on costs. According to Bhaskarabhatla, it is unlikely that any of the factors mentioned would lead to a higher cost for mini quantities of the same product. Packaging costs would be the most obvious, but according to the researcher, mini-packs are usually made of cheaper plastic than larger bottles or packs.

More information

The full article from NRC, 17 March 2021, can be downloaded above (in Dutch).