Social entrepreneurs face many challenges: finding the right impact investor, working with government regulations in emerging markets (or lack thereof), meeting the needs of citizens at the Base of the Pyramid, designing products and services that are profitable and scalable. Most importantly, social entrepreneurs must make their products and services affordable. The world’s poorest citizens have no savings and little access to formal credit, but that is not to say that they do not have purchasing power. Their individual spending may be small, but combined it is largely powerful. However, the problem for individuals is the large, up-front commitment to a purchase is close to impossible for those who earn an irregular and inadequate income. Even if the purchase will pay for itself after a period of time, it’s simply not feasible for the world’s poorest citizens. This post looks at pricing models that work and serve the BoP in ways that directly meet their needs. It’s not enough to simply have a well-designed product with good intentions. Social entrepreneurs need to create innovative pricing models.
In a report from Monitor, “Emerging Markets, Emerging Models,” Karamchandani et al. introduce the example of an Indian company, Servals. Servals designed a kerosene lamp that was more efficient, safer, and would “pay for itself after about two months.” However, to everyone’s surprise, sales were way below forecasted estimates. Customers at the BoP don’t have disposable income to “invest,” even if it will save them money in the long run. After a redesign of the product that allowed for a lower retail price, sales increased significantly to over one million units by 2008 (p. 11). This is one option for social entrepreneurs: simply redesign the product so it is more affordable. In the Monitor report, the authors outline seven different pricing models that “have the best chances of success,” (p. 7) determined after a multi-year extensive research project in emerging markets.
Serval lowered the price of their product with a cheaper design. But what if the product’s price can’t be lowered any further? The price of solar power, for example, deters many middle-class consumers even here in the US, so how can citizens at the BoP afford it? Simpa Networks developed an innovative pricing model to resolve that exact problem. Simpa designed its pricing model to be the same price as what many would spend on kerosene lamps. Instead of inefficient kerosene lamps, Simpa offers modern, small-scale solar home systems made affordable by allowing consumers to pay-as-they-go. The systems include “a solar panel, battery, charge control, at least 3-4 lighting points, a mobile charging port and power for charging or powering small DC devices.”
This pricing model is based on “radical affordability,” which Simpa defines across three axes: “the initial purchase price, the total cost of ownership, and the flexibility of expenditures over time.” Simpa’s model of radical affordability is one solution to the pricing model problem that entrepreneurs in emerging markets face. This post is the first of many that will highlight examples of companies that are practicing effective and innovative pricing models that best serve the BoP. For even more examples, check out “Emerging Markets, Emerging Models.“