NextBillion - An Initiative of the William Davidson Institute at the University of Michigan

Today I’d like to highlight what I see as a frequently occurring theme in BoP business models, and an element that could make it or break it for companies that look to target BoP markets. Entrepreneurship is often cited as the critical component for small and medium-scale enterprises, especially ones that employ a franchise model. Enterprises such as Scojo, Medicine Shoppe, Drishtee, HMX Sumaya, Florestas and Berni Labs are among many examples of business plans that rely on entrepreneurial individuals to take a model and make it work in their own communities.

Despite this impressive list, I think what underlies some of these entrepreneurs’ success is not based on ?entrepreneurship’ per se. Rather, there is another, crucial element that explains why smaller enterprises often are the ones to find a successful BoP niche, and why larger corporations (even when they have greater economies of scale and resources available) do not always succeed in these same markets.

That element: KYC. No, not Colonel Sanders; KYC stands for know your customer. And in the BoP context, that doesn’t just mean doing market research about consumer preferences and purchasing power (though that IS important). No, KYC means becoming a provider of personal attention and building an individualized connection with initial and potential customers. The importance of this for a BoP business model is perfectly illustrated by Acumen Fund Fellow Catherine Casey in her recent blog post about rural SHEF Health Clinics in Kenya.

Casey describes the success of a for-profit rural health franchisee based on the personalized attention that customers receive and a willingness to tailor services to meet a variety of needs and comfort levels. Evidence from SHEF clinics in Kenya shows that BoP customers are willing to pay for these services, even where the alternative option of a free government clinic is available.

Is this specific to the BoP? No, not at all. Many a small, local outfit manages to compete with big-box stores in the US, and their management will tell you that customer loyalty and knowledge of customer preferences and other special orders is what sustains them. For the BoP, however, knowing the customer is essential, because most BoP business models face extra challenges, including changing the expectations or the deeply ingrained practices of the target market. This is something rarely done without a lot of time-intensive work on consumer education and confidence-building at eye level.

For example, KB Drip, the brand that markets IDE India’s drip irrigation systems that are specifically designed for poor small-scale farmers, initially confronted a huge challenge of building trust among farmers. IDEI had to demonstrate, to individuals willing to take the risk, that their increases in yield and efficiency at the end of the harvest season would outweigh the upfront cost to investment in new technology. An innovative product design was a first step. Creating financing mechanisms and packages to increase the product’s accessibility was another. But demonstration and distribution strategies based on a detailed and intimate knowledge about the customer, their priorities, and their concerns is what has built this BoP-business model into a successful brand. For what it’s worth, demonstration and distribution are also central to KickStart’s success in the same market (irrigation).

What’s important about know your customer is that relatively higher overhead costs incurred by BoP-targeted businesses do not necessarily reflect inefficiency. Overhead costs will always need to be monitored and tweaked, but investing in hands-on efforts required to gain and retain the trust of a loyal customer base may actually increase the long-term economic sustainability of a business. Since BoP consumers are typically less trusting from the outset that a product or service will work (and work consistently), securing their personal confidence leads to a major first-mover advantage.

This incumbent position will ultimately be advantageous to the firm, as its competitors will have to spend more to capture the same market. In addition, proximity to and trust among customers will allow it to further grow and service its BoP customer base. So, from a business perspective, higher overhead costs that develop the two-way exchange involved in knowing your customer might make more sense. Two examples of companies willing to incur such higher up-front costs are Cemex (in its Patrimonio Hoy program) and P&G (where its Colombia and Ecuador staff are mandated to spend at least a few days every year living with BoP customers).

Higher overhead is not necessarily problematic from a development perspective, either. Spending more to provide services that engage the customer/client may also produce more sustainable results that have a greater multiplier effect. Take the argument for client-centered microfinance, for example. Unlike traditional finance institutions that serve experienced and well-advised clients, some researchers have argued that microfinance institutions (MFIs), to be successful in attaining their stated goals of poverty alleviation and profitability, must not only offer financial products and services, but also provide training and support that ensures the wise use and management of loans to achieve long-term improvements. This client centered approach is put forth by “In Microfinance, Clients Must Come First” (Stanford Social Innovation Review, Winter 2008):

“Just because clients use a loan to stock more inventory…does not mean that they will be able to sell the goods at a profit. And just because they sell goods at a profit does not mean that they can generate enough profits to support household needs, business reinvestments, and loan repayments – sometimes at interest rates as high as 60 percent per year. Yet that is exactly what most MFIs and clients presume.”

Higher overhead costs invested in the hands-on servicing of BoP clientele will inevitably deter many companies and institutions that do not have the ability or the patience to tap into local market knowledge. This is good news for small entrepreneurs, since they are, in many ways, still the best-positioned to access and serve local BoP markets. After all, they know the customer best.