Shared Prosperity through Inclusive Business: HOW SUCCESSFUL COMPANIES REACH THE BASE OF THE PYRAMID IN PARTNERSHIP WITH: ABOUT IFC IFC, a member of the World Bank Group, is the largest global development institution focused exclusively on leveraging the power of the private sector to create jobs and tackle the world’s most pressing development challenges. Working with private enterprises in more than 100 countries, IFC uses its capital, expertise, and influence to help eliminate extreme poverty and promote shared prosperity. WRITTEN BY The writing team included Kathy Gaertner and Eriko Ishikawa, with guidance from Toshi Masuoka and input from Beth Jenkins. Groff Creative provided the design. ACKNOWLEDGEMENTS This report is based on the inclusive business models that resulted from the pioneering efforts of IFC’s clients. A special thanks to all of those clients who agreed to be profiled in it. RIGHTS AND PERMISSIONS © International Finance Corporation 2014. All rights reserved. The material in this work is copyrighted. Copying and/or transmitting portions or all of this work without permission may be a violation of applicable law. IFC does not guarantee the accuracy, reliability or completeness of the content included in this work, or for the conclusions or judgments described herein, and accepts no responsibility or liability for any omissions or errors (including, without limitation, typographical errors and technical errors) in the content whatsoever or for reliance thereon. Foreword Many IFC clients, including those highlighted in this report, are directly impacting low income people. These clients have incorporated the ‘base of the economic pyramid’ into their value chains in a variety Shared of ways. IFC has committed over $11 billion to more than 400 such companies in just the past ten years and is proud to help them grow. Prosperity What our inclusive business clients have achieved is even more remarkable given that the world is increasingly being shaped by through demographic dynamics and slow growth. Overall economic and income growth sharply decelerated following the global financial crisis Inclusive of 2008-9 and the pace of structural reform has since been uneven. Rising inequality in many countries is now a serious concern, while the unprecedented pace of poverty reduction over the last three decades Business: may be losing momentum. HOW SUCCESSFUL COMPANIES REACH Against this macroeconomic backdrop, however, there remain THE BASE OF plenty of untapped growth opportunities, especially given current THE PYRAMID technological advances. These advances could enable billions of people at the base of the economic pyramid to join the modern global economy. At IFC, we believe in the critical role that the private sector can play to realize people’s dreams by creating jobs and markets where these did not previously exist and by making goods and services accessible to low-income customers, often for the first time. More work is needed. Our mission will not be complete until people everywhere have the opportunity to achieve the same levels of productivity and life satisfaction. Narrowing the gap in economic conditions between the most advanced countries and emerging markets is critical to achieving the goals that we have laid out as the World Bank Group — ending poverty and boosting shared prosperity.  IFC is committed to achieving these goals and to accelerating the spread of inclusive, commercially viable business models. Ted Chu Chief Economist IFC Contents LIST OF CASES STUDIES SHARED PROSPERITY The following companies are profiled in the THROUGH INCLUSIVE report to highlight a particular aspect of their BUSINESS: HOW SUCCESSFUL inclusive business model. We would like to thank each of these clients for agreeing to be a COMPANIES REACH part of this report and for the work they do to THE BASE OF THE PYRAMID reach the base of the pyramid. AGRIBUSINESS: Alqueria S.A., Colombia 29 Bankaool, Mexico (Finance) 13 INTRODUCTION 2 ECOM, Cote d’Ivoire 15 Engro Foods, Pakistan 9 ENGAGING BOP SUPPLIERS 5 Jain Irrigation Systems Ltd., India 35 Procurement 7 Kenya Tea Development Agency, Kenya 11 Aggregating Suppliers 8 Providing Capacity-building 10 EDUCATION: Bridge International Academies, Facilitating Access to Finance 12 Africa Region 21 Finding the Right Mix of Solutions 14 Ideal Invest, Brazil (Finance) 37 Trustco, Namibia (Finance) 39 ENGAGING BOP CUSTOMERS 17 Uniminuto, Colombia 25 Product and Service Development 19 HEALTH: Reducing Costs 20 Fundacion Cardiovascular, Colombia 31 Offering Value for Money 22 salauno, Mexico 21 Matching Customer Cash Flows 24 HOUSING: Distribution and Retail 27 Aadhar Housing Finance, India (Finance) 35 Leveraging Retailers 28 Vinte, Mexico 23 Leveraging Technology 30 ICT: Marketing and Sales 33 Millicom, Africa and Latin America 29 Communicating Value 34 Roshan, Afghanistan 23 Alternative Pricing 36 Shanghai F-Road Commercial Services, China 41 Facilitating Access to Financing 38 Suvidhaa, India 31 Facilitating Payment 40 RETAIL: CONCLUSION 42 Bakhresa Malawi Limited, Malawi 25 Tribanco, Brazil (Finance) 39 UTILITIES: AEGEA Sanemento e Particpacoes S.A., Brazil 37 Manila Water Company, Philippines 41 Engaging the BOP An Overview of Challenges and Solutions Suppliers Customers Procurement Product Distribution Marketing and Service and Retail and Sales Development Sourcing Appealing Maximizing Unlocking from small to value- access while willingness farmers conscious minimizing and ability customers cost to pay The Challenge Aggregating Reducing costs Leveraging Communicating suppliers retailers value Offering value Providing for money Leveraging Alternative capacity- technology pricing building Matching customer cash Facilitating Facilitating flows access to The Solutions access to financing finance Facilitating payment 1 Introduction C ompanies in emerging markets do business with people who live at the “base of the economic pyramid” (BOP) at various points along the value chain for strategic reasons. IFC has invested in hundreds of such companies, which we call “inclusive businesses.” These companies have achieved commercial sustainability and growth while benefiting the poor. COMPANIES ENGAGE THE BOP and retailers to reach its customers. BOP populations BECAUSE IT IS GOOD FOR BUSINESS capitalize on these opportunities to increase earnings, improve quality of life, and fulfill their potential. On the supply side, companies might look to supplement and diversify their supply bases to meet volume targets IFC CLIENTS PROVIDE INSIGHTS and reduce risk, or position themselves for long-term cost INTO WHAT WORKS savings. Some want to ensure security of supply by engaging, what are today, small suppliers, while others might cater to In 2011, we identified seven common business models in customer preferences for specific supply sources. our inclusive business portfolio. This new report goes into greater detail on specific tactics that successful companies On the demand side, companies are aware that the BOP in our portfolio use time and again to reach the BOP. These comprises over 4.5 billion people with a combined are local companies, or those with significant investments spending power of $5 trillion.1 Companies, therefore, look locally. Before IFC invested in these companies, we conducted for innovative solutions to bring these people into their due diligence on each of them to ensure that their business customer bases, gain market share, and increase revenues models are commercially viable and that they meet IFC’s and profitability. Some see an opportunity to establish first environmental, social, and governance standards. IFC regularly mover advantage and customer loyalty in segments that will monitors these companies for the duration of the investment. become the future middle class. We believe that this report will add to the existing knowledge WHILE INCLUSIVE BUSINESS BENEFITS base on inclusive business, to which many different A COMPANY’S BOTTOM LINE, IT ALSO stakeholders have contributed over the years. This report has BENEFITS PEOPLE AT THE BOP two sections that reflect the two principal ways companies reach the BOP — as suppliers and as customers — Inclusive businesses provide BOP suppliers with reliable although companies may also engage BOP distributors and markets that may not have existed previously. Inclusive retailers in the process. The solutions presented are not businesses offer their BOP customers better access to the sector-specific and can be tailored and used across industries. goods and services they need at a better value for their We hope that businesses in emerging markets will find these money. These businesses may also engage BOP distributors solutions relevant to the challenges they face. 1 Figure is in 2005 purchasing power parity terms (PPP) 2 The BOP in the Value Chain The BOP earns $8/day or less (PPP) and/or lacks access to basic goods and services. BOP Customers BOP Retailers Inclusive Business Companies BOP Suppliers BOP Distributors The BOP capitalizes on value-chain opportunities to increase earnings and improve quality of life 3 Engaging BOP Suppliers INCREASING INCOMES AND STANDARDS OF LIVING AT THE BOP CASES STUDIES IN THIS SECTION ENGAGING BOP SUPPLIERS 5 AGRIBUSINESS: Procurement 7 Bankaool, Mexico 13 Aggregating Suppliers 8 ECOM, Cote d’Ivoire 15 Engro Foods, Pakistan 9 Providing Capacity-building 10 Kenya Tea Development Agency, Kenya 11 Facilitating Access to Finance 12 Finding the Right Mix of Solutions 14 5 Engaging BOP Suppliers The Opportunity Companies procure products or services from BOP suppliers for a variety of reasons. These include: SUPPLEMENT SUPPLY: In developing countries, procuring from BOP suppliers Companies may need to expand beyond the existing supply is more widespread in agriculture than in any other base to meet volume requirements. sector, as large numbers of farmers with very small land holdings dominate production of many commodities. DIVERSIFY: Not only can procuring from these farmers make Incorporating a range of suppliers enables the business sense for companies, it also benefits company to diversify the supply base and Buying from farmers. Companies help farmers improve reduce risk. their production practices, which increases BOP suppliers productivity and quality. Companies MARKET PREFERENCES: make business then purchase farmers’ crops come To reach certain markets, companies must cater to market preferences for products sense and harvest time, offering markets to which they might not otherwise have access. that benefit low-income suppliers. also benefits As farmers’ incomes rise, their families farmers become more food secure and can afford LOCAL REQUIREMENTS: better healthcare, education, and other Depending on the country, companies may services that improve their standards of living. purchase from small farmers to meet requirements to purchase locally or to be eligible for tax incentives. 