Reaching deep in low-income markets Enterprises achieving impact, sustainability, and scale at the base of the pyramid

Supported by Table of Contents

Preface 03 Executive summary 04 Introduction 10 Reaching the BOP—Key report concepts and variables 12 Methodology 14 Findings 22 Implications for the field 36 Conclusion and next steps 38 Case studies 41 Snapshots 85 Appendix I 92 Reaching deep in low-income markets I. Preface

Enterprises seeking to achieve both impact and financial returns—and the investors that back them—have been working hard over the past dozen or more years to deliver critical goods and services to those living at the Bottom of the Pyramid (BOP). While these collective efforts have clearly had tremendous impact helping large numbers of very poor people, it still remains unclear how deeply down into the BOP we as a field are reaching. Are these enterprises consistently reaching people living on $8 a day? How about $4, or $2, or less? Given the lack of good data, we really do not know.

And yet we need to. In order to understand how to reach deeply down the pyramid, we need to understand who is successfully reaching customers in the lower-income ranges. In order to know when we should subsidize for-profit enterprises to get them to reach deeper into the BOP, we need a better understanding of the “natural” limits to their current reach.

This report is intended to help provide greater transparency and guidance to advance the broader field of funding for businesses serving the deep BOP. It builds off the recent report by Omidyar Network, Frontier Capital1, in which a number of variables and hypotheses were proposed about how best to reach the BOP and other low-income populations.

This report synthesizes the ideas and contributions of numerous individuals and organizations; we are extremely grateful for their time, energy, and insights.

We would like to acknowledge our funding contributors in the research, Omidyar Network, the Rockefeller Foundation, and the MacArthur Foundation, who have contributed their time, insights, and networks to the project. In particular, we would like to recognize Mike Kubzansky (Omidyar Network), Claudia Juech (Rockefeller Foundation), and Urmi Sengupta (MacArthur Foundation). Furthermore, we would like to thank the report’s Advisory Committee for their continuous support and guidance: Louis Boorstin (Osprey Foundation); Tom Adams and Sasha Dichter (Acumen); Richard Gomes (Shell Foundation); Chris Jurgens (US Agency for International Development (USAID)); Vaughan Lindsay (Leapfrog Investments); and Graham MacMillan (Ford Foundation).

Finally, we would like to thank our project team—Michelle Larivee, Kristen Dobson, and Allie O’Shea—for their outstanding work.

If you would like to get in touch with us about this report, please contact Kurt Dassel ([email protected]) or John Cassidy ([email protected]).

June 2017 3 Reaching deep in low-income markets II. Executive summary

Over the past 10-15 years, entrepreneurs, impact investors, incubators and accelerators, foundations, development banks, major donors, and even some large-scale corporations have been working hard to reach those living at the BOP by building, investing in, and supporting for-profit businesses that reach BOP customers. Unlike traditional development projects that often rely heavily on government or philanthropic grant funding (which often suffer from finite funding streams), for-profit enterprises can both sustain themselves and grow over time as long as the product offered elicits sufficient demand and revenues from its buyers. While important roles certainly remain for governments, philanthropic actors, and mission-driven non-profits in providing critical goods and services to the poor, the potential scalability and sustainability of for-profit enterprises serving the BOP as customers also holds significant promise for long-term development impact.

That said, there are going to be limits to leaving enterprises with the appealing and whom for-profits can reach. At some point, often survival-focused option of moving How deeply down a potential customer will simply not have up the pyramid to more stable customer enough money to buy the good or service. segments. Governments and donors then into the BOP This begs the question of how deeply face the decision of when to subsidize down into the BOP for-profit enterprises for-profit enterprises to reach customers for-profit enterprises can reach while still achieving profitability, that may be “slightly-too-poor” to buy the financial sustainability, and scale? As a good or service. But to know if and when can reach while field, we do not have a good idea as to it is appropriate for a development actor how deeply we are reaching. The data to subsidize a for-profit enterprise, we first still achieving on customer income is hard to come by need to know how deeply an enterprise can and most of these organizations are hard “naturally” reach into the BOP without that profitability, financial pressed to spare the resources to gather help. And again, to know this, we need the it. And yet, if we are to better understand data on the income level of the customers sustainability, and how to reach deeply into the BOP, we need of various for-profit enterprises reaching to understand which enterprises are doing BOP customers. scale? As a field, so; in order to specify best practices for reaching deeply, we need to know what a Our research makes an early effort to gather we do not have best practice is. Moreover, an enterprise some of this data and to begin to assess operating in BOP markets will naturally seek what it takes to reach down deeply into the a good idea as to to reach an underserved population that BOP. It is by no means a definitive statement also has sufficient income that it can pay on the depth of that reach or on how to do how deeply we are enough for the good or service to enable the it. The data is simply too scarce and spotty enterprise to profit, sustain itself financially, at this stage to be able to do so. That said, reaching and hopefully pay for scaling to a broader we are confident this document presents group of customers as well. But customers the most comprehensive assembly of at the BOP often do not have the financial relevant data available today. means to be a predictable customer base,

4 Reaching deep in low-income markets

Reaching the BOP—Key report concepts While it is important to consider and test On the other hand, serving multiple income and variables: Ability to reach deeply may whether or not asset light businesses or segments—segments with potentially be influenced by a few general conditions. those selling pull products reach more different tastes, product preferences, One hypothesis is that enterprises, which deeply into the BOP, the reality is that much, desired price points, and modes of are able to function effectively with an if not most, critical development work payment—could complicate business “asset light” business model, will be better necessarily entails asset-heavy operations, operations, driving up costs or detracting able to serve poorer customers.1 At a often delivering push products. Most of from an enterprise’s ability to reach lower high level, asset light businesses have what we as a development field want to do down the pyramid through products and low marginal costs and up-front capital involves efforts such as providing access services tailored to the specific needs of the requirements (e.g., a mobile phone app). In to health, education, clean drinking water, deep BOP. contrast, “asset-heavy” businesses carry a basic sanitation, life-saving vaccines and higher cost structure due to the need for medicines, safer cooking methods, and so Methodology: To assess the extent to physical presence, complex distribution forth. These are all goods and services that which these three conditions help or hinder channels, and a skilled labor force (e.g., a must typically be manufactured or carried an enterprise’s ability to reach more deeply manufactured product). The more asset long distances, distributed through real down the income pyramid, we opted for a light a business, the lower its infrastructure, property, delivered by skilled and expensive case study approach. Through secondary overhead, and distribution costs, and the workers, sold via lengthy educational research and interviews, we narrowed more it ought to be able to offer a low price campaigns, and the like. It stands to reason down a list of 100+ potential case studies for its products and thus, reach customers then that enterprises with asset-heavy to a set of 20. We recognize there are with limited purchasing power. A second or push products face quite challenging several limitations to using a relatively small hypothesized condition is that enterprises conditions to reach deeply into the BOP. The sample size for case studies, including selling “pull” products will be able to reach question then becomes whether there are overrepresentation of enterprises that more deeply than those selling “push” conditions or variables that might mitigate have lasted long enough to be studied products. Highly valued products for which these challenges. (e.g., survivor bias), have volunteered to there is ready demand and that can be participate in the study (e.g., self-selection used immediately with little risk are pull Here we looked at whether or not having bias), and have made some effort to collect products (e.g., food and electricity). These some customers at higher-income levels data on customers (potentially reflecting are in contrast to “push” products, which are (e.g., $8/day and $10/day) might help the maturity of the enterprise). Our view has goods and services with less obvious value companies also reach lower-income also taken in a dynamic market environment, or that provide uncertain benefits in the customers (e.g., $2/day, $4/day). On the one where many of these enterprises live on the future (e.g., insurance, clean drinking water, hand, accessing higher-income customers, thin edge of profitability on a year-to-year and mosquito nets). Organizations selling in addition to the targeted lower-income basis. Despite these issues, we are confident pull products tend to have lower marketing groups, might confer a number of benefits, that at this stage, given the paucity of and sales costs and thus, ought to be able such as providing a larger number of available data, our case study approach is to offer lower price points, again enabling prospective buyers, buyers who are able to the most effective one available. deeper reach. purchase more consistently and reliably over time, less risk averse buyers, and so forth.

5 Reaching deep in low-income markets

Please see the main report for details on selection criteria. The table below provides a summary of the cases.

