Untapped’s five-point strategic management framework draws concise lessons from businesses that have successfully invested in underserved markets. It offers managers the practical knowledge they need to navigate the challenging—and rewarding—terrain of serving the underserved.
1. Mine local market information
2. When realities don’t fit your business model, try a new model
3. Prepare to cope with cultural challenges
As of 2005, the 100 fastest-growing companies located in inner-city underserved markets in the United States recorded an average five-year growth rate of 716 percent. Retail spending in America’s inner cities totaled $85 billion, which is 7 percent of all U.S. retail spending and larger than the formal retail market in Mexico.
By 2009, it is estimated that ethnic minorities in the United States will have purchasing power that exceeds $1.5 trillion. For African Americans alone, aggregate buying power already exceeds the entire Canadian economy.
Abroad, the numbers are equally startling:
In the United States, barriers to entry into underserved markets are diminishing rapidly, with crime and inner-city deficits down. Inner-cities’ competitive advantages such as their central location, proximity to transportation, and the availability of labor will become even more pronounced in the coming decade. Outside the United States, more liberal trade statutes and increased foreign direct investment have begun to erode barriers to prosperity.
Still, investors must be careful as they approach underserved markets. They must keep in mind:
Low-income consumer behavior often cannot be predicted using models for middle-income consumers.
Studies show, for example, that consumers in underserved areas often spend up to 30 percent more than their earned income.
How can this be? One answer lies in the idea of a cash economy, otherwise known as an informal economy. Some of the income earned in underserved areas never gets reported to the government. Aside from cash payments from employers, undocumented income may include gifts, transfer payments, and remittances. Much of this income is not subject to tax, and therefore does not have to be reported on income tax returns.
To get a better estimate of total expenditures in a community, companies need to go beyond the standard sources of data. Better measures for determining market size, buying power, market stability, and growth potential in underserved areas include:
The underserved workforce often has different needs and requirements from those of the standard middle-class workforce.
Such needs include child care, transportation, and flexible schedules. When investors keep these ideas in mind—for both consumers and potential employees in underserved areas—they take the first step toward tapping an extraordinary market.
