How Deep is the Reach of Inclusive Businesses Really?
Can an inclusive businesses reach the Base of the Pyramide (BoP) while achieving profitability, financial sustainability and scale? A Deloitte Study published in 2017 attempted to find out how deeply down into the BoP inclusive businesses are reaching. As a first of its kind study, it searches for best practices on, how the lowest income groups at the BoP can be served by for-profit enterprises. Further, it aims to provide governments and donors with guidelines for subsidising such efforts.
At the outset, the authors concede that their findings can only serve as pointers and further work is needed. Challenging business environments have impacted the size and methodology of the study. Another drawback is the use of nominal rather than real (purchasing power) income to group consumers although the case study covers businesses from various parts of the world. Nevertheless, the achievements of the businesses included in the study are inspiring and proof that the livelihoods of low-income customers can be uplifted sustainably.
The study revolves around the following assumptions:
Asset-light vs asset-heavy companies: businesses that require low infrastructure, carry low overheads and distribution costs are defined as asset-light. Hence, they should be able to offer their products and services at lower prices that are more affordable for customers with limited purchasing power.
Pull vs push products: products such as food and electricity, that are already in demand and carry little risks are defined as “pull-products”. Push-products tend to require education or awareness campaigns and/or may not have immediate benefits. Insurance, clean drinking water and mosquito nets are mentioned as push-product examples. It is assumed that pull-products are lower priced since they incur lower marketing and sales costs and can therefore reach deeper into the BoP.
Narrow vs wide customer bases: this refers to the range of income groups a business serves. It is assumed that a broader range may drive up costs or distract from reaching lower-income groups.
The research covers 20 case studies. The authors acknowledge some bias since it only includes surviving businesses, those that volunteered their participation in the study and were able to provide data about their customers.
The study found that three quarters of the 20 businesses are reaching customers earning less than USD2.50 per day. To measure their customers' income, most case study businesses (10) used fairly rigorous studies such as Poverty Probability Index (PPI) methodology, partnered with the Gates Foundation or used proprietary methods. The remaining used impressionistic methods such as asking micro-entrepreneur- resellers to estimate income levels of their customers, customer surveys or estimations from monthly mobile phone spendings.
Those who are reaching the BOP even at a deep level, are fairly successful in terms of viability and growth. A few such as FINAE, a higher-education-loan provider, the housing solution providers Patrimonio Hoy and Echale, eKutir (tech-enabled kiosks providing farmers agricultural inputs and market access), Aldeia Nova (enhanced agricultural production and distribution of outputs), and Urban Planet Mobile (English language
instruction via mobile phones) have achieved profitability. Others, such as mobile payment services, power, and cookstoves (M-KOPA, IFMR/KGFS, and Zoona, among others) businesses are financially sustainable while re-investing their profits in growth. However, the Deloitte study also advices cautious optimism regarding their future financial security due to their young age and their difficult operational environments. A few of the case study businesses are either not yet financially sustainable or have reverted to not-for-profit status.
In regards to scale, the Deloittes study found the businesses split into two groups, one generating income below USD1mio and the other above USD 5mio. Particularly financial services, insurance, cook-stoves, housing and electricity businesses scaled well across sectors, industries and geographies. In contrast, providers of health care products or services appear to have a hard time scaling their businesses.
Even businesses selling “asset-heavy”, “push” products reach deep down into the BoP. Cook-stove enterprises manufacture and distribute heavy physical items (asset-heavy) that require customer education (push-product). Nevertheless, the cook-stove businesses Burn and Envriofit, rebuffed the researchers' expectations with their strong growth and ability to sell to very low-income customers. Likewise did the two low-cost housing providers Patrimonio Hoy and Echale. Their success, however, may have been accelerated by the subsidies, all of them received in one shape or another.
Most businesses sell to a range of customers across income levels which suggests that diversification may contribute to viability rather than being distracting. One of the businesses mentioned in the study, eKutir, started with the distribution of agricultural inputs to very small farmers. Subsequently, it diversified into veggie kiosks to sell the farmers' produce to higher-income urban dwellers.
Chances for success are improved when businesses employ tactics to become more asset-light, make it easier for customers to prefer their products and appeal to customers from a broader range of incomes. The study identifies a number of characteristics used to achieve this.
The Role of Subsidies
In early stages, most of the businesses included in the study had received subsidies. The most common types of subsidies received were philanthropic grants, prize-monies and below-market-rate loans for specific purposes such as market research, product design, etc. The study finds “the fact that subsidies tended to be provided early on, and then did not appear in later stages, suggests that it is possible to get enterprises “over the hump,” and then on to self-sustaining financial viability; in other words, subsidy does not seem to doom these firms to remaining perpetually on the take.”
Apart from the immediate social impact of their products and services these enterprises also often create job and entrepreneurship opportunities contributing to resilience of individuals and communities.
“These enterprises are stepping in where government is under resourced and failing, helping to upgrade the enabling environment in these poor communities. As these sorts of dual-purpose enterprises grow and spread, they will tend to make it easier for yet more enterprises—socially oriented or not—to operate successfully, provide livelihoods, and improve the quality of life of those at the BOP.”
Implications for development:
Final note: the report includes detailed descriptions of the businesses included in the study, all of them provide inspirational reading!
Monitor Deloitte: Reaching deep in low-income markets, Enterprises achieving impact, sustainability, and scale at the base of the pyramid, June 2017
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