6 Engaging BOP Suppliers: Procurement The Challenge The Solutions Sourcing from small farmers Companies large and small, including buyers, processors, and food and beverage manufacturers, implement a Companies that source from small farmers face a unique range of solutions to overcome critical barriers and set of challenges. These include: procure from farmers in commercially viable ways. High transaction costs: These solutions include: Physically collecting small volumes of commodities from large numbers of farmers, Aggregating suppliers: often in areas with poor transportation Working with farmers in groups, rather than infrastructure, is logistically difficult and individually, to reduce costs and simplify expensive. logistics. Inconsistent quality: Providing capacity-building: Farmers often lack access to the production Providing training and learning opportunities to techniques and business skills needed to run improve quantity and quality of production. farms efficiently. In addition, critical inputs, such as fertilizers, pesticides, and improved seed Facilitating access to finance: varieties, may be unavailable or unaffordable. Making it possible for farmers to access credit to cover operating costs and make investments. Unreliable production volume: Limited training and lack of access to appropriate inputs make farmers’ crops more vulnerable to pests, diseases, and unfavorable weather conditions, resulting in lower yields than expected. Lack of access to financing Companies, large and means farmers are often unable to invest in modern equipment, pay laborers, and transport small, implement a range their produce safely to market. Moreover, without enforceable procurement contracts, of solutions to overcome companies can struggle to maintain farmers’ critical barriers and loyalties and secure the necessary volumes of supply at harvest time. procure from farmers in commercially viable ways 7 Engaging BOP Suppliers: Procurement Solution: Aggregating Suppliers Working with small farmers aggregated into groups, rather than individually, reduces costs and simplifies activities ranging from transportation to payment. Companies can work with groups of farmers in a variety of ways, such as: LINKAGES WITH EXISTING COLLECTION CENTERS: PRODUCERS’ GROUPS: Use facilities located in or near farm areas where farmers Build relationships with producers’ groups, such as can easily and inexpensively deliver produce and receive cooperatives, which can pool resources and procure payment. Companies often use collection centers to inputs in bulk. These groups can also organize transport, provide farmers with information, inputs, and services. run collection centers, and even process raw commodities These central locations can also serve as hubs for “hub- on behalf of their members, depending on their resources and-spoke” models that use traveling agents to collect and capacity. products from farmers located further away. Collection centers can be established and run by the companies, their contractors, producers’ groups, or local communities. PROCUREMENT SOLUTIONS Aggregation reduces the PROVIDING CAPACITY- difficulty of negotiating BUILDING with and sourcing from AGGREGATING individual farmers SUPPLIERS FACILITATING ACCESS TO FINANCE 8 Aggregating Suppliers: Collection Centers ENGRO FOODS LTD., PAKISTAN Dairy farming is a fragmented, home-based industry in Pakistan. Approximately eight million families, spread across hundreds of thousands of square kilometers, earn their livelihoods through dairy farming. Each farm has an average of 2 to 5 cows or buffalo. Engro Foods Limited (EFL), Pakistan’s second-largest producer of processed milk, has brought 300,000 of these farmers into its supply chain by creating a vast village-level direct procurement infrastructure. EFL aggregates 85 percent of its suppliers through 1,800 milk collection centers (MCCs). The MCCs are situated within an average of 2 kilometers from farmers’ homes, so that they can be reached by foot or by local transport. Around 300 square feet in size, the MCCs contain chilling tanks, basic laboratories, and geysers. Each MCC collects approximately 400 liters of milk every day. management information system. The magnetic cards enable efficient collection and payment. The EFL tests and measures milk at the time of delivery MIS provides EFL with complete traceability of milk to the MCC. A unique magnetic card assigned to purchases, payments, quality parameters, and agri- each farmer is swiped at a point-of-sale terminal, services requirements for individual suppliers. More and transaction data are uploaded into EFL’s than 360 trucks with insulated tanks then transport the milk from the MCCs to EFL regional hubs and from there to milk processing plants. When farmers visit the MCCs, EFL provides them with training and guidance through EFL’s agri-service units, which each serves a cluster of MCCs. Topics include vaccination, hygiene, and feeding practices. Farmers located too far away from the MCCs hand over the milk to 1,700 village milk collectors trained in milk testing, handling, and hygiene and are equipped with collection tools, testing kits, and record books. Read the full case study at: www.ifc.org/inclusivebusiness/casestudies 9 Engaging BOP Suppliers: Procurement Solution: Providing Capacity-building Small farms need to be run like profitable businesses. Building farmer capacity to use the latest cultivation techniques, apply inputs like fertilizers and pesticides correctly, and manage finances can help farmers improve productivity and quality. Capacity-building can also help farmers implement environmental, health, safety, and labor practices and obtain certifications that buyers may require. By improving productivity, quality, and, in some cases, Common capacity-building tactics include: eligibility for price premiums, capacity-building services can also improve farmers’ credit risk profiles, giving EXTENSION AGENTS: prospective lenders greater confidence in their ability Specialists who visit farmers to provide agronomic to repay loans. As these services begin to lead to higher advice. Some agents may also offer business or financial incomes, they can also enhance farmers’ loyalty to the management skills coaching. To further increase their companies that provide them. reach, agents may use a training-of-trainers approach to establish a network of sub-agents or volunteer farmers Adoption of certification standards can help farmers who can in turn train others. obtain price premiums for some crops, as well as open up new markets. Certification schemes are an important FARMER TRAINING CENTERS: avenue for farmers to adopt good agriculture practices Group training sessions that can cover a wide range and improve productivity, while of topics from agronomy to farm incorporating business process management to financial skills. These PROCUREMENT improvements. SOLUTIONS sessions are often held in community PROVIDING facilities or at a participant’s farm. CAPACITY- Some companies offer capacity- BUILDING building support directly, while DEMONSTRATION PLOTS: others hire contractors or Sites where companies, their partner with non-governmental AGGREGATING contractors, or partners grow crops SUPPLIERS organizations, foundations, or using inputs and/or techniques they donors to provide these services. are teaching to farmers. These allow farmers to observe the results before FACILITATING ACCESS TO investing time and resources to FINANCE implement them. 10 Providing Capacity-building: Extension Agents and Farmer Training Centers KENYA TEA DEVELOPMENT AGENCY (KTDA), KENYA Kenya Tea Development Agency Ltd. (KTDA) is one of the largest tea companies in the world. It is made up of over 550,000 tea farmers, typically working on less than half-acre plots. Established in 2000, KTDA procures tea from the farmers, processes it, and supplies it to Europe, Asia, North Africa, and the Middle East. KTDA offers comprehensive services for its tea farmers including training, provision of inputs, transportation, processing, marketing, and access to finance. KTDA’s training activities are designed to enhance the sustainability of farmers’ production practices and contribute to the sustainability of the overall value chain. KTDA uses two training methods: farmer field schools (FFSs) and a lead farmer approach. conduct farm-level inspections prior to farm audits. Lead farmers train fellow farmers in agricultural KTDA introduced the FFS model following a pilot on practices that comply with the ecological, social, good agriculture practices conducted in cooperation and economic requirements of Rainforest Alliance with Unilever’s Lipton company in 2006. FFSs offer certification. Training topics include agronomic hands-on learning through bi-monthly two-hour practices, climate-change adaptation (for example, sessions