Sector Enterprise Est. Geography Description Provides farmers with agriculture production inputs, and buys Aldeia Nova 2012 Angola and distributes poultry and dairy farming outputs Agriculture India, Cambodia, and Operates a network of microentrepreneurs/kiosks that use eKutir 2009 Bangladesh technology to deliver inputs and sanitation solutions Provides loans to low-income college students through risk- FINAE 2006 Mexico Education and cost-sharing agreements with university partners Urban Planet Provides affordable, basic English language instruction via 2007 45 countries Mobile mobile phones Designs, manufactures, and distributes fuel-efficient Burn 2011 Kenya/East Africa Energy cookstoves for urban and peri-urban customers (cookstoves) 45 counties (Asia, Africa, Latin Develops and sells fuel-efficient cookstoves (charcoal, wood, Envirofit 2003 America) and LPG), stove accessories, and lighting products Designs, manufactures, and installs 25-250 kW “mini” power Husk Power 2008 India and Tanzania plants in villages and sells energy on a pay-per-use basis Energy Manufactures, sells, and provides financing for solar home M-KOPA 2011 Kenya, Tanzania, and Uganda (electricity) systems that provide electricity to rural households Manufactures, sells, and services solar electricity systems to Off-Grid Electric 2011 Tanzania and Rwanda rural and commercial customers Provides financial products and services in rural areas through IFMR/KGFS 2008 India Financial an adviser-driven wealth management approach services Zambia, Malawi, and Provides domestic and international money transfer via an Zoona 2009 Mozambique agent network of 1,500+ mobile money transfer outlets Produces and sells compostable low-cost sanitary pads to Aakar Innovation 2011 India and Bangladesh low-income women via a female-led microenterprise model Operates a network of health clinics, focused on quality and Health Livewell Clinics 2009 Kenya efficiency, that serve as a “one-stop-shop” for primary care Swasth Operates nonprofit health centers that provide high-quality 2008 Mumbai, India Foundation primary health care services at half current market rates Offers an affordable and sustainable “self-build” housing Echale 1997 Mexico solution and provides low-cost financing solutions Housing Patrimonio Hoy Provides market-based, do-it-yourself housing solutions to 1998 Latin America (unit of Cemex) low-income families Provides farmers microinsurance products that lower risk of ACRE Africa 2009 Kenya, Rwanda, and Tanzania investing in quality inputs, productivity, and access to loans Provides low-cost insurance and m-Health services via mobile BIMA 2011 15 countries Insurance network operators and financial service providers Designs and delivers affordable microinsurance with MicroEnsure 2002 15 countries in Africa and Asia insurance companies, mobile network operators, and microfinance institutions (MFIs) Purchases, operates, and maintains a network of hygienic Sanitation Sanergy 2010 Kenya toilets; converts waste to agricultural inputs (fertilizer)

6 Reaching deep in low-income markets

Ultimately, we wanted to understand how •• Financially sustainable2 and investing order from most rigorous to least precise, deeply enterprises can reach into the BOP, in scale: Demonstrated financial viability these include: selling their goods and services while also and focused on growing the business •• Rigorous external measure: Grameen’s achieving some level of profitability and before achieving total enterprise Progress Out of Poverty Index survey or scale; we wanted to know if enterprises profitability. third-party funded measurement and are reaching a large number of very poor •• Not yet financially sustainable and evaluation studies. people in a financially sustainable way. moderate growth: Moderate progress Measurement was difficult due to scarce •• Rigorous internal methodology: toward breakeven and scale. data, concerns about confidentiality, and Proprietary enterprise income or financial the subjective nature of concepts like •• Declared non-profit status:Converted health tracking methodology, income “sustainable” and “at scale.” What we were from for-profit to non-profit status. verification through sales or enrollment able to gather in a fairly consistent way was: process. As with business performance, assessing •• Total enterprise profitability and •• Impressionistic internal estimate: depth of reach into the BOP is easier said continuing to scale: Reached profitability Basic customer surveys or focus groups, than done. As there is not yet a standardized on a consolidated enterprise basis and proxy metrics to estimate income (e.g., and widely used method for measuring continued ability to grow. ARPU, monthly rent, geographic level income levels of customers, we report the income data, and occupations). raw customer income data that our case study enterprises were able to provide. In

7 Reaching deep in low-income markets

Finally, we hypothesized that a few conditions affect enterprises’ ability to reach deeply into the BOP while achieving sustainability and scale. The table below outlines the critical indicators used to classify enterprises along these variables (see the main report for a fuller explanation).

Asset intensity Product preference Customer base Heavy Light Push Pull Narrow Wide

Physical product; Digital/mobile Not easily Provides Revenue from one Different income requires products exchangeable fungible income segment segments with manufacturing purchasing varying revenue power contribution Large sales and Shifted risk of Nice-to-have Necessary Relevant to only a Undifferentiated distribution sales and amenities economic particular products network distribution inputs customer segment Highly skilled Paraskilled Expensive Cheaper Single product, Multiple labor labor non-replaceable substitute single price products, good different prices Physical No/limited Difficult-to- Obvious or Limited business Need to distribute facilities physical demonstrate or immediate model risk risk across presence long-term benefits benefits income levels

Findings: Despite the limitations of the •• Third, being asset-heavy and selling a push challenges inherent in BOP markets. It data, as well as of the case study approach, product does not necessarily prevent was often received at an early stage and there are several findings from the synthesis companies from reaching the BOP in a then replaced by more market-rate capital, of our 20 case studies that we believe are financially sustainable way; several have suggesting subsidy does not preclude worth calling out for various stakeholders done it. Moreover, selling to customers businesses from eventually becoming actively seeking to reach the BOP. These across a broader range of incomes is self sustaining. findings include: clearly possible, since the vast majority of •• Sixth, while all our enterprises had an our cases did so, and given its prevalence, •• First, most of the enterprises we studied obvious social impact from the goods may be critical to financial viability are able to reach BOP populations with or services sold to BOP customers (e.g., and growth. critical goods and services and some are access to finance, and greater food able to reach surprisingly deep down (e.g., •• Fourth, regardless of sector or products security), these enterprises also yielded those living on less than $2.50/day and sold, enterprises can improve their a number of less obvious development even $1.25 in some cases). chances for success by using a number of benefits (e.g., job and entrepreneurship common business model design tactics to opportunities, provision of public goods, •• Second, many of the enterprises reaching get more asset light, make products more and improved resiliency of individuals and the BOP and deep BOP are operating fairly preferential, or serve customers across a communities). successfully, at least when we assessed broader range of incomes. them, both in terms of financial viability and growth. •• Fifth, most enterprises in our study did receive some form of subsidized capital, which was often very helpful in mitigating start-up risks as well as navigating the

8 Reaching deep in low-income markets

Implications for the field: An obvious seem to prevent organizations from also Conclusion and next steps: The report implication is that supporting for-profit reaching much lower-income levels; given underscores several areas where there enterprises that provide needed goods its prevalence, this also may be a near is an opportunity for further research, and services to the poor is a viable way to necessity. analysis, and support of enterprises drive a development agenda. Our going-in serving the BOP. These opportunities expectation was that it would prove very A fourth implication is that for-profit span a wide range of topics, from data difficult for asset-heavy businesses selling enterprises can be used to help deliver availability to better understanding how push products to reach deeply down the public goods and other services typically for-profit enterprises go to market within the income ladder to those living around $2-$4 provided by government. Organizations context of other development programs. per day. Our subsequent research, however, provided power, sanitation, health care, Based on our interviews and research tended not to support that expectation. Our housing, and education. For governments with the enterprises, as well as feedback research found that asset-heavy businesses and donors, these enterprises could be we received from leading experts in the selling push products could indeed reach a useful supplement or substitute to field, three specific areas are particularly BOP customers in a financially sustainable government services. important for advancing our understanding way, at scale. of how to effectively serve the BOP: 1) Finally, a fifth implication is that improved information on BOP customers, This having been said, a second implication governments and donors might consider including their needs and behaviors and of the research is that many of these investing in public education campaigns the customer segments they form in the enterprises still seem to benefit greatly to promote certain product categories market; 2) advancing and standardizing from, perhaps even require, some form of or services that benefit society overall. how data is collected, analyzed, and shared subsidy. With the exception of the asset Any spending to get customers to buy for enterprises reaching BOP customers; light business selling pull products, virtually one brand of a product category (or 3) further analysis of when and how every organization received a subsidy of service) over another should of course be subsidies can play an appropriate role some type, indicating such financial support shouldered by individual businesses. But in the launch and growth of enterprises, may be critical. Similarly, a third implication educating customers about the value of a in particular for asset-heavy enterprises is that grant makers and impact investors product category (e.g., preventive health providing push products. These three ought not to insist that all or most of an care, insurance, and improved agricultural areas have implications for future research enterprise’s customers be at a certain inputs) is a public good and can legitimately and technical assistance that is needed level of poverty for that enterprise to be be taken on by government and other from governments, foundations, and eligible for funding. Serving populations at development organizations. BOP investors. somewhat higher-income levels does not

9 Reaching deep in low-income markets III. Introduction

Over the past 10-15 years, a movement from macro challenges related to serving has emerged in the development field that customers in environments without the The potential seeks to deliver critical goods and services needed infrastructure (e.g., appropriate to the very poor through more market- business regulations, physical infrastructure, scalability and based approaches.3 Entrepreneurs, impact and social services) to constraints faced investors, incubators and accelerators, by individuals living at the BOP, including sustainability of for- foundations, development banks, major income volatility and very limited purchasing donors, and even some large corporations power relative to those one or two steps up profit enterprises have been working hard to reach those living the pyramid. After all, these organizations at the BOP by building, investing in, and are exchanging goods and services for serving the BOP supporting for-profit businesses that serve money; at some point, a potential customer BOP customers. will simply not have enough money to buy as customers also the good or service. Put another way, there These efforts usually have an equally is a limit to how far down an organization holds significant important dual purpose of profitability can go on the income pyramid and still and scaled social impact. Traditional make sufficient profit to be both financially promise for long- development projects often suffer from sustainable and able to scale. This begs the finite funding streams. While significant question of how deeply down into the BOP term impact impact can be achieved, it often lasts only can for-profit enterprises reach while still as long as the allocated budget allows. achieving some level of profitability, financial For-profit enterprises, in contrast, can both sustainability, and scale. sustain themselves and grow over time as long as the product offered elicits sufficient As a field, we do not have a good measure demand and revenues from the buyers. of how deeply we are reaching. While While there certainly remains important, some enterprises know their customers even dominant, roles for governments and well enough to understand how far they mission-driven non-profits in providing are operating down the income pyramid, critical goods and services to the poor, the most do not. The data on customer income potential scalability and sustainability of is hard to come by. Gathering it takes for-profit enterprises serving the BOP as resources—time, money, person-power— customers also holds significant promise for and most of these organizations are hard long-term impact.4 pressed to spare such resources. And yet, as a field, it is very important for us to While there is considerable potential in understand how far down into the pyramid these more market-based approaches we can go. and a number of oft-cited success stories (M-Pesa, d.light, Aravind Eye Hospitals, First, we want to understand how to reach etc.), even the most devout disciples of this deeply into the BOP; the more people we movement will not argue that everyone can can reach with critical goods and services, be served by a for-profit enterprise. Several the more lives we can improve and the more challenges face BOP-focused enterprises, people we can help lift out of poverty. But,

