We frequently hear the question: “What if the people who need and use my products or services can’t pay?” If you think that the customers who will most benefit from your social enterprise’s services may not be able to afford them, it can feel like an insurmountable hurdle.
While it’s true that some customers have real barriers to paying, don’t be too quick to assume users will not pay for basic goods and services that add essential value to their lives.
The solution often lies in addressing the customer’s ability to pay, shifting the company’s revenue model (by adjusting costs and pricing), or a combination.
If you’ve been faced with the challenge of finding a revenue model that allows for both meaningful impact and financial sustainability here are some ideas. They are centered around getting creative with what you offer, who pays for it, when they pay, where you focus in the value chain, and how you decide to grow.
WHAT YOU OFFER
RETHINK YOUR OFFER
If the product or service you provide isn’t useful, needed, or desired by your target customers, everything stops there. No amount of creative economic structuring will fix a poorly conceived and designed offer. If you have doubts about the effectiveness of your offer, it’s worth reviewing +Acumen’s Introduction to Human Centered Design course.
However, if you are sure you have a beneficial and needed product or service, and still struggle to find customers willing to pay, consider whether you could redesign the solution in a more economical way. This could come from finding a creative way to deliver the same outcomes for your customers in a less complicated, and therefore less costly, way.
One example is Saral Designs, a social enterprise based in Mumbai that offers compact vending machines for sanitary pads. These machines produce the product on the spot and can be installed directly in toilets of schools and other venues. This innovative product design addresses issues of accessibility and affordability caused by poor infrastructure and extra distribution costs that result in competitive products adding up to be 60% more expensive.
CROSS SUBSIDIZE YOUR OFFERS
When looking across an existing product line, or envisioning new additions, there may be opportunities to cross-subsidize by using profits generated from one product line to subsidize another. Some products or services might be more lucrative or have broader appeal than other products that will never be profitable, even if they have powerful social impact. The offerings with broader appeal can generate revenue that serves to subsidize the less profitable, but highly impactful areas of the business.
For example, a pharmaceutical company could use profits from the sale of a popular vitamin product to fund the development of a drug for specific type of diabetes patient. Or an education technology company might be able to turn a profit quickly on online courses focused on job skills, and use those profits to fund the development of humanities courses that have less immediate revenue potential, but still hold social value.
ADJUST YOUR COST MODEL
If you discover that the price point required to cover the total costs are too high for your target customers to bear (or what funders will pay), you may have to redesign your product or service in order to cut costs, allowing you to lower the price.
Consider the relative costs of each of the key activities, key resources, and assets that are essential to produce or deliver the product or service. For the most expensive, consider if there is another path you can take to achieve the same goal. Perhaps there are more affordable alternatives that could be used to lower the costs, and thus the price, while keeping the same level of profitability. Or instead of paying for key resources or raw materials up front, look for ways to lease or borrow them instead to spread out up front costs.
Aravind Eyecare took this approach with intraocular lenses. Existing manufacturers were charging up to $150 for lenses, which left the cost of surgery much higher than many living in Madurai, India could afford. Starting in 1992, Aravind Eyecare started a new company, Aurolab, to manufacture intraocular lenses used in surgeries for only $4, while keeping the same level of quality.
CROSS-SUBSIDIZE CUSTOMER SEGMENTS
Perhaps the most common type of cross-subsidization is with customer segments. This is when purchases from one customer segment who has a higher ability to pay are used to subsidize or fund access to a lower-income customer segment. Serving both customer segments with a very similar offer is key for this approach to work. This means that ideally the same core technology and core competencies are leveraged when delivering value to both customer segments.
A successful example of this approach in action is Biolite. Biolite uses a model they call Parallel Innovation where their core technologies are used to create a compelling value proposition that applies to two distinct markets. This allows for Biolite’s high-end camping light that is sold in Western markets to fund the development of solar lanterns for the poor, which is sold at a subsidized rate.
Going back to Aravind Eyecare, they also offer services that range in price from free to market rates. Customers choose what price they wish to pay, but everyone receives the same high level of care. In some cases, this means that almost completely destitute people manage to find a few rupees to pay for services, while the future president of India once opted for free treatment. People are treated with dignity regardless of how much they choose to pay. With such a high quality of care attracting high volumes of customers, the cross-subsidization model allows Aravind to serve roughly two-thirds of their clientele for free or below market rates.
