Free Trials and Payment Plans: Creative financing plans take a bit of risk, but up the reward for clean energy retailers
Families in rural northern Uganda who cook over open fires and use kerosene as their primary light source face numerous health and safety issues – they should be rushing to buy fuel efficient cookstoves and solar units. Why aren’t they?
Evelyn is a shop owner in Kitgum, a municipality of about 60,000 people in northern Uganda. Judging from her shop, full of general merchandise, food and cold beverages, it’s not readily apparent that she also sells solar units. Yet, one solar unit did catch my eye – sitting in a far corner. The box looked as though it had been opened and closed many times as potential buyers expressed interest, but none strong enough to take the unit home. I met with Evelyn during my first week in Kitgum this summer, having just arrived for my internship with Mercy Corps. I came onboard to research financing plans that could be adopted by energy company partners to increase their network of resellers and by retailers to increase their sales broadly and to the most vulnerable households. Earlier in the week, I traveled from Uganda’s capital, Kampala, to Kitgum, a seven-hour drive.
Making my way, I couldn’t help but notice the visible impacts of the long-standing conflict between the Ugandan government and Lord’s Resistance Army. Our car bumped and lurched over the unmaintained road as we passed one neglected piece of physical infrastructure after another. But it was my first-hand, day-to-day interactions with shop owners in Kitgum that revealed the less visible impacts of conflict: the traumatic memories, the new opportunities to achieve a sustainable livelihood, and the struggle to keep markets functioning.
As I sat down with Evelyn, a bright-eyed and poised young woman, she candidly recalled the poor sales record of her solar units over the last few months since she became a retailer of solar products. Evelyn sold solar units that consisted of solar lanterns and an integrated lantern and mobile-phone charging unit. On average, she sold just one unit per month. The price tag of about 130,000 Ugandan shillings (USD $50) was certainly cause for concern for many consumers, considering the average monthly income for rural households in northern Uganda is just 117,000 shillings (USD $46), while an urban household in the same region makes about 361,000 shillings (USD $142).
These prices are in part a result of high transportation costs from the poor road infrastructure and fragmented markets characterized by inefficient and unshared distribution channels. All these factors increase the cost of doing business in the region. Aside from pricing, Evelyn mentioned other factors that seemed greater barriers to sales – consumers not fully aware of the benefits of solar units over time, including cost-savings, and trust in the product and its ability to function properly over time. A Mercy Corps solar market assessment conducted in May, 2012 found that the average household would need eight months to pay off the value of the most advanced solar unit.
(Evelyn, the shopkeeper in Uganda)
As the Mercy Corps team and I listened to Evelyn and other retailers’ concerns, we determined that we needed to come up with tailored innovative financing plans that shopkeepers could use to increase sales of clean energy products.
To ease buyers’ burden of purchasing clean energy products, our team developed five financing plans that retailers like Evelyn could offer. Here they are, and the results we saw:
The “pay-by-installment” offer. The retailer would allow the consumer to pay for the solar unit in two installments over one week increments. This resulted in a 100 percent increase in sales volume over a four-week period. There were no defaults and 100 percent payment recovery.
The “one-week free trial plus pay-by-installment” offer. The retailer would offer the product to a consumer to try out for a week for free. If the consumer found it useful and saw that they would save money, the retailer would then allow the consumer to pay in two installments over one week increments. Beyond that, consumers could return the product if unsatisfied, an unprecedented option in northern Uganda. Sales increased threefold over a four-week period, with no defaults and an 100 percent payment recovery.
The “price discount” offer. The retailer would offer a consumer a discount of 800 shillings (USD $0.30) with the purchase of a small-sized stove; a discount of 1,900 shillings (USD $0.75) with the purchase of a medium-sized stove; and a discount of 1,000 shillings (USD $0.40) with the purchase of large-sized stove. One stove retailer adopted this offer, and it was valid for two weeks. During this time, the retailer’s weekly cookstove sales increased by 167 percent.
The “free related product” offer. This offer involved a radio advertisement announcing a giveaway: free charcoal with the purchase of a fuel-efficient charcoal cookstove. The free charcoal amount was predetermined based on the stove size purchased. This offer increased customer visits and inquiries regarding cookstoves by 388 percent and stove sales by 75 percent during the two-week promotional period.
The “pay-by-installment plus discount” offer. The retailer would offer a customer the option of paying for a solar unit in three installments over one-week increments. But the customer could receive a discount of 5,000 shillings (USD $2) if they paid off the unit in just two installments.
The Mercy Corps team initially hoped to make the “pay-by-installment” offer a four-part payment to increase affordability to the consumer, especially for the more expensive solar units. However, retailers were reluctant to adopt the idea because of the cost of retrieving payments and other factors, like losing the liquidity needed to purchase more products to sell. Instead, we modified the offers to two installments or, at the most, three.
The offer that combined the free trial with the option of paying in installments had the most potential for increasing sales. It tackled consumer trust with the free trial period, and acknowledged consumer cash constraints by offering the option to pay in installments. Most of the retailers were interested, but they decided against participating because of the inherent risks associated with the offer. Only Evelyn saw the opportunity.
At first, Evelyn handed out all of her products during the free trial. This was a great result but it meant she ran out of stock without the cash to reinvest in new products. The trick, she learned, was to determine demand and ensure there was enough liquidity to meet it. Yet, this didn’t weaken Evelyn’s eagerness to continue promoting these products. Once she collected all outstanding payments, Evelyn immediately reinvested her profits in acquiring more solar units.
Although our research came to an end, Evelyn enthusiastically kept up the sales program. “With or without this research, we will continue with these offers,” she said. “Because they have worked for us.”
Evelyn’s enthusiasm however, was not shared by many other retailers in Kitgum. This was also the case for one of the retailers who originally agreed to participate in the research. The solar retailer who adopted the “pay-by-installment plus discount” offer stopped mid-way through his sales trial. When asked why, he said that because of drought conditions creating poor harvests and school fees that households had just finished paying, most families were allocating their resources toward basic necessities and food rather than clean energy products, despite their long-term benefits. Yet, when we asked participating retailers why they offered the financing plans in spite of these constraints, most agreed with Evelyn: they couldn’t wait for the most opportune time to strengthen their business.
With forward-looking retailers like Evelyn offering financing plans to customers, clean energy products can be more affordable to the families who need them, improving their lives.
This article originally appeared in Global Envision, a blog focused on market-based solutions to poverty managed by Mercy Corps, a NextBillion Content Partner.
Alba Topulli is a master’s student at The George Washington Univertsity in international development with a concentration in economic development. She served as an applied research analyst with Mercy Corps in the summer of 2013.