Business models and sales in base of the pyramid low income markets have traditionally been built around the model of “low price, low margin, high volume”, and has held sway for more than a decade. However there is a growing body of evidence that suggests quite the opposite requirements to be adopted by companies trying to introduce and scale their products and services in low income markets. The case for implementing basic business tenets so as to make ventures and pilots successful and sustainable cannot be built on the low margin model in most instances, as companies have found at their cost. An HBR paper by Erik Simanis of Cornell University’s Johnson School of Management goes on to explain just how low prices and low margins will not work, and why building a platform for margin boosting sales is the need of the hour to scale social enterprises and ventures.

Why won’t low costs and low margins work in the low income markets? Because the volumes needed for the product to be sustainable are unrealistically high, in any scenario. The history of low cost low margins models which did sustain high penetration in terms of aggregating volume of sales seemed to have two things working for them – an existent infrastructure that can be used for the low income customers (one that had already been established for services to relatively wealthier customers – as in the case of Unilever’s Wheel detergent powder in India, and Manila Water in Philippines; one used the Kirana shops frequented by customers of both income segments, and the other used existent pipes and central metering points), and the fact that customers already know how to use the company’s products, thereby reducing the costs required for high-touch sales. Again, the latter condition was also met by both the product and service cited as examples above. However, usually the opportunities to leverage existent infrastructure are limited, and most products made for the BoP customers are relatively new to them, requiring a specialized sales force.

Creating an infrastructure in village and scattered urban slums for adoption of product/service would generally be costlier. Roads are potholed, badly lit, and capital and variable costs rise with every unit of expansion the company mulls. High-touch sales team and marketing strategies also end up costing the companies quite a bit, because specialization by means of training is required, of a population which is mostly ‘illiterate and innumerate’.

The HBR study suggests that to make models sustainable, margins must be boosted so as to extract maximum profit from single transactions. To make that happen three conditions must be fulfilled – pushing costs of production and distribution down, boosting the amount customers are willing to pay for the product/service and raising price points for single transactions. With these end criteria in mind, the paper goes on to suggest a three pronged strategy.

However, when you do raise prices, how do you convince customers to buy your products, especially in the high-touch and difficult-distribution scenario? Apparently, by creating Margin Boosting Platforms and integrating them ‘coherently’ into the business plan.

With the sole purpose of boosting the size of marginal profits, this report goes on to deftly explain the concept of margin boosting platform as a combination of three key principles –

(1)    Localized and bundled products,

(2)    Enabling services and,

(3)    Customer peer groups.

If the products are localized, by ensuring that local labour involvement, last mile costs are significantly reduced, the labour cost of the respect ‘last-mile’ areas being lower than that where the products are sourced from. For example, repeat customers of one of the nutrition sector company cited as an example in this paper, used their own refillable containers, thereby reducing costs. Bundled products, again provide the consumers with a better experience –  the consumption of an entire bundle (of say a ‘body care kit’ package of shampoo, toothpaste, soap, etc., or a solar light which also provides for mobile charging, portable radio and more) delivers a better consumer experience than simply the sum of the individual components. For this reason, consumers are willing to pay more, and the producers are able to charge more. Again, an efficient cost saving technique.

By enabling services, the report refers to giving the consumer a richer and more engaging service experience. The paper cites the example of a cement manufacturer in Mexico which was able to charge relatively higher prices for cement with which the low income consumers would build their houses, simply because they also provided access to architectural knowledge, warehousing of materials and inspections. A relationship based on trust is forged between the customers and the service providers, and the customers are willing to pay more for these ‘enabled’ services. The existence of a relationship is a good thing for the company as the consumers have a relatively low capacity for ‘cultural competence’  for product consumption – that is, the low income consumers will not experiment much with many products, unlike their better off counterparts. Played right, this translates into customer retention and hence business sustainability for companies.

Creating peer groups is again an effectual strategy in again, bringing down costs. Peer groups enforce discipline and scaling of product/service knowledge. It enhances the benefits of high-touch sales, and thereby reduces costs.

With this paper, it seems the roadmap for making social enterprises sustainable has become clearer. Firmly based in factual snippets of knowledge from the ground, this paper goes on to talk about a malaria reducing campaign in rural Ghana which has so far proven to be profitable. Despite low levels of knowledge, low distribution infrastructure, and lower discretionary income than that required for the sustainability of the project, it seems to be working.

How? The company seems to have back calculated the revenue numbers required, and formulated a plan around it. In rural Ghana, where public celebrations are a part of the culture, groups of homemakers have been organized around the central product, which is available in ‘bundles’. The model has thus taken advantage of peer groups here, as well as bundling strategies, thereby implementing the Margin Boosting Platform.

All in all, this paper seems to have infused some clarity into the operational requirements of completely self-sustainable social enterprises, which have been the subject of critical debates globally.

You can read an excerpt from the paper here.