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 Monitor Group has just released an extremely comprehensive and concrete report about business models to reach bottom of the pyramid markets.
This report comes at a time when it looks like microfinance has reached a more mature position on it market and when every social funds, companies, NGO... try to benefit from the financial crisis and the microfinance example to find ways to address poverty through profitable and scalable operations. Microfinance organizations being the quite only one to reach the poorest so closely and extensively, they are harassed with people trying to sell their products or services through their agents! Building a product and sending it trought local network is clearly not enough as a business model to succeed! This report may contribute to formalize and clarify efficient models observed recently in India.
Global considerations
Interestingly, they chose India as their main source of documentation and observation. As I already quoted in many books or articles, India is maybe the leading countries for this new social venture, combining very large markets, high level professionals and long experience and tradition in the mix of social and business activities.
As for every other business models, question is: “how to create value on a market and capture it”. With the specific issue of a market that can obviously pay, even if individual income is very low, and is victim of a poverty penalty, making them paying often higher than middle class the goods or services they consume. Specific issue also of a dispersed population, with few efficient distribution channels.
C.K. Prahalad, in “Fortune at the bottom of the pyramid” (2004), was mainly targeting big companies willing to penetrate this market, and was recommending a complete change of vision and methods. Monitor assumes that most of successful models will come from small and medium companies, well connected with the ground.
What Ashish Karamchandani, Michael Kubzansky and Paul Frandano from the Monitor Institute did was to observe 270 indian companies targeting bottom of the pyramid market, make field study for 36 of them and identify 7 efficient business models, that could be profitable and scalable.
About scale up
They also made a tremendous effort to bring figures behind strategies! And to define clearly their subject. Scale up in India, for example, is qualified for 1 million clients at least. In microfinance industry, only four institutions (SKS, Spandana, Share, and on a lesser extent Basix) can pretend to this outreach.
And quite all operations has taken more than 5 to 10 years to scale in this acceptation, if they scaled. Only SKS and ITC E-Choupal are commercially viable before 10 years of development. Few words about this scale up myth, by the way. A banker made a clear and interesting intervention during last sankalp award conference in Mumbai, to emphatize scale up doesn’t always come from a growth of a company, but also from small and robust models that can be replicated. It would be interesting that so-called social investors understand that and don’t only focus on the client forecast of the ventures they are challenging!!
Some figures provided about this “half the humanity” market are impressive.
“For the bottom 60 percent of the income distribution, India’s education market is estimated to be about $5.2 billion, a sizable opportunity by any measure.14 As points of market comparison, this is about the same size as the global market for radio frequency identification (RFID) chips in 2007, tablet PCs in 2009, network security software and devices in 2007, or the anticipated
Chinese market for laser printers in 2010. The current health care market for the same segment in India is about $18 billion.”
Exciting, but not easy. As quoted by the report: “In water, the problem of operating complexity is even further magnified. Bisleri, India’s leading manufacturer and marketer of bottled water, currently operates 50 plants generating over $70 million of revenue. To generate the same revenues that Bisleri produces with 50 plants, a market-based enterprise catering to poor people would need to operate more than 17,500 village water plants.”
Finally, Monitor end by considering poors both as consumers and as producers. Because they are cheap manpower, using them in the supply chain can be an economic and efficient way to co-invent and create access to the products and services.
As consumers, it is interesting to observe that people are expecting loans from microfinance much more for TV or gold coins than for walter filter or solar lanterns.
7 efficient models
In pay per use model, consumer pay for the use of a product, not for the purchase. It can be for example a single water filter (Birraju Foundation) per village, that is used to sell water at a price affordable even for less than INR2000 population ($30 a month). First investment is made by donor and external fundings. But the model can be sustainable providing enough water is sold. Today, two third of Birraju Plant are sustainable. Or solar lantern (SELCO, not quoted in the report) that is used for a limited time. An external entrepreneur is in general involved to organize the infrastructure
No frills model aim at reducing the cost of the production and delivery at every stage of the supply chain. It is in general linked to a specialization strategy that allow maximum efficiency, standardisation, process... It relies also on the fact that poor people are ready to pay for a low cost and efficient service or products, even if revenues are low and uncertain. Lifespring hospital (Hyderabad). It is specialized only in ginecology, and had get rid of all non necessary features. It has also limited the medical intervention. It cost of doctor per patient is 4 times lower than a standard hospital, as is it utilization of asset. Yet, it can be a challenge to recruit and train efficient employees to insure the quality of service. SKS is also a model of no frill microfinance service.
Paraskilling is my favourite one, and a sort of derivate of the no frills model, adding a reingenerating component to allow low skill workers to produce or deliver. A prerequisite is to transform a complex chain into many simple operations, and to be able to monitor and train enough workers to assemble the final product or services. It can be a way to generate both revenue, training and low cost products. Gyan Shala (Ahmedabad) is a training NGO typical of this model. For $3 a month, often subsidized, this school teach to 8 000 students. It has build a system in which a master train a large staff of junior teacher, to whom he can provide support, and that cost much more less than classical teacher. Investment in pedagogic material and high level management staff is expensive but make possible and efficient a model where teaching staff is paid 3 time less than in classical private school. The famous Aravind hospital specialized in eyes surgery and prevention has also a paraskilling model in which senior doctor are less used, and trained a bunch of junior.
Shared models address the complex distribution issue of BOP market, by organizing a piggy back of existing distribution channels and platforms. Proper incentives has to be proposed all along the chain. Classical retail network begin operations in slum and rural areas, but not enough to provide efficient platform to push new products, that are not well known and need promotion, awareness and training to be sold. Private channels experience like Shakti HUL (read in the blog) or ITC e-choupal are very rare.
Create its own distribution force can be costly and non professional.
Existing channel are so extremely attractive for BOP producers! Microfinance, in particular, that reach globally 35 million clients in India. Mixing the “door opening, awareness” capacity of a MFI, as well as the credit it can provide, with the professionalism of a distributor could be an efficient way for distribution.
Cooperatives (230 millions of farmers) can also be an interesting but difficult partner, as proven by the example of Yeshasvini in Karnataka for mutual products distribution.
Three next model consider procurement and sourcing from the bottom of the pyramid. Both through contract production, deep procurement or demand led training. I don’t go in details, just quote our competitor in Sankalp award and finally won the award for organizing the procurement of deskilled labourers to construction company (Labournet)
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