Tuesday
November 11
2014

Tamar Koosed

Distinguishing Between Demand and Need at the BoP: Part 3 in a series of BoP fundamentals, cases, and debates

Editor’s note: The Erb Institute at the University of Michigan is a partnership between the School of Natural Resources and Environment and the Ross School of Business. The insitute is committed to creating a socially and environmentally sustainable society through the power of business. In coordination with MANAUS Consulting, the institute is publishing a long-term series on base of the pyramid fundamentals, which NextBillion is cross-posting with permission. Check out parts one and two.

This week’s blog discusses a common mistake made by companies entering BoP markets: assuming that social needs will quickly manifest themselves as market demand. I wil provide three examples of how companies have had to change course in search of demand and profitable and sustainable business models. BoP markets face many challenges including lack of reliable distribution channels for scaling up efforts, limited product awareness and understanding, scarce after-sale support, and cash-poor consumers, to cite just a few.

Because of these challenges, creating a product that targets a social need is just the beginning. To be successful, companies must address each of the constraints associated with bringing products or services to market, regardless of the evident need they may satisfy. In some cases, in addition to addressing these challenges, companies may have to generate demand to be successful. The history of market-based approaches to the distribution of clean cook stoves is a good example of how social needs don’t always translate into demand. Indoor pollution from traditional cook stoves used in low-income households has consequences for deforestation, carbon emissions, and, most immediately impactful to consumers, on health.

Over the past two decades international development organizations have invested heavily in the development of cleaner alternatives. However, according to the World Health Organization and the UN Development Program, less than a third of the total biomass-using population adopted cleaner alternatives by 2009. After analyzing numerous clean cook stove initiatives and businesses, Deloitte Consulting concluded that the link between traditional stoves and health impacts is not always evident to consumers, making it essential for businesses to raise awareness of the benefits of the product in order to drive sales.

Another example is the experience of VisionSpring in El Salvador. With operations in 11 countries, VisionSpring’s mission is to reduce poverty and generate opportunities in the developing world through the sale of affordable eyeglasses. The organization relies on a micro-franchising model, providing micro-entrepreneurs (or Vision Entrepreneurs) a toolkit containing all the products and materials needed for marketing and selling eyeglasses in hard-to-reach communities.

Glasses from VisionSpring. Photo credit: Gaurav Parnani, Erb Institute MBA/MS Program alum

When visiting the organization’s operations in El Salvador, my firm, MANAUS Consulting, learned that one of the big challenges faced by VisionSpring was the lack of perceived legitimacy of Vision Entrepreneurs in the small communities where they operated.

Despite the few options for vision care services at affordable prices in El Salvador and the lack of access to services in remote communities, potential customers did not trust the micro-entrepreneurs’ services. Consumers were aware of brand reputation and wanted to have confidence in the product they were buying. To mitigate this problem, VisionSpring adapted the model and opened “hub” stores that support Vision Entrepreneurs, providing greater legitimacy to the brand, offering additional services that could not be performed in the field, and linking need to demand.

Another common, but important, solution to mitigate demand constraints in BoP markets is to ensure products and services are affordable. The well-known example of CEMEX’s Patrimonio Hoy program shows the market potential that can be unlocked by offering creative payment solutions to low-income consumers. The Mexican company, one of the largest cement producers in the world, launched the program after realizing its high dependence on the country’s formal market.

Aware of the large housing deficit in Latin America and the market potential among consumers who were building their own structures, buying materials multiple times in small quantities to build over a large span of time, CEMEX created a savings and micro-credit model. It is able to provide credit to consumers without any credit history by, first, creating a savings program. Customers form groups, similar to the micro-financing models created by the Grameen Bank, and pay a fixed weekly amount (as low as U.S. $11.50) into their accounts. After accumulating a number of payments, CEMEX advances customers the cement equivalent to the amount paid and a projection of future payments. The program also offers on-site technical advice for construction, helping customers improve their home architecture. According to CEMEX, the program operates in five countries and has benefited more than 2 million individuals, who are now able to build their homes three times faster.

There are many more, but the three examples above illustrate that BoP markets are not just in need of product inventions. Companies that thrive in the BoP do so because they invent the way they communicate, deliver, and provide access. We will continue to explore these solutions in future blogs. In the meantime, contribute to the conversation and share examples you know of creative solutions companies have put in place to link need to demand in the BoP.

Tamar Koosed is the founder of MANAUS Consulting.

Categories
Health Care
Tags
affordable housing, Base of the Pyramid, health care