held over the course of a year. They include crop diversification) and mitigation (for example, field experiments and observations, study tours, and planting indigenous trees), soil conservation, and training sessions. Farmers gain knowledge on how water management. Lead farmers are trained by to increase productivity and crop quality through Partner Africa and the Rainforest Alliance, supported sessions on planting, fine plucking, and preparing for by KTDA staff. Training is conducted at KTDA’s buying certification. In 2013, 820 FFSs were being managed centers and factories. by KTDA extension staff. Read the full case study at: In addition to the FFSs, KTDA also uses lead farmers www.ifc.org/inclusivebusiness/casestudies to provide capacity-building using a training-of- trainers approach. High-performing tea farmers volunteer to be trained as lead farmers and to 11 Engaging BOP Suppliers: Procurement Solution: Facilitating Access to Finance Farmers may need short-term loans or cash advances to pay for inputs, labor, or transportation, and longer-term financing for capital improvements to enhance productivity and quality. Loans can be made to individuals or to groups. In areas where social ties are strong, producer groups may guarantee individual loans. Companies can facilitate access to finance through the following mechanisms: DIRECT LENDING: THIRD-PARTY FINANCING: Providing credit directly or through a subsidiary Referring farmers to other lenders such as microfinance established for this purpose. The company’s close institutions, other non-bank financial institutions, leasing relationship with its small-scale suppliers makes it more companies, and local banks. Loans can be disbursed in cash familiar with their production potentials and better able to the farmer, or paid directly to the company that is selling to evaluate their credit risks than an outside financial inputs the farmer needs. If a farmer has a procurement institution. In some cases, the maximum loan amounts contract with a company, a lender could potentially are based on a percentage of what the company expects use the contract as collateral. The lender may ask the to receive from the farmers. Repayment can then be company buying from the farmers to provide information deducted from the amount the farmer is paid at harvest. or recommendations that would help it assess the farmer’s For example, companies can provide inputs, such as high- credit risk. The lender may require that the buyer set aside quality and improved-variety seeds and other planting part of its payment to farmers at harvest time and use material, fertilizers, pesticides, those funds to directly repay the lender and equipment on credit at the PROCUREMENT up to the farmer’s outstanding loan appropriate time in the production SOLUTIONS amount. The lender may also ask the PROVIDING cycle, and later deduct the cost CAPACITY- buyer to guarantee a percentage of BUILDING from the amount paid at harvest. losses, if any. AGGREGATING SUPPLIERS Financing is FACILITATING critical to improve productivity and ACCESS TO FINANCE growth 12 Facilitating Access to Finance: Direct Lending turned Third-party BANKAOOL, MEXICO Bankaool was created in 2005 when Agroindustrias Unidas de Mexico (SA AMSA), the Mexican subsidiary of ECOM, an international commodity trading company, decided to spin off its supplier financing division. Before this, SA AMSA had financed suppliers directly for more than 50 years. Bankaool offers farmers short-term working capital loans and medium-term loans for capital expenditure. Bankaool’s rates are lower than those offered by traders and processors who finance their suppliers directly, and much lower than those of most microfinance institutions. Almost 99 percent of its clients have monthly incomes of less than $1,200, and 80 percent have not previously had access to formal financial services. Bankaool has relationships with 15 buyers, enabling Bankaool works with a trusted network of traders more than 25,000 loans totaling over MXN 500 million and processors to identify farmers who are ($37.73 million). The company serves a wide range potentially good credit risks. These buyers help of Mexican farmers, including producers of coffee, Bankaool compile information and documentation cocoa, cotton, sugar, rice, grains, vegetables, fruits, for farmers’ credit files. The buyers retain the money pork, and shrimp. A recent Mexican government study owed to Bankaool when they pay farmers at harvest found that Bankaool issued nearly 50 percent of the and guarantee a percentage of Bankaool’s losses. country’s loans to the agriculture sector. In return, Bankaool pays the buyers a small success fee. This model allows Bankaool to finance a large Bankaool has since expanded into other sectors number of farmers who are otherwise difficult with similar needs. It complements its offerings to reach. Bankaool’s ability to aggregate farmers to farmers and other customers with deposit and reduces the administrative requirements of dealing savings services. It uses online and mobile banking with many small clients and enhances the credit and banking agents as service channels and offers quality of Bankaool’s portfolio. human-centered products, such as commitment savings. Initially, after being spun off from SA AMSA, Bankaool’s only buyer relationship was with its former parent Read the full case study at: company, whose loan portfolio it inherited. Today, www.ifc.org/inclusivebusiness/casestudies 13 Engaging BOP Suppliers: Procurement Insight: Finding the Right Mix of Solutions C ompanies working with BOP suppliers must understand differences across their supplier bases and develop the right mix of solutions to optimize their supply chains. Developing a deeper understanding of the company’s suppliers boosts business efficiency, improves decision-making, reduces risk, promotes loyalty, and enhances a firm’s overall ability to compete and innovate. To do this, companies use surveys, focus groups, and other methods to gather insights and improve operations, tailor supplier services, identify new service areas, and test delivery approaches — and then start the process all over again in ongoing feedback loops. In agriculture, these feedback loops can help companies identify farmers who are ready to adopt new agricultural techniques or leverage financing, design relevant offerings, and continuously improve them over time. These insights include: SUPPLIER PORTRAITS: MARKET SEGMENTATION: Analysis of socio-demographic information and other data Identification of the needs and aspirations of key market on the needs, motivations, requirements, and capacity of segments in order to tailor product or service offerings or suppliers. adapt models of engagement. SATISFACTION PROCUREMENT MEASURES: SOLUTIONS PROVIDING Measure satisfaction with and CAPACITY- perceptions of a company’s BUILDING activities vis-à-vis its stakeholders across the value chain. AGGREGATING SUPPLIERS Understanding suppliers can FACILITATING improve company ACCESS TO FINANCE performance 14 Using Market Insights to Understand BOP Suppliers ECOM, COTE D’IVOIRE ECOM is a global commodity trading company specializing in coffee, cocoa, and cotton in 30 countries around the world. In Côte d’Ivoire, ECOM sources cocoa directly from 15,000 farmers and provides them with inputs, capacity-building programs, and access to finance. ECOM worked with IFC to conduct a detailed survey of over 2,000 of its suppliers as ECOM wanted and determined if ECOM could better target its to better understand its supplier base and increase services based on suppliers’ performances, attitudes, supplier productivity, enhance loyalty, and improve aptitudes, and service gaps or needs. efficiency of its operations. The survey collected individual profiles of the farmers to answer: How do The results of the survey provided ECOM with detailed BOP farmers manage their farms? How productive profiles of its suppliers. The results suggested that are they? What are the perceived and actual certified farmers were doing better than non-certified benefits of the training programs in which ECOM farmers, that they had higher yields, were more was investing? Do some farmer groups do better satisfied, and devoted more of their land to cocoa and or worse than others? other cash crops. However, ECOM also found that productivity levels varied widely even among certified ECOM and IFC analyzed the survey results to farmers. Access to financing and capacity building on determine what they meant for the services that tree grafting were identified as key service gaps, as ECOM offered. They identified opportunities to was gender-specific training on activities with higher tailor the services to better address key production women’s participation, such as cocoa fermentation issues, such as aging trees or lower productivity, and drying. It also identified some key long-term risks to the supply chain, such as lower levels of interest in farming among younger farmers. Lastly, the surveys indicated that mobile banking could expand farmers’ access to financial services. ECOM is using this feedback to tailor its services and address strategic concerns identified by the surveys. The feedback also helped formulate key messages around food security, community needs, and the benefits of certification that ECOM is conveying to partners—including buyers, nongovernmental organizations, and other technical assistance partners. 