Using Platforms to Gain Scale in BoP Markets (Part 1of 3) – By Francisco Mej?a and Manuel Bueno
These series of posts have been co-authored by Francisco Mejía. Francisco is a Principal in the Opportunities for the Majority Office at the Inter-American Development Bank (IADB), based in Washington DC. He currently leads the preparation of various transactions involving the financing of BoP projects in leading and innovative companies in Latin America and the Caribbean. Prior to joining the Bank, Francisco was the Director of the Center for Economic Development at the Universidad de los Andes in Bogotá, the leading economic think tank and research institution in Colombia, and consulted for various international organizations. The views expressed in this blog contribution do not necessarily reflect those of the IADB.
By now there is a reasonably strong consensus about the main ingredients of a successful business model in BoP markets, namely:
- Include low-income community members as productive agents in the firm and try to make use of their local knowledge, either by outsourcing part of the operations to local businesses or by hiring local population.
- Use flexible operational mechanisms to deal with patchy infrastructure.
- Decrease costs as much as possible to be able to offer lower prices, but without impairing quality (within reasonable boundaries).
- Offer products that meet the needs of the customer (versatility here tends to be quite important) and adapt to their payment constraints.
- Associate with local stakeholders such as civil organizations or NGOs to penetrate the target market and educate the population on the most efficient use of the product.
What is still in very much open to debate is how to scale up profitable business model so that their social impact is maximized. Broadly speaking there are two non-exclusive approaches:
Al Hammond in a series of posts proposes a sectorial approach. This in a nutshell involves identifying an outstanding business model for a particular sector and replicating it in different countries and businesses. However, as Al admits, finding such a business model capable of being applied everywhere is a tough nut to crack. In order for the business model to be replicated in different regions it needs to have a certain degree of ambiguity. The details would then have to be fixed depending on the local conditions, even though the success of business models in BoP markets can often depend on such minute details.
On the other hand, Francisco Mejía from the Opportunities for the Majority (OMJ) office in the Inter-American Development Bank suggested in one of our guest posts a platform approach as a means to rapidly gaining scale. In this post we would like to elaborate in more detail the basics of this approach while in the next two posts we will go into more detail about the advantages and disadvantages of specific platforms.
A platform is the public or private distribution and/or sales network that has been built to cater to low-income markets and, as a by-product of its operations, generates potentially useful information for additional market-based offerings. As such, it offers two very useful characteristics for incoming firms with a pre-defined business model wishing to gain scale rapidly: accessibility and information about BoP customers.
Accessibility is a variable that may be measured using two different parameters: capillarity and reach. Capillarity (from capillaries) refers to the density of the network in a particular area. For example, a mobile phone company may control either one or many points of contact in one neighborhood. Depending on the number of points of contact it owns, we may argue that it has more or less capillarity in that region. Reach, on the other hand, is related with the number of different regions the platform may have a presence in. As a result, a platform may have strong capillarity in one region but barely any reach beyond that particular area, or vice versa.
Information is also a crucial variable in gaining scale, because, if properly utilized, it can be leveraged by incoming firms to differentiate those clients that are trustworthy from those that are not. By having information about customer quality, incoming firms can then choose to serve only the reliable customers and often even lower the final retail price, since they do not have to cover any losses arising from the unreliable ones (for our economics-minded readers, this is the adverse selection problem).
Furthermore, since BoP customers know that information is collected about them, their quality as a customer will tend to not deteriorate after the product is sold. For example, a reliable customer may (consciously or unconsciously) take less care of her house after buying insurance, because now the losses will be borne by the firm, rather than the customer (for our economics-minded readers this is the moral hazard problem). This is because it is in the best interest of buyers to be perceived as “safe bets” also after the purchase because their transaction history (payment timeliness, credit, insurance, etc.) is being built through this behavior and thus will have a decisive impact in future transactions they may want to conduct.
However, accessibility and information quality and type will vary depending on the platform itself. Some platforms may generate high quality information, but at the cost of lower accessibility. Additionally, incoming firms should also consider whether their products are complementary to those already being sold in the platform and whether they will have any power in deciding the spreading and growth of the platform activities. In the next post we will talk about different platform types and explain in more detail what are their respective characteristics and how they can be leveraged.