10 Reaching deep in low-income markets

in order to understand how to move down One way to reach these customers would be statement on the depth of that reach or on the income pyramid, we need to understand to develop a government or philanthropic how to do it. The data is simply too scarce which enterprises are doing so; in order to program, and certainly that will be needed and spotty at this stage to be able to do so. specify best practices for reaching deeply, in many instances. But, likely, a more cost- That said, we are confident this document we need to know who is modeling a best efficient way to reach them is to subsidize presents the most comprehensive assembly practice or at least good practice. To do that, the for-profit social business so that it can of relevant data available today. Moreover, we need data on the income level of the reach down a little deeper and do so in a we are pleased to report that the findings customers of various for-profit enterprises way that does not jeopardize the financial are, on the whole, encouraging. Specifically, that are serving BOP customers. health of the entire enterprise. This report most of the enterprises we studied are aims to assess the use of subsidies through able to reach BOP populations with critical Second, we think it is important to the case studies, providing some evidence, goods and services and some are able to understand the impact of subsidies on for- as available, of when and how subsidies reach surprisingly deep down (those living profit businesses serving a poor customer were used to support the enterprises. on less than $2.50/day and even $1.25/ segment. An enterprise operating in BOP The findings, however, do not provide a day in some cases). Many of these deep- markets will naturally seek to reach an comprehensive framework or offer a set of reaching organizations are also operating underserved population that also has guiding principles for future decisions on fairly successfully, both in terms of financial sufficient income that it can pay enough how government or investors should make viability and growth (though given the tight for the good or service to enable the decisions about how and when to support margins, difficult operating conditions, and enterprise to profit, sustain itself financially, BOP-focused enterprises. Such a framework fragile customer base, caution is warranted). and hopefully pay for scaling as well. But would likely be a useful tool, but first we Finally, these enterprises are not only customers at the BOP often do not have need to know how deeply an enterprise can having the direct social impact that results the financial means to be a predictable “naturally” reach into the BOP to understand from the goods or services sold to BOP customer base, leaving enterprises with when subsidies would be most effective and customers (e.g., provision of power, and the appealing option of moving up the create the least distortion of the market that food security), they also generate a number pyramid to more stable customer segments; has paying BOP customers. And again, to of less obvious, broader development government organizations face the decision know this, we need the data on the income benefits, such as creating significant job of when to subsidize for-profit enterprises to level of the customers of various for-profit and entrepreneurship opportunities, reach customers that may be a “slightly-too- enterprises reaching BOP customers. providing a wide range of public goods (e.g., poor” set of potential buyers for the good or health care and sanitation), and improving service. Our research makes an early effort to resiliency of individuals and communities gather some of this data and to begin to through products, such as health and crop assess what it takes to reach down deeply insurance. into the BOP. It is by no means a definitive

11 Reaching deep in low-income markets IV. Reaching the BOP—Key report concepts and variables

Depth of reach on the income pyramid While it is important to consider and test will depend to a large extent upon factors whether or not asset light businesses or The reality is specific to a given business, its customers, those selling pull products reach more and its operating environment. Indeed, deeply into the BOP, the reality is that much, that much, if not in later pages, this report will relay some if not most, critical development work “tricks of the trade” that may be useful to necessarily entails asset-heavy operations, entrepreneurs (and investors) seeking to often delivering push products. Most of most, critical serve the BOP. However, ability to reach what we as a development field want to do deeply might also be influenced by some involves efforts such as providing health development more general conditions. One hypothesis and education to populations in urban along these lines is that enterprises that slums and rural villages. It’s about finding are able to function effectively with an solutions for access to clean drinking water, work necessarily “asset light” business model will be more basic sanitation, life-saving vaccines and able to serve poorer customers.5 At a high medicines, safer cooking methods, and entails asset- level, asset light businesses (e.g., a mobile so forth. These are all goods and services phone app) have low marginal costs and that must be manufactured or carried long limited up-front capital requirements. In distances, distributed through real property, heavy operations, contrast, “asset-heavy” businesses (e.g., a delivered by skilled and expensive workers, manufactured product) carry a higher cost sold via lengthy educational campaigns, and often delivering structure due to the need for a physical the like. presence, complex distribution channels, and a skilled labor force. The more asset It stands to reason then that enterprises push products. light a business, the lower its infrastructure, with asset-heavy or push products face overhead, and distribution costs, and the quite challenging conditions to reach deeply more it ought to be able to reduce the price into the BOP. The question then becomes of its products and, thus, reach more deeply whether there are conditions or variables down the income pyramid. which might mitigate this challenge. Here we looked at whether or not having some A second hypothesized condition involves customers at higher-income levels ($8/day enterprises that sell “pull” vs. those that sell and $10/day) might help companies also “push” products. Conceptually, push vs. pull reach lower-income customers ( $2/day and is about a buyer’s expected return on what $4/day). they spend, adjusted for risk and the time lag needed to realize that return. Highly On the one hand, a number of benefits valued products for which there is ready may follow from having a wider range demand and that can be used immediately of customer income levels. Accessing with little risk are pull products (e.g., food higher-income customers, in addition to and electricity). These are in contrast to the targeted lower-income groups, adds a push products, goods, and services with larger number of prospective buyers and less obvious value or that provide uncertain may enable an organization to more quickly benefits in the future (e.g., insurance, clean achieve economies of scale. Higher-income drinking water, and mosquito nets). Even customers might provide a steadier base if buyers see value in push products, they of buyers who are able to purchase more are typically quite reluctant to part with consistently and reliably over time, and, their money to acquire them. Organizations therefore, help a company weather dips in selling pull products tend to have lower purchases from poorer income segments marketing and sales costs and thus ought subject to financial volatility. Wealthier to be able to offer lower price points, again buyers with more disposable income are enabling deeper reach. typically less risk averse and more willing to test out a new product; presuming they like

12 Reaching deep in low-income markets

the product, their observable use of it can as sturdier, higher-quality goods that last the long run, whereas poorer customers make a product seem less risky from the longer and have value-add services, such might not be able to do so and, thus, perspective of lower-income buyers, leading as technical assistance. Or, they might want have to pay per use or rely on financing to product adoption. Similarly, wealthier to lower the risk of their purchase with options available. Alternatively, wealthier buyers might make a product somewhat warrantees or maintenance plans. Thus, it customers might want financing to smooth “aspirational” and encourage purchase by is possible that developing a product that out payments, while poorer buyers might lower-income buyers. sells well to higher-income segments might not want the risk of taking on a long-term make it harder for a business to sell to lower- stream of payments. Again, it could be that On the other hand, serving multiple income income segments. offering pricing options that are attractive to segments could complicate business higher-income segments would discourage operations, driving up costs or detracting Additionally, wealthier buyers might prefer sales to lower-income segments. from an enterprise’s ability to reach lower different payment options and price points. down the pyramid through products and Most obviously, all the product attributes Our research—interview questions, data services tailored to the specific needs of noted above increase a product’s price, and gathering, and case selection—seeks to the deep BOP. It is a maxim of marketing so wealthier customers desiring additional assess the extent to which these three that different customer segments prefer features may prefer higher prices for more conditions help or hinder an enterprise’s different attributes in their purchases. advanced goods or services. Less obviously, ability to reach more deeply down the Wealthier buyers might be difficult for an wealthier buyers might prefer to pay the full income pyramid. enterprise focused on the BOP because cost for a product up front because doing they may prefer different products, such so drives down their per-use price over

13 Reaching deep in low-income markets V. Methodology

Case study approach: To make these Through secondary assessments, we opted for a case study approach. While a large “n” quantitative research and interviews approach may have been preferable, there with investors and other simply was not enough high-quality data available on the key variables in question. stakeholders, we narrowed Through secondary research and interviews down a list of 100+ with investors and other stakeholders, we narrowed down a list of 100+ potential case potential case studies to a studies to a set of 20 cases. We recognize set of 20 cases. there are several limitations using a relatively small sample size for case studies, including •• Coverage across the factors affecting reach overrepresentation of enterprises that have on the income pyramid: Cases were also lasted long enough to be studied (survivor selected to help ensure that some of our bias), have volunteered to participate in the enterprises operated in conditions of study (self-selection bias), and have made asset light or pull products, while others some effort to collect data on customers were asset-heavy and either push or (potentially reflecting the maturity of the pull. We also sought to have a sample enterprise). It is also worth noting that of enterprises with a broader range of the information presented in the case income levels to test if a mixed-income studies, as well as the conclusions in our customer base helped reach into the BOP. findings, is also a snapshot in time of these •• Breadth across industries and sectors: enterprises. These snapshots are taken in a All case studies were from industries dynamic market environment, where many where the products or services have of these enterprises live on the thin edge of social impact. In addition, we sought to profitability on a year-to-year basis. Despite be diverse across these social sectors these issues, we are confident that at this because often a particular industry has stage, given the paucity of available data, our inherent conditions that make operating a case study approach is the most effective profitable business more challenging than one available. others. Industries covered in this report include health, education, clean energy The criteria for selecting cases, in rough (electricity and cookstoves), insurance, order of importance, were: housing, agriculture, sanitation, and •• Access to the enterprise and availability of financial services. data: Since we needed to conduct several •• Geography and size: We wanted examples in-depth interviews with senior leaders across continents (Asia, Africa, and at each enterprise studied, as well as South America), as well as both start-up understand the income composition enterprises and larger corporations; of their customer base and relative however, this was a tertiary consideration profitability and scale, we needed often trumped by the first three criteria. participants willing to connect with us and to share information.