15 16 VILLAGE PRODUCE MARKET, NIGERIA PHOTO: CURT CARNEMARK / WORLD BANK PHOTO ID: NG013S18 WORLD BANK Engaging BOP Customers EXPANDING ACCESS TO GOODS AND SERVICES CASES STUDIES IN THIS SECTION ENGAGING BOP CUSTOMERS 17 AGRIBUSINESS: Product and Service Development 19 Alqueria S.A., Colombia 29 Reducing Costs 20 Jain Irrigation Systems Ltd., India 35 Offering Value for Money 22 EDUCATION: Matching Customer Cash Flows 24 Bridge International Academies, Africa Region 21 Distribution and Retail 27 Ideal Invest, Brazil (Finance) 37 Leveraging Retailers 28 Trustco, Namibia (Finance) 39 Leveraging Technology 30 Uniminuto, Colombia 25 Marketing and Sales 33 HEALTH: Communicating Value 34 Fundacion Cardiovascular, Colombia 31 Alternative Pricing 36 salauno, Mexico 21 Facilitating Access to Financing 38 HOUSING: Facilitating Payment 40 Aadhar Housing Finance, India (Finance) 35 Vinte, Mexico 23 ICT: Millicom, Africa and Latin America 29 Roshan, Afghanistan 23 Shanghai F-Road Commercial Services, China 41 Suvidhaa, India 31 RETAIL: Bakhresa Malawi Limited, Malawi 25 Tribanco, Brazil (Finance) 39 UTILITIES: AEGEA Sanemento e Particpacoes S.A., Brazil 37 Manila Water Company, Philippines 41 17 Engaging BOP Customers The Opportunity There are a number of reasons why people at the BOP make an increasingly interesting target market for many companies. They provide companies with opportunities to: EXPAND THEIR CUSTOMER BASE: Companies offer BOP customers clean water, foods, housing, There are approximately 4.5 billion people at the BOP in electricity, mobile phones, healthcare, education, and developing countries and emerging markets, more than financial services. Millions of people at the BOP are able to half the global population. access levels of quality and affordability they have never experienced before. GAIN MARKET SHARE AND BRAND LOYALTY: Sometimes, companies that serve BOP As incomes continue to increase, many The BOP customers also create income-generating opportunities for BOP distributors and who currently live at the BOP will transition to middle class and have spends more retailers, whose physical proximity, local more disposable income. The BOP is than $5 trillion knowledge, and relationships make them the best channels to reach BOP also younger, on average, than its richer counterparts, and as such, will continue to every year 1 customers. Companies have realized the comprise a large portion of the market for potential of many of these small businesses years to come. and their ability to grow along with them. INNOVATE: Targeting the BOP market can drive product, service, and business model innovation and possibly trigger a Companies that have successfully reached competitive advantage in higher-income markets as well BOP customers typically focus on at least — a phenomenon called “reverse innovation.” one of the following three key areas: > Product and Service Development > Distribution and Retail > Marketing and Sales. 1 Figure is in 2005 purchasing power parity terms (PPP) 18 Engaging BOP Customers: Product and Service Development The Challenge The Solutions Appealing to value-conscious customers Companies of all sizes, across industries including agribusiness, education, energy, healthcare, housing, water and sanitation, and more, have several Companies that develop products and services for considerations when developing products and services BOP customers face a number of challenges: that can compete successfully in BOP markets. Limited individual purchasing These include: power: While their aggregate purchasing power is Reducing costs: impressive, individually, BOP customers have Making products and providing services that are limited money to spend. affordable. Risk aversion: Offering value for money: With little flexibility or margin for error in their Creating a relevant, good-quality product and purchasing decisions, BOP customers tend to service. be highly value-conscious and resistant to new products. Matching customer cash flows: Making products and services accessible to Inconsistent cash flows: customers with fluctuating incomes. Besides being low, BOP customers’ cash flows can be unpredictable. Financial services such as savings, credit, and insurance which could help BOP customers make both regular everyday purchases and large once-in-a- lifetime investments are limited. BOP customers’ incomes vary in size and stability, as do their abilities and willingness to make purchases 19 Engaging BOP Customers: Product and Service Development Solution: Reducing Costs Affordability is the most important issue for BOP customers; the price of a product or service is a critical hurdle for customers with limited incomes. However, reducing the cost of a product or service must be done while maintaining a strong value proposition. Companies can develop lower-cost products and services through: DESIGN: STANDARDIZATION: Using innovative materials that deliver high performance Developing a consistent set of procedures and tools at reduced costs, eliminating functionality that does without compromising quality. Standardization enables not add value, and selecting features that reduce the companies to scale at an accelerated pace, thus recouping customer’s cost of ownership and maintenance. Lower- any upfront investments. Codifying business processes cost designs often leverage existing e-platforms or also helps the client maintain a consistent level of quality make use of hardware that the customer already across multiple locations. Often, standardization owns, such as a cellphone. In addition, the company can reduce the time and skill levels workers need may develop an array of additional related products to build a product or deliver a service. It thus holds or services, such as course offerings or e-platform great potential in service sectors such as education and applications, which leverage synergies. healthcare where cost and availability of specialized professionals is a barrier to reaching the BOP. PRODUCT AND SERVICE SOLUTIONS OFFERING VALUE FOR MONEY REDUCING COSTS MATCHING CUSTOMER CASH FLOWS 20 Reducing Costs: Design BRIDGE INTERNATIONAL ACADEMIES, AFRICA REGION Bridge International Academies is the world’s largest chain of nursery and primary schools, working to realize the dreams of every child living below $2 a day. Bridge’s academies are purpose-built around the developmental needs of children living in Reducing Costs: resource-poor environments. Eight hours of lessons and physical activities are fully programmed each Standardization day, including design and creation of textbooks and workbooks along with hands-on learning toys SALAUNO, MEXICO and tools. Teachers are recruited from the local community and are trained to engage children inside salauno offers specialized eye care and is, by volume, the classroom and within the community. Bridge a top cataract surgery provider in Mexico City. The pupils score higher on average than their peers in company uses the same advanced techniques used in neighboring schools.   higher-income countries, but targets lower-income patients with prices that are 40 percent lower Thanks to than competitors. salauno reaches low-income proprietary, communities by using a hub-and-spoke model which centrally- reduces the geographic and information barriers managed, and that can prevent low-income people from seeking data-enabled treatment. systems, Bridge maintains focus salauno’s model is based on best practices pioneered on a child’s by Aravind Eye Care in India through which it imports development low-cost, good quality consumables. It relies on and learning procedures, including screening, pre-operative care, outcomes while scaling rapidly within communities and surgery, designed to optimize efficiency and then and across countries. These systems leverage standardized. In the case of cataract surgeries, salauno Wi-Fi-enabled smart phone and tablet technologies pioneered the use of small-incision cataract surgery in for community engagement, parent and teacher Mexico to reduce costs for low-income patients. Surgical communication, instructional delivery, pupil and instruments were selected with efficiency in mind and teacher attendance and learning assessments, and the facility is designed to create optimal patient flow. operational cash management and procurement. Tasks that do not require trained ophthalmologists are Parents’ total average costs are less than $6 assigned to other medical staff, enabling surgeons to per month. As of September 2014, more than focus exclusively on surgery and final diagnosis. These 100,000 children are enrolled at over 350 Bridge measures have brought operating time down to a mere International Academies, with plans to reach 10 10 to 15 minutes per patient, increasing productivity up million children by 2025. to 10 times compared to government hospitals. 