GENERATE VALUE FOR A THIRD PARTY
If subsidizing with another customer segment doesn’t make sense, it could be that a third party would be interested in paying on behalf of a group of customers. This could be a government or another business purchasing a product or service and passing it onto the end user, who does not pay.
One example is CircMedTech, a social enterprise that sells male circumcision technology to the Rwandan government as part of HIV prevention. The government becomes the paying customer, not the users themselves.
WHEN PEOPLE PAY
OFFER FLEXIBLE REPAYMENT
The concept of affordability for low-income customers is often determined as much by when you ask them to pay as by how much you ask them to pay.
Take the case of One Acre Fund, an organization that sells agricultural inputs (like seeds) to smallholder farmers in Africa. They realized that the optimal time for farmers to make purchases is dictated by seasons and harvesting cycles. This seasonality impacts their cash flow greatly and makes it hard to save or spend large sums in upfront payments for new products or services. As a solution, One Acre Fund decided to provide inputs to farmers at a higher price than they would pay in local markets but offer a flexible repayment plan and timely access. As one farmer explained, “I am able to pay back the loan after my harvest over a longer period. This flexibility is important given there are many other needs I must also meet and many that can be unexpected.”
Another example of this idea in action is with Mamahuhu shoe company. Mamahuhu’s beneficiaries are the artisan shoe producers from whom they purchase shoe inventory. Not only do they help artisans with training and education to get their shoe manufacturing business up and running, but they also support them with start up microfinancing. This initial loan is repaid in the form of first goods produced in the workshop, not cash. In this way artisans are empowered to start off their manufacturing businesses with access to the tools they need to create valuable goods from the very start.
PROVIDE A PAY-AS-YOU-GO OPTION
One way to shrink the gap between the price point and a customer’s limited cashflow is through a pay-as-you-go model. This is a financing solution that allows customers to rent a product, while they make incremental payments until they eventually achieve ownership. For example, Angaza Design is a social enterprise that has pioneered mobile pay-as-you-go platforms for clean energy products. When a customer has funds, they load the money into their account and unlock the ability to use the product, like a solar light, for as long as those funds cover. Angaza’s technology tracks the usage and limits access when the account is out of funds. This pay-when-you-can model provides the ultimate in flexible financing and puts the product within financial reach of a much larger market segment.
Another way to provide flexibility in payment is through direct financing options. Financing can be an effective way to help customers bridge the gap between the price point and their ability to pay. One example of this model in action is BURN Manufacturing. BURN produces clean cookstoves that cut fuel consumption by 56% and reduce carbon emissions by 65%. There are significant money savings and positive impact on health and environment by switching to these stoves, but the full price is a barrier for most users. To combat this, BURN has partnered with a local lending institution to provide financing solutions that greatly reduce the purchasing power barrier other cookstove companies face.
WHERE YOU FOCUS
MOVE ALONG THE VALUE CHAIN
A value chain includes all of the processes or activities required from multiple players to provide the end user with the product or service. Steps that could be part of a value chain are manufacturing, sales, delivery, and after-sales service. Some ventures have discovered that operating businesses at multiple stages of their value chain provides another unique opportunity for cross-subsidization. At some points in the value chain, the business may have larger profit margins that can then be used to subsidize other areas of the value chain which generate social impact, but might not be profitable.
For example, BRAC operates at multiple stages of the silk production value chain. The silkworm harvesting business is subsidized by the business of selling silk goods. This enables them to keep the entire value chain running without compromising on impact or financial sustainability.
HOW YOU GROW
ADJUST YOUR SCALING STRATEGY
Healthy businesses strive to earn a profit after covering essential variable and fixed costs. This profit is what allows the business to reinvest earnings into the things that will make the organization stronger and able to impact more people.
Investments into growing the team, improving infrastructure, or purchasing new products to make the business more efficient are necessary but may not need to be funded through profits alone. To fund expansion projects, new assets, or other costs of scaling, seeking alternative capital like philanthropic donations or grants might be the smartest approaches.
This information is taken from https://www.acumenacademy.org/
More information is available here.
This publication has been prepared within INDIGISE project. The content of this publication is the sole responsibility of the project coordinator and may not always reflect the views of the European Commission or the National Agency.