Business Models that Engage Consumers or Producers at the Base of the Pyramid
Success in inclusive business depends on getting the business model right. Obvious, but not easy. Of course there is no blueprint. But scrutinising 40 inclusive businesses in the portfolio supported by the Business Innovation Facility pilot from 2010-2013, we discern some common features. As the BIF pilot draws to a close, we have five assertions and conclusions about business models that work – or don’t – for operation in base of pyramid (BoP) markets.
1. Companies investing in inclusive business need the right business model, but this takes time and innovation – usually more than is expected.
As with many strategic investments, it takes time, resources and internal champions to get an inclusive business model right, but there are also unique challenges when operating in BoP markets. The returns to an inclusive business are often unclear, the journey is ambiguous, and target markets are fragmented and underdeveloped. So there is no off-the-shelf business model that will work. Companies have to persevere, learn by doing, and sometimes take on unfamiliar roles or work in new partnerships, in order to get a business that will sustain and thrive.
2. There are six key ingredients that any inclusive business focused on reaching consumers at the Base of the Pyramid needs to address before the business can work. The business model can be regarded as a series of interlocking pieces of a jigsaw puzzle, and the six pieces for a consumer model are shown in the jigsaw.
The jigsaw says what other commentators also say: it’s not just about innovating a great product, or selling to the BoP at a low price point. Roughly half of the BIF portfolio businesses targeted BoP consumers. Finding the right distribution channel was one of the elements that companies struggled most with. Some expected to set up their own networks of village level entrepreneurs. In practice, we saw few of these. What we did see is companies entering new partnerships with other organisations – commercial, non-governmental and governmental – to harness their partners’ networks that extend into villages, informal settlements, and wallets of the poor.
Creating demand and creating a market system were two other big challenges. Creating demand means cultivating a presumed consumer ‘need’ into an actual market demand and willingness to pay for the product on offer. High-touch engagement and word of mouth seemed to work best here, whether for soil-testing kits, solar lanterns, or mobile phone-based farmer information.
It is a mistake to confuse ‘creating demand’ with ‘creating a market’. The first is essential but the second is an even bigger task. A new product also needs supply chains, service systems, payment systems, government acceptance, and much more as a wider ecosystem. This is often beyond the scope of a single firm, so again has required partnership.
3. Inclusive business models that source from farmers and other producers need to get four components right.
The product needs to be one that smallholders have the skills and experience for (so not too unusual), but it will probably be less vulnerable to competing demands (side selling) and more likely to offer farmers a price premium if it is an upgraded product from conventional production. E.g. a higher variety or quality crop. All components of the production system, from seeds to post-harvest storage and transport need to be in place. But the most important two components, or at least the two that were most often missing or not working, are credit and intermediaries.
Credit is needed so farmers can afford the investment that leads to a virtuous circle of improved productivity, higher value outputs, and business growth. But the flipside is risk, which needs to be very carefully managed. We have seen examples where the farmers took too much risk on a new crop variety, and we have seen examples such as Stanbic’s Smallholder Insurance Scheme in Nigeria, where risk is locked down at every step along with way.
The role of intermediaries is ‘the’ big issue. In the BIF portfolio we saw several companies assume that NGOs would do not only aggregation but also farm extension and finance, but ended up having to take a more direct role themselves. The case of Universal Industries in Malawi is one example, told in the Universal Industries deep dive case study. The company is now extending its own direct engagement with farmers. Another Malawian business, Malawi Mangoes is an interesting alternative because it started with a strategy of company-led intensive farmer engagement for mango grafting.
4. The biggest challenge does not lie in one piece of any jigsaw, but in making them fit together.
It’s a jigsaw of moving parts, but a business can’t thrive unless all the parts are in place at once. In both consumer and producer-focused businesses, ensuring that each component of the model fits together coherently takes time and often multiple iterations. If one piece changes, the other pieces will need to adjust accordingly. One pilot is rarely enough so it is a journey (see the next blog in this mini-series) as well as a jigsaw.
5. This leads to our final lesson, that across these different models there are some common needs, which are the 4Ps of inclusive business:
The findings presented here are from The 4Ps of inclusive business: How perseverance, partnerships, pilots and passion can lead to success, by Tom Harrison, Carolin Schramm and myself, which is one of two final reports from the Business Innovation Facility (BIF), during its pilot phase in Bangladesh, India, Malawi, Nigeria and Zambia. The themes and models introduced above are explained in Section 2 of the report along with examples of how each business model component has worked, and how companies have adapted their entire jigsaw.
While BIF worked with hundreds of companies, it engaged with 40 most intensively, and tracked their progress closely. The findings are taken from them, but we are well aware that they are a sample that is not representative and is faring with mixed fortune. As BIF was explicitly open to taking risk, a share of ‘failures’ was expected. As of mid/late 2013, 80 per cent of businesses in the portfolio are progressing and 20 per cent are stalled or ‘on ice’. While drawing on some emerging success stories (see seven case studies), we have also drawn just as much on examples of when things didn’t ‘go to plan’.