14 Reaching deep in low-income markets

Case studies profiled in the report: Using the criteria outlined above, we selected 14 full case studies and six shorter “snapshot” case studies. The table below provides a summary. See Case Studies on page 41 for additional information.

Sector Enterprise Est. Geography Description Operates agro-industrial centers that provide farmers with agricultural production inputs Aldeia Nova 2012 Angola and buys and distributes the poultry and dairy farming outputs Agriculture India, Operates a network of microentrepreneurs and kiosks that use technology to deliver eKutir 2009 Cambodia, agricultural inputs and sanitation solutions Bangladesh Provides loans to low-income students for a bachelor’s or other postgraduate studies FINAE 2006 Mexico at affordable interest rates through risk- and cost-sharing agreements with university Education partners Urban Planet Partners with local mobile network operators to provide affordable, basic English 2007 45 countries Mobile language instruction via mobile phones Kenya/East Designs, manufactures, and distributes fuel-efficient cookstoves for urban and peri-urban Burn 2011 Africa customers Energy 2003 45 counties (cookstoves) (became Develops and sells varying types of fuel-efficient cookstoves (wood, charcoal, and LPG), as Envirofit (Asia, Africa, operational well as lighting products and cookstove accessories Latin America) in 2007) Designs, manufactures, and installs 25-250 kW “mini” power plants in villages that Husk Power 2008 India, Tanzania households, businesses, and small factories connect to on a pay-per-use basis Kenya, Energy Manufactures, sells, and provides financing for solar home systems that provide M-KOPA 2011 Tanzania, (electricity) electricity to rural households Uganda Off-Grid Tanzania, Manufactures, sells, and services solar electricity systems to rural and commercial 2011 Electric Rwanda customers Provides a suite of financial products and services to individuals in remote rural areas IFMR/KGFS 2008 India through an advisor-driven wealth management approach linked to household needs Financial Zambia, services Provides domestic and international money transfer service via an agent-based network Zoona 2009 Malawi, of 1,500+ mobile money transfer outlets Mozambique Aakar India and Produces and sells compostable low-cost sanitary pads to low-income populations 2011 Innovation Bangladesh through a female-led microenterprise model Livewell Operates a network of health clinics, focused primarily on quality and efficiency, that serve Health 2009 Kenya Clinics as a “one-stop-shop” for primary care Swasth Operates nonprofit health centers that provide access to high-quality primary health care 2008 Mumbai, India Foundation services at half current market rates 1997 (became Offers an affordable and sustainable “self-build” housing solution and provides low-cost Echale Mexico for-profit in financing solutions 2006) Housing Patrimonio Hoy (a business 1998 Latin America Provides market-based, do-it-yourself housing solutions to low-income families unit of Cemex) 2009 Kenya, (became Provides farmers microinsurance products that lower risk of investing in quality inputs, ACRE Africa Rwanda, for-profit in productivity, and access to loans Tanzania 2014) Provides low-cost personal life, accident, and health insurance as well as m-Health Insurance BIMA 2011 15 countries services through partnerships with mobile network operators and local financial service providers 2002 Designs, implements, and operates affordable life, health, accident, and other (became 15 countries in MicroEnsure microinsurance by partnering with insurance companies, mobile network operators, and for-profit in Africa and Asia MFIs 2012) Purchases, operates, and maintains a network of hygienic toilets; collects waste from Sanitation Sanergy 2010 Kenya toilets and converts it to agricultural inputs (fertilizer) that are sold to farmers

Note: All data and information in the case studies was sourced from extensive primary and secondary research and has been vetted and approved by the enterprises and in some cases also by their investors or board. 15 Reaching deep in low-income markets

Depth of reach on the income pyramid than done. Different organizations define and business performance: Ultimately, the BOP differently, some using income per we wanted to understand how deeply day, and others looking at factors, such as enterprises can reach into the BOP selling cash flow variation, amount of accumulated their goods and services while also achieving wealth, or ability to consume a basket of some level of profitability and scale; we goods that allow a minimal living. Even wanted to know if enterprises are helping among those using income earned per day, a large number of very poor people in a there are different cutoff points (e.g., two sustainable way. common cutoffs are earning below $2/day or below $8/day), as well as inconsistencies While perhaps simple in concept, this is around standardizing income based on quite difficult to measure in reality. Data is purchasing power parity. Rather than take a scarce, organizations are understandably position on where the BOP starts and how sensitive about sharing it, and definitions best to measure that, we simply look at how of concepts like “sustainable” and “at scale” far down on the income pyramid enterprises are inherently subjective. The variability in are reaching. quality and availability of data on profitability and scale across the enterprises we As there is not yet a standardized and widely connected with were notable. What we used method for measuring income levels were able to gather in a fairly consistent of customers, we report the raw customer way was: 1) the scale at which an enterprise income data that our case study enterprises would break even (number of units sold per were able to provide. In order from most year, number of outlets opened, etc.); 2) rigorous to least precise, these include: how close enterprises were to that break- even point; and 3) how long it had taken to Rigorous external measure: get to their current scale (and, therefore, •• Grameen’s Progress Out of Poverty very roughly, how long it would take to Index survey. break even). •• Third-party funded measurement and Based on this, we categorized the business evaluation studies. performance of case study enterprises into four separate buckets: Rigorous internal methodology:

•• Total enterprise profitability and •• Proprietary enterprise income or financial continuing to scale: Reached profitability health tracking methodology. on a consolidated enterprise basis and •• Income verification through sales or continued ability to grow. enrollment process. •• Financially sustainable6 and investing in scale: Demonstrated financial viability Impressionistic internal estimate: and focused on growing the business •• Basic customer surveys or focus groups. before achieving total enterprise profitability. •• Proxy metrics to estimate income (ARPU, monthly rent, demographic data, •• Not yet financially sustainable and geographic and country level income data, moderate growth: Moderate progress and customer occupations). toward break even and scale.

•• Declared non-profit status:Converted For transparency, each case study has from for-profit to non-profit status. a detailed “data methodology” section that describes what method was used for As with business performance, assessing gathering data and how precise or imprecise depth of reach into the BOP is easier said the estimates actually are.

16 Reaching deep in low-income markets

Factors affecting reach on the income surprisingly, data measuring these factors cost of the network can be considerable. pyramid: As previously mentioned, we is very difficult to gather and doing so was Alternatively, some enterprises hypothesized that a few general conditions beyond the means of this research effort. educate, sell, and distribute through affect enterprises’ ability to reach Nevertheless, we did observe a number of microentrepreneurs, which shift some deeply into the BOP while also achieving characteristics that serve as rough proxies or all of the cost and risk of sales onto sustainability and scale. While we tend to for asset intensity. In decreasing order of the entrepreneurs. This turns the sales speak of these as “either/or” conditions relative importance, these are: and distribution channel into a potential (asset-heavy vs. light, push vs. pull, narrow revenue stream as opposed to a cost, in •• Physical vs. digital products: Some vs. wide range of customers), they are in turn making the model much more asset products can be fully (or at least fact all more nuanced and continuous. light. For operations located in densely substantially) digitized and transmitted Thus, below we outline some of the critical, populated areas, a predictably high through the Internet or mobile networks relevant indicators we used to classify volume of sales can help spread costs over (e.g., mobile money), whereas others enterprises along these variables. many customers and drive the marginal require physical infrastructure to costs down. The more these strategies are manufacture, package, and transport Asset intensity: Heavy vs. light. At a used to drive down distribution costs, the to reach the end customer (e.g., conceptual level, there are at least three more asset light the business. fertilizer dairy products). The more factors affecting the asset intensity of intangible the product, the more asset •• Real Estate/Costly Equipment: Some an enterprise: 1) size of fixed costs (does light the enterprise and the lower the industries require a physical presence in the company need to carry real estate, infrastructure or overhead costs to a particular place. While some health and buy equipment, pay a large labor pool, develop and deliver the product. educational services can be substantially etc.); 2) “lumpiness” of variable costs as digitized, the full range of these services the enterprise scales (a scaling cookstove •• Relative labor intensity of sales/ cannot (at least not yet). The need for business faces fairly smooth scale-up distribution: Some products, even stores, schools, and clinics imposes a costs whereas a system of health clinics or digitized ones, require a large salesforce more asset-heavy cost structure on some schools faces a series of discrete big costs to educate customers and sell and deliver enterprises, which requires a higher price as new sites are opened); and 3) size of the product. Some organizations hire a point for customers. In addition, clinics marginal costs (businesses with a digitized relatively large network of agents to do and other manufacturing sites often product face much lower marginal costs this. Even when these agents are from require expensive technology (medical to serving the next customer than does the local community and, therefore, fairly devices, advanced machinery) that further a company with a tangible product). Not inexpensive on an individual basis, the drive up the up-front capital requirements.

