WHAT IF... you raised your revenues by selling premium products to affluent customers to be able to reach the poor?
Many social enterprises aim to reach the poorest households, where basic products and services around water, sanitation and resources sector are lacking the most. Due to the low purchasing power of these customers, profit margins are extremely small. In consequence, serving the base of the pyramid alone often does not allow to generate the necessary revenues to run a business sustainably. In order to improve the profitability prospects for your business while simultaneously serving the poor, one solution many businesses have adopted is to opt for a strategy that targets two very different types of customer segments: sell your product or service at a much higher price to affluent customers to subsidise the lower price for the customers with very limited purchasing power. This strategy can help generating the profits needed to cover your costs while at the same time improving the lives at the base of the pyramid by taking from “the rich” to be able to sell to “the poor”.
Turning challenges into opportunities
The base of the pyramid is often most affected by the lack of access to basic services like water and sanitation (World Bank, 2010). Many social enterprises seek to improve the lives of the poorest by making needed products and services accessible for them (KRISHNA, R. and KUMMITHA, R., 2016). However, serving only the poorest households with your products and services will likely be a challenging endeavour if you seek to build a viable social business. Profit margins with customer segments with low to no ability to pay for water, sanitation or waste services are small (FRANCEYS, R., GERLACH, E., 2012).This makes it difficult to cover costs and build a viable social business that can sustainably serve the marginalised and underprivileged customers.
At the top of the economic pyramid, there are affluent customers who are able and willing to pay higher prices for services or products that, if they draw their attention, are prestigious or very convenient. Often, people at the top of the pyramid are also interested in helping and supporting those at the bottom. Many social businesses have thus successfully used this setting as an opportunity to sell a service or product to the ‘rich’ that helps to subsidise offers for the ‘poor’.
Moving towards a strategy
To serve customers with low ability to pay for basic services, you will need to find a new approach that allows you to still generate enough revenue to cover your costs.
The Robin Hood strategy is about subsidising offers for BoP customer segments with profits generated from highly profitable sales to affluent customers. In our area of interest this means selling the same or adapted products or services at a much higher price to affluent customers to create affordable water, sanitation or waste management solutions for the poorer customers. Cross-subsidised pricing allows you to balance out the losses from one customer segment with the profits from profitable sales.
When applying this strategy, you need to keep in mind that serving more than one customer group requires your business to make distinguished efforts to satisfy different needs. This means that your value proposition and marketing also have to be tailored to each group to meet individual preferences and provide the expected customer experiences. This may require setting your products for the wealthier customers segments apart from your other products by using e.g. higher quality materials or offer perks that high-end customers will find favourable.
Given different communication and shopping habits, you need to adapt communication, distribution and sales channels for each customer group. Aligning your value proposition to your customers’ needs and preferences is key to reap the benefit from cross-subsidisation between low and high-income customers. While setting your prices arbitrarily can be considered unfair, price differences between customer segments become acceptable if affluent customers can be convinced that their buying decision creates a social value.
Case Study 1
Saathi is a social enterprise from India that created biodegradable and compostable sanitary pads with the aim to positively impact women’s hygiene and menstrual practices. Saathi produces sanitary pads out of leftover banana fibres which are highly absorbent. After the banana harvest, the fibres are usually discarded. Saathi buys the agricultural waste from local farmers and uses the fibres as absorbent for the sanitary pads.
Saathi’s main goal is to increase access to safe and eco-friendly menstrual products for women everywhere. Besides servicing the wealthier urban communities, Saathi is keen to equally reach women that are less affluent and live in rural areas at the BOP, although this is currently a loss-making activity.
As a result, Saathi has been pursuing a two-pronged pricing scheme. By selling the pads to urban women at a premium, Saathi is able to cross-subsidise the cost for rural women allowing them to have the product at an affordable price (PRAPATTI C., 2017).
Saathi further reduces its cost by tailoring its packaging according to the customer segment. The products have the same quality for both urban and rural women. However, the packaging for urban women looks more premium than the one for rural women (ibid.). By simplifying the packaging, Saathi is able to offer the product at a reduced price for rural women.
In terms of distribution and communication, Saathi uses different strategies for each customer segment. Rural women often use newspapers or rags during menstruation and are not aware of affordable alternatives. To draw the attention to their sanitary pads and reach as many women as possible, Saathi is working closely with local NGOs, who have the networks and infrastructure to distribute the product via e.g. awareness programs or workshops.
By openly communicating to its wealthier consumers that they are subsidising pads to women in rural communities, the social enterprise has established a transparent pricing strategy, appealing to the social value of the purchase.
Saathi pads workshop in India. Source: https://saathipads.com/
Case Study 2
Spouts of Water is a social business that provides affordable ceramic water filters in Uganda. It manufactures the pots in Uganda from locally sourced clay and rice husks and sells the “Purifaaya” filters for around $20-25 each. Spouts of Water has been growing its reach to various regions within Uganda but also to neighbouring countries like South Sudan. To date, over 32’000 filters have been distributed, impacting over 125’000 people (SPOUTS, 2020).
One of the success factors of Spouts of Water can be seen in its elaborate distribution system aimed at reaching as many customers as possible regardless of economic status or location. On the one hand, Spouts of Water sells its filters to high-income families via a broad network of local retailers like pharmacies, supermarkets and grocery stores etc. From this – mostly urban – customer segment, Spouts of Water sells the filters at a profit. For middle and low-income customers, Spouts of Water is working out financing plans in cooperation with micro-finance institutions (Finca) as well as local savings and credit cooperatives (SACCOs). By facilitating access to funding for rural communities like subsistence farmers, less affluent customers are able to buy “Purifaaya”. Without this service, these customers would otherwise struggle to afford water filters.
The last customer segment are individuals at the very bottom of the pyramid that simply cannot afford to purchase a water filter. In such cases, Spouts of Water partners with local aid organisations that serve such communities. Spouts of Water offers the filters at a reduced price to the aid partners, who then install them for free while also educating the poor communities on water safety. The costs for servicing the customers in immediate need are cross subsidised by the revenues from the other more profitable customer segments.
Besides building a broad distribution network, Spouts of Water further leveraged different communication channels in order to reach its various customer segments. It was able to gain the trust of its customers through local product certification processes, word of mouth, brand ambassadors, and experiential promotions.