21 Engaging BOP Customers: Product and Service Development Solution: Offering Value for Money BOP customers need a strong value proposition to justify purchases, large and small. Successful products and services might help customers generate more income, save time and money, and cultivate social ties. Companies that develop products and services can create value for BOP customers by focusing on: QUALITY: and easier for BOP customers to understand. Value-added Delivering quality products and services that are effective, features include biometric readers or voice technology for durable, and safe. Obtaining external quality accreditation, illiterate users or community spaces or Internet access in in privately-provided education for instance, can help housing developments. Companies can combine the base lower perceived risk to the customer. product or service with additional services to add value to the customer. For example, by including tailored career VALUE-ADDED FEATURES: services in a certificate program or free insurance with a Adding features to the product or service that increase home loan. the value proposition to BOP customers, while still remaining affordable. Ensuring that the offering is relevant in the local context can make it more attractive PRODUCT AND SERVICE Companies need to SOLUTIONS OFFERING VALUE FOR demonstrate value while MONEY maintaining affordability REDUCING COSTS MATCHING CUSTOMER CASH FLOWS 22 Offering Value for Money: Value-Added Features ROSHAN, AFGHANISTAN   Since its launch in 2003, Roshan has become Afghanistan’s leading mobile telecommunications company. The company realized that the needs of its customers go beyond mobile telephony: 95 percent of the population is unbanked, 75 percent works in agriculture, and 70 percent is illiterate. As a result, Offering Value for Money: Roshan leverages its platform to offer value-added services such as mobile payments and agricultural Quality and Value-added market information, among others. Features Mobile payments: Roshan’s M-Paisa, launched in 2008, is Afghanistan’s first mobile financial service. VINTE, MEXICO It now registers more than 8,000 users per month. Originally focused on Vinte is a Mexican housing developer that focuses on loan disbursements and low and middle-income customers. Vinte prides itself repayments, M-Paisa on balancing affordability with quality products offers a range of that fulfill customer dreams of home ownership. payments from salaries to bills to remittances Vinte emphasizes location, attractive designs, and to humanitarian aid special features like a computer, Internet access, and disbursements. security cameras. Vinte provides shared courtyards, playgrounds, and community rooms, which give Agricultural market homeowners space to cultivate ties with their information: Roshan’s neighbors, families, and friends—critical sources of Malomat service social support. provides farmers unprecedented access Vinte further differentiates its homes by using to real-time prices of over 40 commodities as well innovative technologies that reduce the costs of as farming tips and access to buyers. Malomat is owning the home. Vinte’s homes are designed to available via SMS and interactive voice response reduce gas bills by 75 percent, and have the option (IVR) technology, making it accessible to illiterate of rooftop solar cells to generate energy, which customers. significantly reduces electricity bills. Homeowners can monitor their electricity, gas, and water See full case study: consumption with individual meters and adjust habits www.ifc.org/inclusivebusiness/casestudies to save money. See full case study: www.ifc.org/inclusivebusiness/casestudies 23 Engaging BOP Customers: Product and Service Development Solution: Matching Customer Cash Flows In addition to value and cost, a third consideration for companies that develop products and services for BOP markets is customer cash flow. BOP customer incomes are relatively low, and also fluctuate, sometimes in unpredictable ways. This can make large purchases and long-term commitments especially hard. Companies can design products and services that account for cash flow fluctuations.1 They can do this in two primary ways: AFFORDABLE SIZES: INCREMENTAL ITEMS: Offering products and services, ranging from mobile phone Offering higher-priced products or services in parts that airtime to food and beverages, in smaller amounts. Selling build on one another and can be purchased in increments products and services in small quantities makes them as time and cash flows permit. This can help make products accessible to customers who cannot defer purchases long and services more accessible for customers whose incomes enough to save, who have trouble saving, or who lack the and schedules fluctuate. This tactic is particularly important storage space in their small homes to buy in bulk. for traditionally big-ticket items. For example, pursuing a degree, one certificate course at a time, or purchasing a home, one room at a time. In the financial sector, small, successive loans for incremental items can reduce risks for both the company and BOP borrowers. PRODUCT AND SERVICE SOLUTIONS OFFERING VALUE FOR MONEY REDUCING COSTS MATCHING CUSTOMER CASH FLOWS 1 Some companies offer or facilitate access to financing. This is discussed in the Marketing and Sales section of this report. 24 Matching Cash Flows: Affordable Sizes BAKHRESA MALAWI LIMITED, MALAWI Bakhresa Malawi Limited is the leader in flour milling in Malawi, with an 80 percent market share. BOP customers previously bought flour in small quantities from disorganized sources, often in scoops from informal market traders. This exposed them to frequent Matching Cash Flows: stock-outs, price fluctuations, and unreliable quality. Smaller Increments In response, Bakhresa introduced small packs of flour; good quality, fresh wheat flour was made consistently available to BOP customers for the UNIMINUTO, COLOMBIA first time. Bakhresa now sells flour to artisanal and home bakers, small retailers, and large commercial Uniminuto offers affordable, high-quality technical, bakeries under a variety of brands in package sizes technological, and university education in Colombia. ranging from 2 to 50 kg. Most relevant for the artisanal More than half of its programs are vocationally and home bakers are the small packs; they typically buy oriented, designed to prepare graduates for work in one or two bags a day. Small retailers typically buy 10 kg key sectors, including engineering, social services, bags, picking up approximately 14 to 35 bags a week. communications and visual design, agribusiness, education, and technology. Its programs range from Bakhresa also encourages and provides capacity- two to five years. building to help BOP customers use flour to start micro-size baking businesses. The start-up costs are Unpredictable family incomes can make it difficult low — less than $2 for 2 kg of flour from Bakhresa, 500 for low-income students to commit to two to five- ml of cooking oil, and a few other ingredients — while year programs. So Uniminuto makes its programs the return on investment can be over 40 percent. accessible in part through a progressive, level- based structure; students earn qualifications See full case study: for each level they complete along the way. This www.ifc.org/inclusivebusiness/casestudies encourages low-income students to enroll since they know they will derive value even if they cannot complete the entire program. According to circumstances, they can exit at any level with qualifications recognized in the job market. And they can return later to complete additional levels. See full case study: www.ifc.org/inclusivebusiness/casestudies 25 26 TOUSSAINT YANICK A SMALL SHOP KEEPER AND BENEFICIARY OF THE PRODEPUR- HABITAT PROJECT, IN DELMAS 32, HAITI. TOUSSAINT ALSO HAS ELECTRICITY UNTIL 11PM IN HER NEIGHBORHOOD AND IS ABLE TO STAY OPEN MUCH LATER. PHOTO:DOMINIC CHAVEZ / WORLD BANK PHOTO ID: HAITI_ELECTRICITY_STORY_EDIT_0018 Engaging BOP Customers: Distribution and Retail The Challenge The Solutions Maximizing access while minimizing cost Companies across industries implement a range of distribution and retail solutions to maximize access to their products and services while minimizing costs. Product and service innovation is just one piece of the inclusive business puzzle; just as important is business Two common themes are: model innovation, of which distribution and retail are key components. Companies must maximize access Leveraging retailers: to their products and services in ways that do not add Selling through local retailers, rather than prohibitively to costs — either directly through higher building dedicated new stores. prices or indirectly through financial costs associated with traveling to a retail outlet that is far from home. Leveraging technology: Using different combinations of hardware, The challenges include: software, and telecommunications innovations to increase efficiency. Logistics: BOP customers are often located in villages or crowded and geographically segregated urban slums where it can be difficult for companies to deliver products and services. Issues include sheer distance, transportation infrastructure that is inadequate or in poor condition, limited access to energy needed to keep telecommunications running and products like BOP customers are food, beverages, and pharmaceuticals cool. Because so many transactions happen in cash, located both in rural and crime can be a complicating factor. urban areas and have Customer habits: varying levels of access Because of limitations on their time and transportation budgets, BOP customers often to complementary or have well-established routines, visiting specific competing products neighborhood shops to access particular products and services. These routines can be important sources of social connections and the relationships involved can make them especially hard to change. 27 Engaging BOP Customers: Distribution and Retail Solution: Leveraging Retailers BOP customers need access to products and services in their own communities as they lack the time and money to travel long distances. Building dedicated new storefronts and hiring sales staff can be prohibitively costly for a company, and it is common for companies to instead leverage existing retailers, sometimes retailers who are at the BOP themselves. Existing retailers have the advantage of proximity and also small vans, motorcycles, or even pushcarts that are well- have existing relationships with end customers. In some suited to their territories. cases, they even allow customers to purchase on credit. Such retailers, especially BOP retailers, tend to be small, have CAPACITY BUILDING: little space to store inventory, little business training, and no Providing basic business skills training on topics such as access to finance. sales and marketing, inventory management, or financial management, as well as industry or product-specific Companies leveraging retailers use several tactics to help knowledge. Capacity-building may be delivered through in- grow sales and cement customer loyalty. These tactics store coaching, classroom training, or e-learning modules. benefit retailers as well as the companies whose products they sell. Retailers tend to see increases in overall sales, not This training helps retailers grow their businesses, and just sales related to the product of any one company. As also encourages loyalty and strengthens the company’s a result, there is room to shares costs with development relationship with them. Some companies deliver capacity- donors and other companies. building support themselves, while others contract training companies or civil society organizations. The tactics include: DISTRIBUTION FACILITATING ACCESS MICRO-DISTRIBUTION: AND RETAIL SOLUTIONS LEVERAGING TO FINANCING: Making frequent deliveries TECHNOLOGY Offering retailers the option to purchase of small amounts of product, on credit, whether directly or through sometimes dividing bulk packs company subsidiaries, or by referring of various products to assemble custom assortments based LEVERAGING them to third-party financial institutions RETAILERS on specific retailer needs. such as microfinance institutions, Companies often contract specialized lenders, and banks. Some a layer of independent local companies actively support retailers to distributors with relationships obtain financing, for example by providing that enable easier or safer access financial institutions with purchase to particular communities, or use histories to help assess credit risks. 