17 Reaching deep in low-income markets

•• Highly skilled/expensive labor: Product preference—push vs. pull: Similarly, while some educational and Conceptually, where a product falls on Conceptually, health services can be provided by the “push-pull” spectrum depends on the paraskilled employees, the full range of return that product provides to its buyer, services still requires trained teachers, adjusted for both time and risk—essentially where a doctors, nurses, and the like. Again, the product’s Return on investment (ROI). this imposes a higher, asset-heavy cost Products that pay a high return quickly and product falls structure on some organizations. with little risk (e.g., food) are highly desired. Products that pay an uncertain return in the In some cases, it is obvious how to future (e.g., insurance) are less desirable.7 on the “push- categorize an organization in terms of asset Again, while it is very hard to measure this intensity. The critical factor that determined concept with data, we did observe a fairly pull” spectrum if a product in our study was asset light was clear hierarchy of goods from higher (more whether it was an intangible digital or mobile “pull”) to lower desirability (more “push”). In product. For example, Zoona was clearly decreasing order of desirability, these are: depends on asset light with its digital money transfer •• Fungible purchasing power: A product system and network of entrepreneurs such as mobile money, microfinance, or the return that take on significant company risk. microloans that helps the BOP customer As discussed above, in some instances purchase whatever it is he or she desires. companies with intangible products also that product have other aspects that make the model •• Necessary economic inputs: These heavier (e.g., an expensive salesforce). are products or services critical to an provides to its Ultimately, in these cases because of the individual’s main economic activities and digital nature of the overall business we still often directly and immediately expand categorized the company as asset light. the person’s ability to generate revenue buyer, adjusted (e.g., agricultural inputs for a farmer that On the other hand, enterprises that increase yield, access to electricity that for both time manufactured tangible products and, thus, enhances a business’ productivity, and required significant infrastructure or real nutritious food to keep oneself healthy). estate were more easily categorized as and risk— •• Cheaper substitute: Something asset-heavy. For example, Burn, with its that enables the buyer to perform a product design and manufacturing needs necessary function (e.g., power to charge essentially the combined with wholly owned sales and a phone, and a cookstove) in a more distribution network, is asset-heavy. cost-effective way. People are performing product’s ROI. these functions now, so when a cheaper Most companies we categorized as asset- alternative comes on the market, they heavy did find ways to “lighten up” their feel they should buy it since doing so business model; however, they still ended eventually puts money back into their up categorized as asset-heavy depending on pocket. For example, Burn cookstoves their physical requirements. For example, enable households to save ~$120/year, KGFS has a costly real estate presence including a 57.7 percent reduction in with hundreds of bank branches around household charcoal expenditures. India, as well as a significant salesforce. However, they use a sophisticated back- •• Amenities: Products that an individual end platform to track customer financial do not require to live, but that are nice to health and generate recommendations have and ultimately improve the quality of based on algorithms, so they can employ life in some way. The more expensive the some low-cost local employees rather than amenity is, the less “pull” it is. For example, requiring highly skilled financial advisors. good roofing or flooring materials are Nevertheless, the real estate and salesforce relatively expensive and more “push.” needs still led us to categorize them as asset heavy.

18 Reaching deep in low-income markets

•• Uncertain/difficult-to-demonstrate the notion of “aspirational goods,” those Amenities, goods with difficult-to- benefits:These are goods or services that are more desirable because they give demonstrate benefits, and aspirational that, even if they are of high quality, do customers the arbitrary feeling of being or goods all played into our understanding of not necessarily pay a return to the BOP becoming wealthier—for example, English push vs. pull, but typically if a product did customer. Examples include insurance language learning products, clean toilets, not generate fungible purchasing power against an event that may never happen and lanterns. This aspirational nature of or was not a necessary economic input or or preventative health care that does not products or cultural traditions can change cheaper substitute, it was categorized as a immediately show results. the push-pull categorization of a product push product. or service. Push vs. pull was a particularly tricky Range of customer income levels: categorization to make, especially given that For example, solar home systems (M-KOPA Narrow vs. wide: Finally, we assessed push products can become pull products and Off-Grid Electric) were considered whether enterprises focused their sales over time as product awareness grows and “pull” products because the electricity primarily at a single, low-income segment or there is more widespread adoption. The immediately enhances productivity, the if they sold to a range of customers across two most critical factors in categorizing a economic savings are realized in a short income levels. Achieving a wider range could product as pull were whether the product time frame, and electricity is considered come from selling the same products at the fell under fungible purchasing power or a an aspirational product. On the other same or different prices to different income necessary economic input. In some cases, hand, cookstoves would seem to also be level customers or having segmented a cheaper substitute for a costly existing “pull” because they provide cost savings to product offerings with different products good, particularly one that was essential the customer; however, due largely to the at different prices for different income for daily life, was also clearly pull. However, cultural importance of preserving traditional level customers. for cheaper substitutes we discovered that ways of cooking, selling cookstoves requires there is also a relative hierarchy within the significant education and can be met with While this would seem like it has an obvious category: the cost savings needed to be resistance by purchasers, in particular, characterization based on the percentage realized over a short enough time frame relative to solar-based systems. Thus, we of customers at given income levels, we and also be easily understandable, requiring categorized cookstoves as “push” products. realized there was often a discrepancy in less customer education. There is also the percentage of customers at a particular

19 Reaching deep in low-income markets

income level and the revenue contribution However, in between, there were from that segment. In many cases, higher- surprisingly many cases where the income customers are buying higher-priced classification was less obvious. In these products and, thus, contribute a greater instances, the most important driver percentage of revenue than the number of of income range categorization was the customers alone would suggest. However, test: “Would the company be profitable we did not often have access to this level of and successful without higher-income detailed revenue contribution breakdown customers?” This we assessed on a relative per customer income segment (or it did and qualitative basis through in-depth not exist). primary and secondary research. For example, Sanergy’s very poor pay-per-use At one end of the spectrum are products toilet customers vastly outweigh the number that are clearly intended for a single, lower- of higher-income customers, the farmers income base, which was obvious because purchasing fertilizer. However, without the the enterprise sells only products that fully integrated value chain where the end higher-income customers would not buy product of fertilizer converted from toilet or would not need. For example, Aakar waste is sold to farmers, the company Innovation currently provides affordable would not be profitable because they sanitary pads only to women in the slums rely on the for-profit fertilizer business who otherwise go without. On the other for long-term sustainability. Another gray hand, even slightly higher-income customers area was undifferentiated products that likely already have access to some type could be relevant to multiple income levels of low-cost product for basic menstrual regardless of the intended end user. This hygiene. was particularly true with digital, asset light products. For example, FINAE provides At the other end, some enterprises clearly student loans at the same interest rates serve a wide range of customers, evidenced to all customer income ranges. Given the by different products at different prices higher risk of lower-income customers, that are sold to different income segments they need to have a balanced portfolio based on the purchasing power of the of customers to distribute the risk. The customer. For example, Envirofit offers a model would not work with only the lowest portfolio of different cookstoves ranging income customers. from a very affordable version for poor rural households to much more expensive commercial products.

20 Reaching deep in low-income markets

Factors affecting reach

Asset intensity Product preference Customer base Heavy Light Push Pull Narrow Wide

Physical product; Digital/mobile Not easily Provides Revenue from one Different income requires products exchangeable fungible income segment segments with manufacturing purchasing varying revenue power contribution Large sales and Shifted risk of Nice-to-have Necessary Relevant to only a Undifferentiated distribution sales and amenities economic particular products network distribution inputs customer segment Highly skilled Paraskilled Expensive Cheaper Single product, Multiple labor labor non-replaceable substitute single price products, good different prices Physical No/limited Difficult-to- Obvious or Limited business Need to distribute facilities physical demonstrate or immediate model risk risk across presence long-term benefits benefits income levels

21 Reaching deep in low-income markets VI. Findings

Despite the limitations of the data, as well immediate social impact resulting from the Most of the enterprises we as of the case study approach, there are goods or services sold to BOP customers several findings from the synthesis of our (e.g., provision of power, food security, studied are able to reach 20 case studies that we believe are worth and health care), these enterprises also BOP populations with calling out for those interested in serving yielded a number of less obvious, broader the BOP, namely entrepreneurs, investors, development benefits. These include critical goods and services, government officials, and stakeholders significant job and entrepreneurship and some are able to reach across the private sector. These are: opportunities, the provision of a wide range of public goods, and improved surprisingly deep down •• First, most of the enterprises we studied resiliency of individuals and communities are able to reach BOP populations with (e.g., those living on less through products, such as health and critical goods and services, and some are crop insurance. than $2.50/day and even able to reach surprisingly deep down (e.g., those living on less than $2.50/day and $1.25 in some cases). Finding I: Enterprises are able to reach even $1.25 in some cases). deeply down the income pyramid •• Second, many, if not most, of the Given the difficultly of reaching the poorest enterprises reaching the BOP and deep people on the planet through a for-profit BOP are operating successfully, both in organization, as well as the dearth of quality terms of financial viability and growth. data on the income levels of the customers being served, the question arises, how low •• Third, being asset-heavy and selling a push are these enterprises going? How far down product does not necessarily prevent the income pyramid are they able to reach? companies from reaching the BOP in a financially sustainable way; several have Of our 20 case studies, we found that about done it. Moreover, selling to customers three-quarters of them were reaching across a broader range of incomes is fairly low down the income pyramid. Most clearly possible, since the vast majority of these (about 10) have done rigorous of our cases did so. Indeed, in several internal or external studies to measure instances, selling across a broad range the income level of their customers. For of income segments was critical to the instance, Burn leveraged PPI methodology success of an enterprise. to understand that 24 percent of its •• Fourth, regardless of sector or products customers earn $2.50/day or less, and sold, enterprises can improve their another 19 percent earn between $2.50 chances for achieving desired results and $4.00. BIMA also conducted a survey by influencing how asset light it is, how based on the PPI, finding the percentage of desirable its products are, and whether its customers living on $2.50/day or less to it serves a broad or narrow range of be 53 percent. M-KOPA partnered with the customers through a number of common Gates Foundation to measure its customers, business model design tactics. learning that 82 percent live below $2/day. IFMR used a proprietary methodology to •• Fifth, most of the enterprises for which determine that 70 percent of its customers we have the information did receive some live on $5/day or less.8 form of subsidized capital, which was often very helpful in mitigating start-up risks as Of the remaining, many use quite well as navigating the challenges inherent impressionistic approaches to assess in BOP markets. It was often received at income levels. Some, however, used proxies an early stage, replaced over time by more to estimate income levels. For example, market-rate capital, suggesting subsidy based on demographic data, Swasth does not preclude businesses from calculates that 90 percent live on $3/day or eventually becoming self-sustaining. less. Based on rent in the geographic areas •• Sixth, while all enterprises profiled in where they operate, Livewell figures that the report had an obvious direct and 60 percent live on $4/day or less. Urban

