July 2011 – Avishek Gupta

Lately, there has been a lot of excitement about a bunch of new initiatives across the world which aims at tackling issues of poverty with the help of market-based solutions. The entrepreneurs embarking upon such initiatives are popularly called social entrepreneurs. Their intention is to find ways of improving affordable access to products and services for people who have historically found it difficult to have access to them either because they reside at some remote location or just because the cost of making the product or service available to them is too high for them to afford themselves.

In most cases, the social entrepreneurs are people who are well-educated, well-connected, and sometimes tech-savvy. These are people who are known as those who are not focused entirely around increasing their own wealth but have a passion to have a positive impact in the lives of other people. A bunch of social investment funds are focusing on these highly talented, well-intentioned people and making sure that they are not deprived of any financial support which they might require to achieve their aim. In fact, the social investors are even fine with a lower rate of return because they consider social impact more important than financial returns. There are no two opinions about the fact that we need more such well-intentioned entrepreneurs and investors.

However, two questions arise at this juncture, how many people in this world do not have access to the products or services that we are talking about? The answer is innumerable! And, how many social entrepreneurs or social investment funds will this world be able to create? The answer, unfortunately, is a handful.

Interestingly, at the same time, there are millions and millions of less educated, less resourceful people who are natural residents of a place, who try to earn a living out of producing or selling possibly the same kind of products/services that the social entrepreneurs intends to bring to the people of his/her community. Let us call him/her the desi-entrepreneur. The desi-entrepreneur’s life is dependent on being able to able to produce and supply these products and services. However, the difference is that this less resourceful desi-entrepreneur either does not have know-how, the sophisticated technology, the business linkages or the training which the social entrepreneur possesses. In fact, the biggest pain point is that even if he knows where the technology and the linkages exist, he does not have the money to invest in capacities or meet his working capital requirements just because the local financial institutions (LFI) think that his “enterprise” is highly risky. This means that this desi-entrepreneur continues to perform at sub-optimal levels, the products and services that he delivers are either not of very good quality or not available at an affordable price. This results in situation that the people in his community do not have access to them or what he produces does not give him adequate returns to support his living.

Interestingly, if he could have access to finance from the LFI, he could possibly have the same positive impact on the lives of the people in his community without having required any social entrepreneur to come in.

A very simple theoretical solution is to have the social venture capital investors invest directly in these so called desi-entrepreneurs! And that is where the problem begins.

The amount of money required to fund all such desi-entrepreneurs is huge and unfortunately there is a limit to the amount of social investor money that the world has! Moreover, these entrepreneurs are too scattered and the size of investment in each enterprise is too small to justify a team to professionals in the social investment fund to do due diligence and make equity investments in them. The volume of work required simply complicates the whole picture. LFIs are however located geographically closer to these enterprises and are better suited to assess and finance them. However, given that equity is certainly not a business of the banks or the LFI, the perceived level of risk of the desi-enterprise is too high and hence the LFI ends up not lending to them at all.

The source of the risk in most cases are as discussed above, uncertainty of supply and price of raw material, lack of advanced skills and lack of affordable access to advanced technology necessary for enterprise viability, with all of this leading to an uncertainty of demand owing to the uncertainty of prices for products or service offered by the enterprise.

Incidentally, if we categorise the enterprises into sectors, we would realise that there are a few key missing links specific to a sector that contribute to the risks for most enterprises in that particular sector. If a solution is devised to address one or two such key risks per sector and such a solution is made available to the all the enterprises in that sector, we may end up unlocking growth potential of hundreds and thousands of enterprises by making them less risky and thus making them attractive for the local financial institution to directly provide debt financing.

For example, a rural tourism company that aggregates and distributes information about rural home stays, provides a payment gateway to potential travellers via an online web platform and provides accreditation facility to the home stays, can provide a steady base of travellers to qualified properties and ensure their revenue certainty. Once this happens, the ability of the home stay owner (desi-enterprise) to leverage debt goes up for every single rural home stay in the country.

An equity investment into one rural tourism supply chain company can thus potentially unlock growth of millions of rural home stay properties, agents and other members of the rural tourism supply chain.