28 Leveraging Retailers: Micro-distribution ALQUERÍA S.A., COLOMBIA Alquería is Colombia’s third-largest dairy company engaged in production and marketing of a wide range of ultra-high temperature (UHT) dairy products. Alquería uses more than 140,000 small mom-and- pop retailers to reach BOP customers. Because UHT lasts longer than pasteurized milk and does Leveraging Retailers: not rely on refrigerated systems, storage is easy and affordable for these small shops and their customers. Capacity Building Every morning, company staff visit small retailers nationwide, taking orders to be delivered the following MILLICOM, AFRICA AND LATIN AMERICA day. Depending on location, deliveries are made anywhere from three times a week to once a day by Operating under the Tigo brand name, Millicom third-party transporters using trucks, carriages pulled offers telecommunications and digital services to by motorcycles, customers at all income levels in 14 Latin American and small trolleys and African countries. Millicom also offers mobile that support payments, and most recently, life insurance. canteens and very A strong retail network has been critical to Millicom’s small shops. This success. The company reaches customers through distribution and 700,000 existing retail outlets, mostly small mom- sales strategy and-pop shops that sell an array of products including accounts for competitors’ mobile phones and SIM cards, as well more than half of as 40,000 “freelance” promoters who exclusively sell Alquería’s revenues. Tigo phones and SIM cards. Millicom has found that In 2009, Alquería introduced a new distribution strategy knowledgeable agents are essential to the customer targeting very small towns and remote areas. In this experience. As a result, Millicom launched the Tigo model, Alquería selects one person in a specific locality Sales School Program to train agents to register to serve as an independent distributor to small retail new customers in compliance with regulatory outlets in that area. Each person must meet screening requirements. The program empowers the sales criteria such as being married or be recommended force to become small, professional entrepreneurs, by a local priest. Because UHT milk does not require while educating them about the entire basket of refrigeration, his or her home serves as a warehouse, Tigo offerings, so they can help customers choose and, in some instances, Alquería may provide financing the right plans and understand new and unfamiliar for a motorcycle or small truck for deliveries. services, such as insurance. See full case study: See full case study: www.ifc.org/inclusivebusiness/casestudies www.ifc.org/inclusivebusiness/casestudies 29 Engaging BOP Customers: Distribution and Retail Solution: Leveraging Technology Companies use technology to improve access to their products while minimizing physical distribution costs and maximizing efficiency. In addition, as access to technology continues to spread throughout BOP communities, companies are able to deliver products and services virtually. EFFICIENT PHYSICAL VIRTUAL DISTRIBUTION: DISTRIBUTION: Using technology to distribute a product or service in Using technology to reduce labor and logistics costs, virtual, rather than physical, form. Increasingly being increase speed, and minimize losses. Companies use seen in distance learning and telemedicine, virtual tablets, cell and smart phone applications, mapping/ distribution enables companies to reach an almost geo-referencing programs, and e-platforms to unlimited number of remote customers at very little extra improve efficiency of physical distribution to the BOP. cost. It also reduces transaction costs for the customer, Companies also obtain and transmit data points from who otherwise would have to allot time and money to various locations back to the central office for analysis, travel to the company’s physical location. In the case of often allowing companies to view data specific to a healthcare, travel might also pose a health risk. Using particular retailer or customer through geo-referencing technology, companies virtually monitor their customers’ applications. When working with small retailers, real- performances in real-time and provide feedback and time, mobile phone-based ordering and payment from service adjustments if necessary. Companies can leverage small retailers can significantly existing retailers or common spaces cut costs, increase response in the community if customers time, reduce the need for DISTRIBUTION require computer access. company staff to visit retailers in AND RETAIL person, and eliminate the perils SOLUTIONS LEVERAGING TECHNOLOGY of dealing in cash. This can lead to better customer targeting and faster and more efficient LEVERAGING distribution to BOP customers. RETAILERS 30 Leveraging Technology: Leveraging Technology: Virtual Distribution Virtual Distribution FUNDACIÓN CARDIOVASCULAR, COLOMBIA SUVIDHAA, INDIA Colombia’s Fundación Cardiovascular (FCV) is the Suvidhaa Infoserve Private Limited enables Indian largest private sector healthcare network in the consumers, who transact primarily in cash, to pay country. It focuses on small cities with limited access online for a wide variety of products and services to specialty care. Approximately 45 percent of its — many of which are virtual and do not require patients are in the low-income group. physical distribution, including train tickets, insurance premiums, mobile airtime, and more. This expands the FCV uses telemedicine to expand its reach to low- marketplace for consumers who would otherwise income patients in the more remote areas. General have had to travel long distances and forego wages practitioners and nurses outside of FCV’s network to make these purchases, and for companies gain access to FCV specialists for consultation, wishing to reach these consumers. More recently, interpretation of data and imaging, and even remote the company has become one of the leading players in monitoring India providing domestic remittance services. of patients in intensive Suvidhaa reaches consumers through a network of care through Suvidhaa Points where purchases and payments are a range of made. Suvidhaa Points are small-scale retailers whose proprietary primary business may be to sell groceries or fast- hardware moving consumer goods. The owners of the points and software must own a computer, a printer, and broadband solutions internet service to make online transactions for their designed and customers. Suvidhaa Points are selected by Suvidhaa assembled in- distributors, somewhat larger and financially stronger house. These solutions include mobile diagnostic and retailers, who manage an average of 200 Suvidhaa monitoring units, handsets to scan x-rays and other Points each. The distributors advise Suvidhaa Points images, digital patient records, a web portal, and a on day-to-day operations, managing cash and credit, communications center. and other topics. Virtual distribution dramatically reduces the See full case study: cost of FCV’s services and increases the likelihood www.ifc.org/inclusivebusiness/casestudies of low-income patients seeking specialty care. Fees are paid by patients’ insurance plans. There is a government-subsidized insurance plan for the unemployed and informally employed, which covers more than half of the country’s population. See full case study: www.ifc.org/inclusivebusiness/casestudies 31 32 OVERLOOKING THE CENTRAL KUMASI MARKET AT CLOSING TIME IN KUMASI, GHANA, JUNE 22, 2006. PHOTO: JONATHAN ERNST / WORLD BANK PHOTO ID: JE-GH060622_33527 WORLD BANK Engaging BOP Customers: Marketing and Sales The Challenge The Solutions Unlocking willingness and ability to pay Companies implement a range of marketing and sales solutions to unlock BOP customers’ willingness and ability to pay. Even the most promising products and services do not sell themselves. This is particularly true in BOP markets. These include: Risk perception Communicating value: BOP customers have limited choices and the Reducing the perceived risk of the companies’ perceived risk of unfamiliar product and service products and services. categories is high — categories ranging from insurance to natural gas to fortified foods Alternative pricing: to technical and vocational education. BOP Finding ways to reduce prices for BOP customers may even be reluctant to try new customers. products and services in familiar categories, such as a new brand or an existing brand they have Facilitating access to financing: Providing or brokering access to financing. not used before. This is especially true when doing so would threaten existing routines or