22 Reaching deep in low-income markets

Planet Mobile, based on the monthly spend accuracy. For example, eKutir canvasses on a customer’s mobile phone, figures its microentrepreneurs to gather their 80 percent of its customers are likely in viewpoints on the income levels of their the BOP, though not necessarily deeply customers. Others simply observe their down in the BOP. While these methods are customers and feel confident relaying that arguably less rigorous than those noted the majority of their buyers are earning above, the income levels of the people between $2 and $4 per day. While these served are very low. This suggests that even impressions may very well be inaccurate, it if the measurements are overly optimistic is worth pointing out that many enterprises regarding their depth of reach, they are still that do deploy rigorous methods, like almost certainly reaching a large number of the PPI, are surprised at how poor their very poor people. customers turn out to be. That is to say, we know that many have impressionistically Other impressionistic approaches pegged their customers have higher-income include customer focus groups and levels than they are actually at. surveys with varying level of detail and

Depth of reach into BOP by select enterprise (see appendix for more detail)

Key: Rigorous external methodology Rigorous internal methodology Impressionistic internal methodology

10 2

8

51% 40% (>$5) 70% 6 57% 9% 26% ($2.5– 10% 40% (>$4) (>$4) (>$4) 70% ($5–$10) $9.99) (>$4) (>=$4) (<$2.5– $10) 10% 4 (>$3) 70% 24% 19% 15% 58% (<$5) (<$5) ($2.5– ($2.5– 18% ($2.5– $4) $4) (>=$2) $4) 60% 30% 18% 75% (<$4) (<$4) 24% 2 53% 24% ($1.88–$2.5) 32% 90% ($1–4) Approximate customer income levels ($/day) (<$2.5) (<$2.5) (<$2.5) 82% (<$2.5) ($0.67– 58% 6% (<$2) $3) (<$1.88) 25% (<$1.25) (<$1) 0 BIMA Burn Husk Micro M-KOPA Sanergy IFMR/ Swasth Aakar Livewell Zoona eKutir Ensure KGFS Enterprise

1 Chart only has enterprises with comparable available data. Not included: ACRE Africa, Aldeia Nova, Echale, Envirofit, FINAE, Off-Grid, Patrimonio Hoy, and Urban Planet Mobile. The approximate income data is reported based on interviews with enterprise leaders and data provided directly from enterprises and investors. The income level ranges are a rough extrapolation developed by the Monitor Deloitte team based on these inputs.

23 Reaching deep in low-income markets

Finding II: Many of the enterprises services, power, and cookstoves (M-KOPA, reaching deep into the BOP are IFMR/KGFS, and Zoona, among others). also financially sustainable and In other cases, enterprises are hovering scaling rapidly around or moving rapidly toward their The next question: Can enterprises sustain breakeven point (i.e., they will reach that this reach? While it is certainly encouraging point in a year or two)—for example, Aakar, that so many enterprises are reaching so Husk, and Livewell. low, some of the luster of Finding I would come off if we found they could only do so It is probably worth pausing here to note at a loss or through continued reliance on that, while this success is impressive and subsidies which would, sooner or later, put welcome, it is not inevitable or assured them out of business. over the long term. These remain relatively young companies, which operate in difficult Fortunately, this does not seem to be environments and sell to very poor people, the case. As outlined in the methodology people whose circumstances can change section, we defined business performance quickly and leave them unable to continue in four categories: 1) total enterprise to pay for goods and services from these profitability and continuing to scale, 2) companies. Based on our research, financially sustainable and investing to optimism in these sorts of enterprises is scale, 3) not yet financially sustainable and warranted, but cautious optimism. moderate progress toward breakeven, and 4) declared non-profit status. These Finally, a few are either not yet financially parameters for business success, while sustainable or have opted for non-profit often blurred at the edges given the status. These are also typically scaling inconsistent nature of start-up enterprises’ more slowly relative to peers in their revenue year to year, provide a useful way to sector. It is worth pointing out that these organize the enterprises. enterprises are mostly in industries—health and sanitation—that typically receive A few have achieved total enterprise considerable support from the government, profitability. This includes all three of the even in very rich countries. enterprises operating in Mexico and Latin America (FINAE, a higher education loan Another important measure of success at program; Patrimonio Hoy and Echale, both reaching BOP populations is the scale of affordable housing solutions), in addition the enterprise: Is it reaching a lot of poor to eKutir (tech-enabled kiosks providing people? Although it is difficult to directly farmers agricultural inputs and market compare the scale and growth rates of access), Aldeia Nova (enhanced agricultural the enterprises included in this report production and distribution of outputs), due to the vastly different nature of the and Urban Planet Mobile (English language goods and services they provide as well as instruction via mobile phones). the geographies they operate in, we have shared our general observations below. A large number of cases have reached We ultimately focused on revenue (US$M), financial sustainability. Many of these where available, as a metric that makes could be profitable now, but are instead comparison most possible. reinvesting earnings in growth rather than focusing on continuing to be profitable. In In our study, there seemed to be a scale gap these cases, achieving financial sustainability separating companies into two groups, with is an indicator of success because these one set at or below $1M and then another enterprises have unit economic profitability set at about $5M and higher. On one end or are already profitable in one or more of the spectrum, we have companies markets. Enterprises in this group cut like Envirofit with approximately $20M in across industries, including those in financial revenue in 2015, operating in 45 countries

24 Reaching deep in low-income markets

globally, and BIMA with approximately Finding III: Even asset-heavy businesses subsection, Serving a wider range of income $11M in revenue in 2015 operating in 16 selling push products can be successful levels, below). In assessing the range of countries globally. At the other end, we in reaching the BOP enterprises across the push vs. pull and looked at much smaller companies like As noted above, one of our objectives was asset light vs. asset-heavy spectrum (see Aakar Innovation, which currently operates to assess whether or not a few factors— chart below), we find financially successful exclusively in the slums of India and had asset light businesses, pull products, and companies reaching fairly deeply into the revenue of approximately $110K in 2015 or breadth of customer income levels—help BOP across all values of these variables. Sanergy operating exclusively in the slums enterprises reach lower while still achieving Certainly there are instances of successful of Kenya. sustainability and scale. In a sense, it is asset light businesses selling pull products fairly clear that they do. How could highly (Zoona and Urban Planet Mobile), which We found companies that successfully desirable products that sell themselves, are toward the upper right of the graphic. scaled across sectors, industries, and have a low cost structure, and attract a There are also successful asset light geographies. The sectors with the most wealthier set of customers not be helpful? businesses selling push products (BIMA demonstrated success in scale were But our question goes deeper than this. Are and MicroEnsure) in the lower right. So too financial services, insurance, cookstoves, BOP customers so poor that asset-heavy, are the upper-left asset-heavy businesses housing, and electricity. It is not surprising push product companies simply cannot with pull products able to thrive (eKutir that the asset light companies in insurance generate sufficient revenues to adequately and M-KOPA). Perhaps most surprising, and financial services were able to scale cover costs? Further, in order to survive and even several enterprises facing the hardest quickly due to the decreased marginal thrive, do these types of companies need to test, asset-heavy businesses selling push costs of adding a new customer and the find alternative sources of income, be it from product, have shown to be successful low distribution costs and requirements. subsidies or perhaps by broadening the (bottom left). But, it is interesting to note the success customer base to include some wealthier of the cookstove, housing, and electricity customer segments? companies, all of which are asset-heavy and, in the cases of housing and cookstoves, As to the first question—are asset-heavy push products. Not surprisingly, scaling push companies unable to really reach the appeared most difficult in health care. BOP?—we did not find this to be the case (as to the second question, please see the

Asset intensity vs. product preference: Enterprises across two key continuous variables Pull

Aldeia Nova* Zoona eKutir

M-KOPA Urban Planet Key: Mobile Profitability Husk IFMR/ KGFS FINAE Total enterprise Off-Grid profitability Burn Financially sustainable Patrimonio Hoy Not yet financially sustainable Echale Envirofit Declared non-profit BIMA Scale Sanergy Size of the circle Livewell Aakar MicroEnsure represnts relative revenue (US$M) Swasth ACRE Africa Revenue data not available Asset- Asset Push * Estimated heavy light