[Disclaimer: This line of thinking is borne out of the work that I did in the past but the views are personal. ]

I have come to a few conclusions based on three years of my personal experience of building businesses for the last mile remote rural customer. The segment that I have been looking at is similar in a lot of ways to the segment referred to as BoP in popular development literature. I, do, however, feel that the term BoP business model is a misnomer because I am increasingly being made to believe out of my experience that such business models do not exist. Even if they do, they are not sustainable. That might be a big statement given the new found belief across circles about the viability of BoP of business models. My experience is limited to a few states in India and limited to the following supply chains like dairy, clean energy, rural tourism, agri, drinking water, etc.

Here are my “learnings”:

1.)I think that instead of segmenting customers into BoP and non-BoP, it is much more useful for companies (those companies who want to reach out to the excluded categories) to segment the customer base in terms of a.)who can be reached easily and b.)who can NOT be reached easily. This is what I call the distribution channel lens of segmenting.

For eg:In a remote rural location there might be both a BoP/low income household as well as a slightly well off household. Similarly so in urban locations. If we design business to serve only the low income household in remote rural locations I doubt if the business can ever be viable. (I will be very happy to be proved wrong.) In other words, I think the business models should be designed in such a way that “Access” is provided to both the low income as well as the high income customers in a particular geographical area. This, according to me, makes more sense in terms of distribution channels AND company viability.

2.) Good intentions ONLY are not sufficient for designing business models. My personal experience with the dairy healthcare backed on the spot cattle insurance product told me that though we assumed that there is a need for the product and that the customers were ready for it, we realised that the ground situation was quite different. No doubt, there is a need for the product but the inertia against a paid service when a free service is available (no matter how bad that quality is)is so huge that it is difficult to ensure that customers pay to buy some product or services. I had a similar experience with smokeless stoves. I think the solution to this type of problem requires a more involved approach which I discussed in an earlier post.

I think any model looking at reaching out to the excluded groups (or BoP) has to involve iterations to come to a final product based on “extreme” customer understanding. Lot of work is needed there. Anybody who says that “BoP” businesses can be low touch is not talking about the BoP market at all.

3.) The distribution channels has to have a very local nature and in all possibility they can not be owned by ONE “company”. They would essentially be multi product channels but similar products flowing through a particular channel. Eg: White goods/capital goods like stoves may pass through a different distribution channel and fast moving goods has to flow through a completely different channel. The channels have to ensure that the last mile customer facing people are a part of the local community AND they are well conversant with the product/service features AND are capable of basic troubleshooting. This most certainly requires a lot of standardised training. Again, a reason why I said these efforts would be high touch. (You might ask, who takes the initiative to build these localised channels? My answer is professional NGOs. They can use some of their “low cost or no cost” money to make an angel investment in the local “distribution companies”)

4.) A big reason why products do not reach the last mile is because there is no one to fund the inventory! Something has to be worked out at the small town levels or the cluster levels to ensure that banks/financial institutions lend to small distributors. I think the big companies should work with banks to promote financing of inventories and building ware-houses in the small sub-sub taluka towns. This will free up tremendous scale. The financing has to target small distributors and NOT purchasers or retailers as has been tried through some MFI and SHG backed models.

Now comes the difficult part. To make sure that the banks lend to small distributors in the small sub-sub taluka towns,the companies might need to give some kind of a guarantee to the banks to start with. (And this is extremely difficult given the corruption ridden last mile banking system in our country. But I think the big companies should be able to manage this.) My assumption also is that the companies will need to bear the cost of doing proper due dilligence in identifying their local area distributors. This is a one time cost. The local banks can then finance the inventory. This reduces the extent of monetary loss in case the distributor identified by one company is poached by another.

5.) There is a good reason to leverage public/Govt infrastructure or funding wherever available: We leveraged govt universities, facility centres, staff in our work. We identified what they were good at and left it to them. It saves a lot of money.

6.)There is no harm in starting with selling a product or service that gives good returns or working a high gross profit pricing model. This would help in ensuring that the business model is sustainable and can fund itself in future when you need to get into the lower margin products. Starting with a difficult aim of making the business sustainable with low margin product/service could end up killing the effort all together. Eg: when you are looking at building a procurement network you might as well start off with a cash crop that gives higher margin, rather than a food crop. You can then start with other types of crops. We had started with castor in our work. It helped!

I say again, instead of a BoP/ non-BoP segmentation, I think it is the distribution channel lens that is a better way of segmenting customers. Given the fact that the unit margins in serving the BoP segment of customers is thin, it is necessary to have huge scale and huge scale is possible only if the distribution model is robust, sustainable and adequately financed.

What do you think?

Month: July 2011

How to “serve the BoP”?