Facilitating payment: upset relationships with providers of alternate Making it easy for BOP customers to pay for products or services. Change can feel risky, products and services. and BOP customers need to be convinced it is worthwhile. Financing BOP customers also need financial help to make purchases. Despite companies’ best BOP customers around efforts to maximize affordability through product and service development and the world come from distribution innovations, BOP customers with dramatically different low, fluctuating incomes and limited savings struggle to purchase big-ticket products and backgrounds and have services, such as education and housing, and different cultural norms, even small everyday items like groceries. values, and tastes 33 Engaging BOP Customers: Marketing and Sales Solution: Communicating Value Before BOP customers spend on a new product or service, they need to understand its value, how it works, and also have any perceived risk associated with it reduced. This hurdle is especially high for product and service categories that they never used before, they previously received for free, or were previously provided by the government. Inclusive businesses communicate the value of their products and services to BOP customers through: PROMOTIONAL CAMPAIGNS: companies with insight into customer needs and Raising awareness about a product or service category, expectations. Some companies also train their networks how it adds value and can benefit the customer (especially of retailers to answer questions that relate to BOP in areas such as health), and why it is worth paying for, as customers or engage social workers due to their strong well as specific product or service attributes. Promotional ties to the community. material should be relevant in the local context; for example, it might relate the product or service to CUSTOMER EDUCATION traditional solutions. Typical promotional channels include PARTNERSHIPS: radio, television, celebrity endorsements, and signage at Combining customer education efforts with other retailers and other frequented locations like train stations. interested parties. Companies may conduct workshops and expositions with other related businesses in similar DIRECT ENGAGEMENT: fields, service providers, or Interactive sessions to answer MARKETING government agencies. If the questions, appease concerns, and AND SALES product or service supports the help potential customers sign SOLUTIONS ALTERNATIVE goals of NGOs, the company PRICING up for the service. Companies go can partner with the NGO to out into communities to answer conduct educational campaigns. COMMUNICAT- questions and demonstrate Some companies piggyback ING VALUE how their products and services on government promotional work, conduct workshops, and FACILITATING initiatives related to their ACCESS TO establish information exchange FINANCING businesses. centers or training sites. This direct interaction also provides FACILITATING PAYMENT 34 Communicating Value: Direct Engagement JAIN IRRIGATION SYSTEMS LTD., INDIA Jain Irrigation Systems (JISL) is the largest manufacturer of micro-irrigation systems in the world. JISL’s systems enable small farmers to switch to water and energy-efficient irrigation systems Communicating Value: such as drip and sprinkler which yield water savings Promotional Campaigns, of 30 to 65 percent over traditional, once-per-year, surface irrigation systems. Beyond micro-irrigation, Direct Engagement, JISL is also the world’s largest tissue culture company, Partnerships producing approximately 60 million plants, including banana and pomegranate plants, and supplying them to farmers throughout the country. JISL has recently AADHAR HOUSING FINANCE, INDIA introduced solar pumps and other solar products for use in irrigation and supply of drinking water. Aadhar Housing Finance (AHFL) enables home ownership opportunities for low and lower middle- The traditional mindset of many small farmers in income households in India by extending housing India, their lack of knowledge about micro-irrigation loans. More than half of its borrowers have average systems, and the relatively high cost of the product monthly household incomes between $100 and $400. made marketing a challenge for JISL. The company overcame this challenge by using approximately Customer interaction and education are AHFL’s 1000 of its own agronomists and engineers preferred means to engage low-income customers. to engage directly with small farmers in their Mortgages are relatively complex products, so communities to explain the value of the systems. the company works hard to simplify and localize In addition, each year over 50,000 farmers visit information and deliver it in the vernacular through the Jain Hills Research and Development facility high-touch, high-impact awareness drives. These to learn the basics of irrigation and agronomy. The awareness drives include periodic events at affordable company also trains its 4,500 distributors and dealers housing developments, workplaces, and village to teach farmers to use the systems. markets, and partnerships with lawyers and architects to discuss technical and legal issues. AHFL also joins To date, JISL has trained an estimated 30 to 32 million forces with banks, construction materials companies, farmers on the value of micro-irrigation systems government housing agencies, and affordable housing and on various production techniques. In addition developers to promote home loans. to serving BOP customers, JISL also engages small farmers as suppliers, purchasing fruits and vegetables Since March 2011, AHFL has extended loans to more from them for processing and sale in international than 12,000 low and middle-income households. and domestic markets. See full case study: See full case study: www.ifc.org/inclusivebusiness/casestudies www.ifc.org/inclusivebusiness/casestudies 35 Engaging BOP Customers: Marketing and Sales Solution: Alternative Pricing Alternative pricing options can help companies reach lower-income customers, who otherwise would be commercially unviable to serve. Companies make alternative pricing viable in two primary ways: COST SHARING: funding may be available to cover all or a portion of costs. Distributing responsibility for payment to multiple Donor funding may also be available to reduce the final parties, beyond the customer. In cases where the product price to the customer. or service increases the BOP customers’ patronage of another business, companies can charge the business full TIERED PRICING: or partial cost of the service, for instance, by charging Charging different customer segments different prices them a monthly service fee or a portion of the overall according to their ability to pay. In some sectors, such cost. Other companies, especially those in the technology as utilities, tiered pricing may be mandated by the sector, develop business-to-business models that enable government. businesses to more effectively reach BOP customers. In sectors deemed a priority by the government, public MARKETING AND SALES SOLUTIONS ALTERNATIVE Different pricing PRICING structures can deflect COMMUNICAT- part of the cost away ING VALUE from the BOP FACILITATING ACCESS TO FINANCING FACILITATING PAYMENT 36 Alternative Pricing: Cost Sharing IDEAL INVEST, BRAZIL Ideal Invest is Brazil’s largest private student loan provider expanding access to tertiary education, having benefited over 40,000 students since 2006. Ideal developed a signature lending product, the Pravaler loan, which is available to students enrolled in any one of the 8,000 approved courses at Ideal’s Alternative Pricing: 175 partner universities throughout the country. Tiered Pricing Pravaler borrowers can join Ideal’s zero interest program, where students pay only the principal amount of the loan and the participating AEGEA SANEAMENTO E PARTICIPAÇÕES S.A. university pays 100 percent of the interest. (AEGEA), BRAZIL The universities’ willingness to participate in the zero interest program and, in effect, pay Ideal a AEGEA is the third largest private sector provider commission reflects the value universities place on of water and sanitation services in Brazil with Ideal’s student financing. Ideal thus expands access concessions in six states. The company’s tariff rates to their partners’ programs for students who would are negotiated with municipalities and stipulated in otherwise not be able to afford it. its concession agreements. Its “social tariff” program grants a 50 percent discount to qualified customers, In 2013, Ideal marked an important milestone with the with qualification requirements determined by signing of an exclusive partnership with Banco Itaú for the municipalities that grant the concessions. In the distribution of private student loans in Brazil. some areas, requirements include a combination of a maximum income level and maximum use of See full case study: electricity and water. If consumption goes above the www.ifc.org/inclusivebusiness/casestudies maximum, the household is billed at regular rates for the overage amount. Multiple overages result in a loss of eligibility. Social tariffs are not mandatory, but some municipalities consider them when awarding concessions. AEGEA can negotiate limits on the number of social tariffs it offers with municipalities and regulatory agencies to ensure financial sustainability. See full case study: www.ifc.org/inclusivebusiness/casestudies 37 Engaging BOP Customers: Marketing and Sales Solution: Facilitating Access to Financing Facilitating access to financing is necessary to help BOP customers make significant investments, as well as small purchases that need to be made daily or weekly, regardless of cash flows. BOP customers typically do not qualify for loans or credit cards from commercial banks, because they lack formal credit histories or proofs of income. Companies facilitate access to