25 Reaching deep in low-income markets

The cookstove enterprises are cases in (see chart above), and that it is the pull point. Burn and Envriofit are asset-heavy qualities of their product that helps them While it is clearly since they manufacture and distribute a overcome the inherent asset-heavy nature tangible good, and cookstoves are widely of their business. viewed as push products, with significant possible for investments in customer education around Housing examples are among the least the benefits relative to the costs to get to comparable cases in our portfolio. These asset-heavy a sale. Still, these two organizations are enterprises report income by household, already growing strongly and continuing whereas all the others report it by individual. to invest in growing more. Similarly, the They are operating more in middle income companies selling low-cost housing providers—Patrimonio countries (e.g., Mexico), whereas the others Hoy and Echale—are two relatively operate in poorer countries. Finally, they push products to successful asset-heavy push companies. assess income level by looking at paystubs They manufacture and install heavy, (which does not necessarily rule out other relatively low-value goods (e.g., cement sources of income), whereas the others profitably serve and bricks) and their product is a more assess it by looking at living conditions expensive necessity (since it replaces some (which would account for all sources of the BOP, there sort of existing housing) or an amenity income, formal and informal). So, while it is (since upgrades are made to an existing quite clear that these are asset-heavy push structure). Hence, they are asset-heavy push companies serving very poor people, it is remain grounds organizations, well placed in the lower-left not as clear that they are serving people as section of the graph. Still, they are reaching poor as those served by our enterprises for caution about fairly deeply into the BOP—with Patrimonio operating in Sub-Saharan Africa and South/ Hoy having 29 percent of households Southeast Asia. served living on less than $8/day and Echale the relative ease serving households making $8-$21 per Finally, to foreshadow Finding V, the asset- day—and both companies are profitable on heavy push companies are among those of doing so. a consolidated basis. that received some degree of subsidy. Both Envirofit and Burn have received subsidies Nevertheless, while our research did identify and capital from investors over the years. asset-heavy push companies profitably Patrimonio Hoy did not receive direct serving the BOP at scale, it is worth nothing funding from its parent company, Cemex, some nuance around this finding. This but it certainly benefited in myriad ways (e.g., finding mainly rests on the performance of access to established back-office functions, the cookstove and housing enterprises. With marketing, and brand recognition) by being respect to the cookstoves, these exhibit the part of a large corporation. Echale reports most pull of all the push products we looked that about 30 percent of its customers at. While the field has, for the most part, receive a 30 percent housing subsidy from decided cookstoves are push products, the the government. In contrast, the asset light executives at the organizations themselves push companies—Zoona and Urban Planet do not agree. They point out that, although Mobile—were among the few that did not the stoves are more expensive up front, receive any subsidy. In short, while it is they offer a cheaper alternative cooking clearly possible for asset-heavy companies method over the longer run. Put another selling push products to profitably serve way, after four to six months, cookstoves the BOP, there remain grounds for caution begin to put money back into the pockets about the relative ease of doing so in of their users. So, some might argue that comparison to lighter companies and those Burn and Envirofit are more like M-KOPA selling pull products. and Off-Grid than Aakar and Sanergy

26 Reaching deep in low-income markets

A word on public goods Swasth opted to become a non-profit for that benefit they received. Similarly, a It might be tempting to make inferences because for-profit status made it too hard person who uses a toilet makes the people about the difficulty of being an asset-heavy to serve the very poor patients it wanted around him or her healthier and more push business based on the fact that the to serve. Sanergy split its toilet business off productive. But again, those people do not three cases that are not scaling as rapidly as from its fertilizer business and made the pay Sanergy for that benefit. It is very hard many of the others are all in the lower-left toilet operations not for profit. Moreover, to build a successful for-profit enterprise area. Livewell and Swasth run health clinics while it continues to grow, it has a long way that sells public goods. Even in the richest, and provide a wide range of services, thus to go to reach break-even. Finally, Livewell is most advanced capitalist economies, carrying the costs of real estate, expensive financially sustainable. It has, however, had governments play a major role in providing equipment, and highly skilled workers (i.e., to shrink in order to consolidate operations health care and disposing of human waste. doctors and nurses). Sanergy manufactures and cut costs. It also depends upon the 40 The fact that these enterprises are achieving toilets, distributes them in slums, and percent of its higher-income customers who some level of success serving some of the gathers and treats the human waste, so it have insurance (i.e., are paying for health poorest people in the world is impressive to bears the costs of production, processing, care services with other people’s money) in say the least. and transport of tangible materials. All are order to achieve financial sustainability. clearly asset-heavy. They are also pretty Serving a wider range of income levels clearly push products. Health care provides On the one hand, these results might point In addition to assessing the impact of uncertain value, since one can never know to the difficulty of selling push products via push vs. pull products and asset-heavy vs. the counterfactual (i.e., maybe the same an asset-heavy operation. On the other, it asset light businesses, we also wanted to outcome would have happened without is well worth pointing out that not only are understand whether selling to a wide range taking medicine or visiting a doctor) and these push products, they are also public of income segments could help enterprises sometimes the negative effects occur over goods. That is, the enterprise selling the successfully serve the BOP. Based on our long periods of time, e.g., inhalation of toxins product does not monetize the full value of cases, it is fairly clear that, indeed, this can from traditional cooking methods. Access to that product. A person who receives health help significantly in terms of both financial a toilet is a more expensive way to perform care is presumably a healthier person and sustainability and growth. a necessary basic function relative to the that makes the people around him or her current free methods. healthier and more productive. But, those The vast majority of our cases served people do not pay the health care providers customers at different income segments.

27 Reaching deep in low-income markets

In some instances, financial sustainability such as telehealth), some of which are did not depend upon having a broad mix only affordable to wealthier buyers. While of customer incomes, but it was helpful volumes on the higher margin products and expanded the size of the organization. are small relative to the total business, For example, eKutir—the provider of these higher margin sales are critical to agricultural inputs through tech-enabled the success of a business. Like an airline kiosks—reached breakeven financial that provides both first class and economy sustainability selling to a fairly narrow seating, the combination of high volume base of commercially oriented smallholder from the deep BOP and the growing revenue farmers. Then, in 2014, it started opening share from higher earners are critical to its “veggie kiosks”, which sell the farmers’ BIMA’s success. output to wealthier urban dwellers. Revenues jumped from $43,000 in 2013 Another unique example is Sanergy. Its (about at breakeven) to nearly $540,000 in business model is dependent on processing 2015.9 KGFS, the provider of financial advice the waste from toilets used by very and products, started off by focusing on a poor urban dwellers and converting it to fairly poor segment of the population, but fertilizer, which is sold to relatively large- over time found it made sense to diversify scale farmers (40+ hectares). From the their product offering to be relevant to perspective of the toilet business, Sanergy the whole village and to keep pace with is turning a core cost (waste processing) their customers as incomes rose and they into a revenue stream (fertilizer sales). From graduated to higher-income segments. It the perspective of the fertilizer business, seems possible that these, and other, cases Sanergy is substantially defraying a core cost could be successful without diversifying (acquisition of key raw materials) by making their customer base, but since there that a break-even business. To make this was little downside to diversification— synergistic relationship work, it clearly needs diversification did not seem to hurt their both poor and wealthy customers. ability to serve their poorer customers—and potential upside, there was little reason to A particularly instructive comparison is stay focused on a narrow, lower-income Livewell and Swasth, the two health care segment only. providers. Of all our cases, Swasth may well have the largest percentage of very For a second set of cases, having a mix of poor customers, with 90 percent living customer incomes was critical to business on between $0.67 and $3.00 per day. To success. For example, the insurance continue operating and serving such a low- provider BIMA sells a high volume of low- income population, however, Swasth had to margin products to very poor customers (53 become a non-profit and grants account for percent of customers live below $2.50/day). half or more of its annual revenues. Livewell, Having digitized much of its business, BIMA in contrast, is financially sustainable and has has very low marginal costs and having this remained a for profit. To accomplish this, volume of sales, even at low price points, Livewell depends upon the 40 percent of its helps cover its fixed costs. Each additional customers (wealthier customers) who have sale chips away at the total amount of costs insurance. This 40 percent generates about that must be covered. BIMA also offers a 60 percent of Livewell’s revenues, whereas range of products (e.g., higher coverage the poorer 60 percent provide the remaining amounts and different types of services; 40 percent of revenues and, more recently, value-added services

28 Reaching deep in low-income markets

Finding IV: To drive financial success and growth, most businesses employ a number of tactics that help them be lighter, more desirable, and reach a wider base of customers While enterprises were shown to be successful regardless of where they fell on the push vs. pull, asset-heavy vs. light, and narrow vs. broad income spectrums, the fact still remains that, all else being equal, becoming more pull, lighter, and broader is probably helpful. Indeed, virtually all of our case examples took steps to get more pull or lighter or broader. Through our research, we identified several business characteristics that were commonly used to do this. These factors are not the only factors that enterprises can leverage in order to better serve customers at the BOP,10 but they were some of the most significant we identified during our examination of the 20 case studies and through the interviews. These individual factors have varying levels of importance, based on a number of other contextual considerations for the enterprise (type of product, industry, and business environment).

Characteristic Description Increases product preference Leverage an established organization for their relationships, connections, and trust of BOP customers Reputation partner to build brand credibility. Partners can be local commercial brand, well-known global brand, the government, and an NGO, among others. Customers pay each time they use a good or service for one use at a time. In some instances, Pay per use companies create single serving size version of a larger product. Access to finance to purchase a product over time; can include starting a community financing arm Financing options as well as working with MFIs, the government, or other lenders and payment platforms to coordinate access to finance. Decreases asset intensity Strip down a product or service to the most basic elements and remove features that would make the No frills product or service too costly for very low-income customers to afford. Leverage technology—digital, mobile, and Internet platforms—to reengineer business processes, Optimized internal increase data connectivity, extend the enterprise’s reach into the BOP, provide more efficient services, processes and reduce overall corporate costs. Break down complex services and business processes into a set of individual, basic tasks and use low- Paraskills skilled workers that lack special qualifications to do these standardized tasks.

BOP as employees Employ low-income populations from the local communities.

Business within a BOP-focused business setup as a separate unit or line within a larger (often multinational) corporation business that serves higher-income customers. Introduce conduit to selling to BOP—microentrepreneurs typically purchase the knowledge, platform, Microentrepreneurs or product from the social enterprise and once they own that, sell directly to the BOP customers. The enterprise collects a royalty fee. Leverage existing distribution channels that can often reach deep into the “last mile” of rural markets. Shared channels Partner to tap into existing customer base of other companies.

