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.
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?