Poverty Premium Research (Harvard Business Review)

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Multinationals that failed to take these realities into account saw their best-laid business plans go bust. P&G’s PUR sachets were envisioned as a low-priced competitor to bottled water; in reality, though, poor households are used to boiling their tap water or drinking it untreated. Grameen Danone’s real competition among rural populations wasn’t expensive store-bought yogurt—it was homemade yogurt that consumers produced for a fraction of the cost.

In places where poor consumers benefit from lower prices, they often incur other costs. For example, the informal economy fails to ensure safe working conditions and reasonable wages, product quality controls, or taxes for the state. The brunt of these externalities is borne by the poor, as workers, consumers, and beneficiaries of government funds. Such places may have a “poverty premium” that multinationals could help eliminate, but that premium does not take the form of higher prices.

The Problem with the “Poverty Premium,” Harvard Business Review, Ethan Kay and Woody Lewenstein, April 2013

Ethan Kay gave a Ted Talk about creating cookstoves for poverty survivors.

Poverty Premium Research (University of Michigan and UC Davis)

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“Because they have to buy small quantities, they have little inventory at home and can’t wait until a sale presents itself to purchase again, making it even harder to take advantage of sales,” says Orhun, professor for marketing. “It’s a double whammy.”

“It’s not about poor people making poor decisions; it’s about them facing liquidity constraints,” she says, “and it matters even for what we’d consider small purchases.

Frugality is Hard to Afford, news release about research completed by Professor Yesim Orhun and PhD student Mike Palazzolo; 02/24/2016

Frugality is Hard to Afford, Working Paper (Revising for invited resubmission at Journal of Marketing Research), Mar 20, 2016, Mike Palazzolo – Paper available for download

Perhaps this sounds like a subtle discovery about minor household goods. But it supports a larger point about poverty: It’s expensive to be poor. Or, to state the same from another angle: Having more money gives people the luxury of paying less for things.

Why the poor pay more for toilet paper — and just about everything else by Emily Badger, Washington Post, 3/8/2016

In a recent working paper, the University of Michigan’s A. Yesim Orhun and Mike Palazzolo, point to how two of American shoppers’ (and marketers’) favorite money-saving strategies, the limited-time offer and buying in bulk, come with savings that are more accessible to some consumers than others. Choosing to buy things when they’re on sale or packaged in huge quantities is something lots of shoppers may take for granted as a matter of preference, but for many, these purchases—and the savings that come with them—are out of reach.

The Privilege of Buying 36 Rolls of Toilet Paper at Once, The Atlantic, Joe Pinsker, MAY 12, 2016

Limited access to supermarkets and discount stores, which contributes to the idea that poor people end up paying more for things or the “poverty penalty,” is one of the biggest problems facing low-income neighborhoods.

But the study suggests that low-income families can’t always afford bulk or sale items in the stores that they do have access to.

Why poor families are paying more for everyday items like toilet paper by Ahiza Garcia, CNN Money, March 25 2016.

Poverty Premium Research (University of Bristol)

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For the purposes of this report, we can understand the poverty premium to occur for one or more of three key reasons:

  • Additional costs directly resulting from having a low income, for example because this reduces the flexibility of payment methods;

  • Additional costs associated with a low income even though not directly resulting from it, for example the additional chance that someone on low-income lives in a high-crime area where insurance premiums are high; and

  • Additional costs that can be experienced by people across income groups, but are more likely to be experienced by lower-income households, such as not “shopping around” for utility tariffs, and which place a disproportionately high burden on low-income households’ resources.

The Poverty Premium – When low-income households pay more for essential goods and services by Sara Davies, Andrea Finney and Yvette Hartfree; University of Bristol, School of Geographical Sciences , November 2016

Notes from the Introduction:

The notion of the poverty premium was first conceived by American sociologist David Caplovitz in 1963. The term is used to describe how poor people pay more for essential goods and services compared to those not in poverty. In the UK the poverty premium has been highlighted as an important social policy concern by charities and organisations working with low-income families. In 2010 Save the Children illustrated the nominal cost of the poverty premium at £1,300 per year and showed how those on low-incomes paid more for fuel, telecommunications, insurance, accessing cash and accessing credit.

This study makes a significant contribution to moving forward our knowledge of the poverty premium in the UK. It takes a fresh look at understanding why the poverty premium arises and analyses new consumer data to show how the poverty premium is actually experienced.