(FORTUNE Magazine) – THERE IS AN INVISIBLE market waiting at the bottom of the world economic pyramid--a market of five billion people who live on less than $2 a day. They are invisible to most large companies because few executives can conceive of a market among people that poor. Businesspeople think that the poor cannot afford their products and services, and also assume, naively, that the poor have no use for advanced and emerging technology.

In fact, selling to the poor is a uniquely powerful way to achieve breakthroughs in products and management practices: The bottom of the economic pyramid is a sandbox for innovation. But you have to understand the rules of the game, which can be startlingly different from what you are used to.

The poor cannot be Wal-Martized.Consumers in rich nations use money to stockpile convenience. We go to Sam's Club or Costco to get bargain prices and the convenience of buying shampoo and paper towels by the case. Selling to the poor requires just the opposite perspective. They do not have the cash to stockpile convenience, and they do not mind frequent trips to the village store. Yet there's money to be made in this market selling single-serve packages. In India, China, the Philippines, and other countries, single-serve packs of shampoo, detergents, pickles, tea, aspirin, cookies, matches, and ketchup are common. Fully 60% of the value of all shampoo sold in India is in single-serve packets. They go for about a penny apiece and are a very profitable business not only for global corporations like Unilever and P&G but also for many local firms. Success in this market is the exact opposite of Wal-Martization.

Poor does not mean irresponsible. The capacity to consume on any significant scale depends on having access to financing; smart businesses know how to extend credit to the poor. Take the Brazilian retailer Casas Bahia, which has built a highly profitable $2.5-billion-a-year chain of 300 stores primarily in the nation's favelas, or illegal shanty towns. The formula is simple. Casas Bahia has developed the skills to assess the creditworthiness of the poor even though their incomes are uneven and sometimes unreported. The company offers credit at low cost, enabling the consumers to buy their favorite kitchen appliance or television.

The poor hunger for technology.The bottom-of-the-pyramid market cannot be addressed without advanced technology--often technology that is much more innovatively deployed than that of the developed world. When ITC, a $2.6-billion-a-year Indian conglomerate, decided to create a network of PC kiosks in villages connecting subsistence farmers to improve the efficiency of soybean acquisition, it had to do much more than just distribute PCs. It had to provide equipment for managing power outages, solar panels for extra electricity, a satellite-based telephone hookup, and more. Otherwise the PCs would never have worked. This complex solution has served ITC very well. Now more than 10,000 villages and more than a million farmers are covered by its system. ITC is able to pay more to farmers and at the same time cut its costs because it has dramatically reduced the inefficiencies in logistics. It is a win-win situation.

Selling to the poor can inspire price-performance breakthroughs.Profiting on penny sachets of shampoo is only the start. The markets at the bottom of the economic pyramid force managers to rethink their costs, quality, scale of operations, and use of capital. When Aravind Eye Care set out to provide cataract surgery to the poor in southern India, for example, it knew customers could never afford the $3,000 per procedure that it cost in developed lands. The company devised a system that enables it to provide the surgery for an average of $25 to $30 per procedure. Aravind is now the largest eye-care facility on earth; it performs more than 200,000 surgeries a year. Not surprisingly, because of the process innovations it has made, the quality of care Aravind delivers exceeds that of similar surgeries in Britain. Debt-free and highly profitable, Aravind boasts an annual return on equity of more than 75%.

The low end is a new source of innovation. Developing markets offer the best opportunity for global firms to discover what is likely to be "next practice," as contrasted with today's best practice. Consider a car that is being developed in India to sell for $3,000. (Obviously, such cars are intended not for the very poor but for the recently poor--the emerging lower middle class. But the business principle is the same.) It may lack the sophistication required to sell in developed countries, though Tata's Indica, which Indians can buy for less than $7,000, is being exported to Europe and sold under the Rover brand. Even if the $3,000 car can't be exported to the U.S., its very existence must send shock waves through the industry's vast supply chain. Companies that build parts and subsystems for this car will have gotten their costs down so low that they may pose a new threat to suppliers of the major auto firms.

Competing in the bottom-of-the-pyramid markets is increasingly an imperative for managers seeking organic growth, innovation, and, most important, organizational transformation. The developing world offers large firms an opportunity to find new sources of value--and to do good besides. Ignoring these markets in the long term could be a fatal mistake; participating will help lay the groundwork for what I like to call inclusive capitalism.

C.K. PRAHALAD wrote The Fortune at the Bottom of the Pyramid: Eradi-cating Poverty Through Profits (Wharton, 2004). India's Economic Times recently named him Global Indian of the Year.