financing for BOP customers in two primary ways: DIRECT CUSTOMER CREDIT: THIRD-PARTY FINANCING: Offering customers time to pay for their purchases in Referring BOP customers to third-party financial full, especially in cases where an up-front investment is institutions, such as microfinance institutions, specialized needed. Some companies provide financing directly, while lenders, banks, and government agencies. Sometimes others establish subsidiaries for this. Some deliver the companies actively support customers to obtain financing, product or service up front and collect payment over time, for example by helping understand the costs and benefits while others require a down payment. of borrowing, assessing eligibility, and filling out forms. MARKETING AND SALES SOLUTIONS ALTERNATIVE Financing is key to PRICING broadening access for COMMUNICAT- BOP customers ING VALUE FACILITATING ACCESS TO FINANCING FACILITATING PAYMENT 38 Facilitating Financing: Direct Credit TRIBANCO, BRAZIL Tribanco is a Brazilian financial institution established by Latin America’s largest wholesaler and distributor, Grupo Martins. Grupo Martins has been in business for over 60 years and is one of the top 100 companies in Brazil. Tribanco serves Martins’ more than 465,000 micro, small, and medium-sized retailers with credit Facilitating Financing: to purchase inventory and make store improvements. Direct Credit Tribanco also enables retailers to offer customer credit cards to their shoppers, more than 70 percent of whom earn less than $450 per month and often TRUSTCO FINANCE, NAMIBIA need help to sustain regular, everyday purchases like groceries when cash flows are tight. After When Trustco Group Holding acquired Namibia’s receiving customer creditworthiness training from Institute for Open Learning (IOL) in 2005, it saw a Tribanco, retailers decide which of their customers business opportunity in providing students enrolled are eligible to receive the cards. Although Tribanco in tertiary education courses with direct access to assumes non-payment risk, stores with higher affordable tuition financing. Today, approximately repayment rates receive lower transaction fees. 98 percent of IOL students receive loans from Trustco Finance, a subsidiary of Trustco Bank Repayment is high — over 95 percent — for two Namibia Limited. reasons. First, store owners often have first-hand knowledge of their customers’ creditworthiness. IOL’s extensive customer outreach supports Trustco Second, store owners often have good relationships Finance in reaching new borrowers. IOL’s marketing with their customers. Customers do not want to team regularly visits government agencies, secondary jeopardize the relationship or their ability to continue schools, and corporations to provide potential shopping at their local stores, as it would mean having students with information, both on academic to travel farther away to buy everyday staples. programs at IOL and on student loan options from Trustco Finance, and to assist potential students See full case study: with their course and loan application forms. Trustco www.ifc.org/inclusivebusiness/casestudies Finance’s close relationship with IOL provides students with an added incentive to repay their loans, as students want to maintain their standing with IOL. See full case study: www.ifc.org/inclusivebusiness/casestudies 39 Engaging BOP Customers: Marketing and Sales Solution: Facilitating Payment Payments for BOP customers should be made easy. They cannot afford to spend much time or travel great distances to make payments. Added incentives can help, given the many demands on their limited budgets. Facilitating and incentivizing payment is particularly relevant for companies offering products or services on credit or on a recurring basis, where payments need to be made regularly over time. Such companies use a variety of tactics: MOBILE PAYMENTS: USING SOCIAL CONNECTIONS: Taking advantage of the low cost and great convenience Linking payments to valued customer relationships, for of paying by mobile phone. Companies may develop their example via group lending or hiring community members own mobile payment platforms or use platforms offered to manage billing and collection. This provides customers by mobile network operators, banks, and third-party with a social incentive to pay. providers. LEVERAGING EXISTING RETAILERS: Allowing customers to pay their bills at local shops, with balances physically collected or, in markets where mobile payment services are available, transferred to the company by mobile phone. MARKETING AND SALES SOLUTIONS ALTERNATIVE PRICING COMMUNICAT- ING VALUE FACILITATING ACCESS TO FINANCING FACILITATING PAYMENT 40 Facilitating Payment: Using Social Connections MANILA WATER COMPANY, PHILIPPINES Manila Water Company provides water and wastewater services to more than 6 million residents in the Philippines. Through Manila Water’s social tariff program, low-income customers who use less water pay less per cubic meter of water than customers who consume more, such as higher income and commercial customers. Facilitating Payment: Manila Water reaches low-income communities by working with local government units and Mobile Payments community-based organizations. This establishes positive incentives for all stakeholders, helping make operations successful and sustainable. In informal SHANGHAI F-ROAD COMMERCIAL SERVICES, settlements and other very low-income areas, the CHINA company uses local Shanghai F-Road Commercial Services developed a social connections business-to-business solution for mobile banking in to improve payment China. F-Road created a technology platform which rates. Water allows an institution’s customers to access mobile meters are placed banking services and other services including bill side-by-side in payments. The platform itself is free; financial public areas where institutions pay a monthly fee per active user. all community members can F-Road made its technology compatible with low- view usage levels end feature phones as well as smart phones, as and calculate corresponding fees. Where individual only 5 percent of China’s rural population use smart connections are not yet possible, bulk connections phones. Also, users transact with the platform via are used to provide access to communities. text messaging—a familiar medium—and do not Community members assign or elect individuals to need data plans. Pre-programmed SIM-overlay cards, administer collections, monitoring, and maintenance. distributed to users via their financial institutions, are This helps build a sense of local ownership and inserted in phones to encrypt their texts. responsibility that helps keep the system in good repair, promotes on-time payment, and discourages F-Road has served 4.3 million rural customers water pilfering. In turn, this results in job creation, through its partnerships with over 1,100 financial superior service, and high water quality for the institutions. The company processes more than 32 community. million mobile banking transactions each month. See full case study: www.ifc.org/inclusivebusiness/casestudies 41 SHARED PROSPERITY THROUGH INCLUSIVE BUSINESS: HOW SUCCESSFUL COMPANIES REACH Conclusion THE BASE OF THE PYRAMID It is IFC’s business to invest in inclusive businesses. In BOP suppliers and customers, even in the most difficult just the past ten years, IFC committed over $11 billion to situations. Improved business environments will enable more than 400 companies with inclusive business models. even more companies to follow their lead and adopt These companies are active in 90 emerging markets and inclusive business models.  operate in many different industries. Looking to the future, the private sector will play an And these inclusive business models work. important role in improving people’s lives. We already see them incorporating the BOP into their value chains. IFC sees the same financial returns from its inclusive The core challenge is how to accelerate the spread of business clients as from its overall portfolio. Inclusive these inclusive business models. This challenge — and business leaders have shown, that with strong business the opportunity — is bigger than any one organization, acumen, they can successfully engage BOP suppliers government, or business. But the reward — reducing and BOP customers. These IFC clients reach millions of poverty and boosting prosperity — is big. While we low-income people — farmers, patients, students, utility see that inclusive business models have a key role to play, customers, first-time home owners, and mobile phone they must be supported by collaborative efforts to have subscribers. People who comprise the BOP. Each client the maximum impact at the BOP. teaches us a unique lesson. IFC is committed to learning from these clients and to sharing these lessons with the Building upon its existing knowledge base, IFC seeks to global business and development community. team up with key actors to do just that. Together, we can support the more than 4.5 billion people who live at the Working with the BOP takes more than a good business base of the economic pyramid with the products, services, idea. It requires ingenuity, creativity, and perseverance and economic opportunities they need to forge their to overcome the many obstacles inherent in developing paths to prosperity. countries. Companies often need to create and invest in their own value chain, upstream or downstream. IFC’s clients succeed despite their challenging business environments. They have shown that it is possible for companies to create value, both for the business and for 42 DRINKING WATER FROM A PUMP. MALI. PHOTO: © CURT CARNEMARK / WORLD BANK PHOTO ID: ML119S17 Inclusive Business Models International Finance Corporation 2121 Pennsylvania Ave, NW Washington, DC 20433 inclusivebusiness@ifc.org ifc.org/inclusivebusiness November 2014