Up-sell, cross-sell Sell existing customers’ follow-on goods or services after the initial product purchase.

End customer does Government, corporation, or other third party pays for the goods or services that are consumed by not pay11 BOP populations. Deepens reach on the income pyramid Price Charge wealthier customers more for the same products. discrimination Product Different products, different prices, often for different customer income levels. segmentation Own the entire supply chain from design through manufacturing, distribution, sales, and post-sales Vertical integration customer service.

29 Reaching deep in low-income markets

Product preference (push vs. pull) through a variety of payment mechanisms Enterprises used a few tactics to build that better match their cash flow and are trust and access customers within the often flexible for income volatility faced by communities they serve to make their low-income customers. For example, 30 products more desirable. Two of the most percent of Burn Manufacturing’s cookstove noteworthy include reputation partners sales use some type of informal or formal and financing. credit and 98 percent of M-KOPA’s solar systems are purchased using financing Working with an established partner was options. In both examples, customers build used by nearly half of the enterprises with a credit history and can gain access to even push products. Reputation partners can better financing options for other future be a variety of stakeholders, including purchases. Off-Grid Electric’s financing local commercial brands, a well-known mechanism employs both access to global brand, or a government or NGO payment, over time as well as pay per use already established in the local community because if clients cannot make a payment with trust and credibility among the BOP then Off-Grid can remotely disable the populations the enterprises are seeking system and turn it back on as soon as the to reach. These partners provide the next payment is made, enabling customers enterprise with credibility and name to choose if they want electricity or not recognition that can be helpful for education depending on their other financial needs in a about the benefits of the product or to given time frame. increase the aspirational value of the product. For example, Patrimonio Hoy Similarly, enterprises develop pay-per-use benefits from the trusted reputation of its pricing models to drive down the practical parent company, Cemex, one of the largest cost of a product. This tactic was widely used building materials companies globally. by enterprises using mobile networks— FINAE, a student loan organization, uses its BIMA, Urban Planet Mobile, MicroEnsure, relationship with well-known universities to and Zoona. This allows enterprises to build trust with students who are in need of charge a very small fee on a transaction student loans. This strategy is particularly basis (Zoona), a prepaid coverage basis helpful in poorer populations who are very (BIMA and MicroEnsure), or for an initial discerning with how they spend their limited lesson (Urban Planet Mobile), improving income, as well as with products that are the likelihood of repeat customers and inherently social goods and the benefits addressing the cash flow challenges faced are not always easy to demonstrate—for by many BOP customers. It is also widely example, insurance products provided by used for enterprises that sell goods that MicroEnsure or BIMA, where the immediate are used or consumed by individuals on an need is not apparent and oftentimes no as-needed basis, for example eggs (Aldeia benefits are ever realized if the negative Nova), sanitary pads (Aakar), and sanitation event does not occur. (Sanergy).

Two other important tactics critical for Product intensity (asset-heavy vs. very low-income populations are financing asset light) options and the opportunity to pay per Many BOP customer needs require an use. Virtually, every enterprise in our set of asset-heavy business. Schools, hospitals, cases employed one of these approaches. A production facilities for agricultural inputs, number of our enterprises produce goods and solar systems, for example, all create that are cost prohibitive for BOP customers up front costs that are often challenging to to buy outright (e.g., cookstoves, solar overcome when selling to the BOP. These systems, and housing). Access to financing enterprises have to get their costs down to allows BOP customers to access products succeed. One tactic widely used, including that would otherwise be too expensive by more than 80 percent of the enterprises

30 Reaching deep in low-income markets

in the study, is BOP as employees. The discrimination, whereby enterprises offer place a high value on their contribution to benefits of this include not only reduced the same products, but wealthier customers poorer customers, chances are the socially costs by employing less skilled workers, but are charged higher prices to offset lower motivated organizations will be driven also a deeper knowledge of their customers, prices for the BOP. For example, eKutir and from the marketplace due to the presence which helps increase sales and guide Aldeia Nova both sell the same agricultural of lower-cost competitors who offer a product design. For example, Patrimonio products (fresh vegetables, and dairy and comparable product. Product segmentation, Hoy provides employment to more than poultry, respectively) at premium prices to in contrast, offers enterprises a more 3K BOP, 97 percent women, who serve wealthier buyers and at a discount to lower- competitively sustainable tactic for retaining as the local salesforce for the enterprise. income customers. Health care clinics often wealthier customers and generating Echale, in building affordable housing, has charge more for various services to their higher margins from them that enable the been able to create 200K temporary jobs wealthier customers, particularly those who organization to continue to serve lower- while keeping the cost low by depending have insurance. income customers. on local labor and affordable materials.12 Even asset light businesses, like Zoona and Product segmentation can help Finding V: Financial subsidies are BIMA, employ BOP workers where possible, organizations leverage wealthier customers common, very helpful, and do not opening up agent-based sales channels with to enhance the overall financial viability seem to discourage organizations from connections to the communities where they of the business. In this case, enterprises becoming self-sustaining sell their products. develop different products at different price While the focus of our report was on how points that appeal to different customers low on the income pyramid successful Shared channels were used by about half based on distinct customer needs and enterprises are reaching, we recognize of our enterprises. This allows for easier budgets. Product segmentation is widely that funding often plays a critical role in customer acquisition and more cost- used for enterprises offering insurance or an enterprise’s ability to reach low while effective market access, addressing the financial products (KGFS, BIMA, ACRE Africa, also achieving profitability and scale. “last-mile” access issue that is common and MicroEnsure), where they often provide Thus, whenever possible, we sought to in developing markets. Shared channels a free version of the product for customers understand the different types of funding also save the enterprise significantly on to test and then a premium version once enterprises had leveraged and the role the infrastructure costs to deliver low- they have built more trust or graduated to of the investors in design, development, cost, low-margin products. For example, a higher-income level. This approach is also and scale of the enterprise.13 Note that we MicroEnsure partners with mobile network used by enterprises selling durable goods, gathered information on only the 14 full case operators (MNO) to provide affordable such as cookstoves, solar, and housing studies in the report, not the 6 snapshots. insurance products through their network. (Burn, Envirofit, M-KOPA, Off-Grid, Echale, Burn Manufacturing, in designing, selling, and Patrimonio Hoy), that offer smaller or Based on the cases we profiled in the report, and distributing cookstoves, partners simpler products as well as larger, more most enterprises received subsidized with banks, MFIs, and pay-as-you-go solar comprehensive and sometimes commercial capital at some point in their start-up enterprises like M-KOPA and Mobisol goods. Product segmentation can help phase (10 out of the 14 full case studies).14 to gain access to both shared channels companies move either up or down the The most common forms of subsidy were and for necessary business capabilities income ladder depending on where they philanthropic grants, prize awards, and for the enterprise (e.g., easy-to-use started and their long-term objectives in below-market-rate capital. While it is hard payment systems). Both Patrimonio Hoy terms of customer reach. to know if these subsidies were absolutely (part of Cemex) and KGFS (part of IFMR) required for enterprise survival, it is clear leverage their parent companies’ existing It is worth pointing out that product that these various forms of financial help infrastructure to access customers—for segmentation can provide a welcome were extremely helpful for mitigating the Patrimonio Hoy, relationships with cement alternative to price discrimination. As high risks of starting a business in volatile distributors, and for KGFS, the existing a core component of an enterprise’s and low-margin BOP markets. Almost wealth management technology platform. business model, price discrimination certainly, the failure rate of these for-profit puts that enterprise at a competitive enterprises would increase without subsidy. Range on the income pyramid disadvantage over the long run, because (narrow vs. wide) non-socially motivated organizations can Subsidies were often awarded to an Enterprises targeting a broader spectrum copy its business model, but not charge enterprise for a specific purpose, at a (very) of customers on the income pyramid wealthier customers more and undercut early stage. Purposes included product have several methods for reaching a the socially motivated enterprise on development, branding, customer/market broader set of customers. One is price price. If the wealthier customers do not research, testing, and piloting the concept

31 Reaching deep in low-income markets

and exploring new markets, among others. Zoona provides access to funding through For example, Aakar Innovation received a digital money transfers and Urban Planet $550,000, two-year grant for a pilot in Africa Mobile provides English language training, and expansion in India from the Millennium which could be a direct pathway to a higher- Alliance (which includes USAID and the speaking job once English skills are acquired. World Bank, among others). In the case of The investors in these four companies were Sanergy, the company got started with prize typically strategic and financial investors, money from competitions and fellowships as well as some investors with a dual totaling $250K in 2010-2011.15 Moreover, the mission to achieve both social and financial fact that subsidies tended to be provided return (profit and purpose). The other 10 early on, and then did not appear in later companies in the report all received some stages, suggests that it is possible to get level of clear subsidy over varying time enterprises “over the hump,” and then on horizons from philanthropic or investors. to self-sustaining financial viability; in other For example, M-KOPA received grants from words, subsidy does not seem to doom the Gates Foundation and Shell Foundation, these firms to remaining perpetually on while Burn received below-market-rate the take. investments from Acumen and OPIC, and, eKutir received no-interest debt from Yunus Not surprisingly, we found that subsidies Social Business Fund. were most common for enterprises with asset-heavy, push products, while those Finding VI: Aside from the direct impact enterprises that required no subsidy were resulting from the products sold to BOP all (relatively) asset light and pull products. customers, enterprises also generated The subsidies were often used to offset a number of broader development the risk of developing an asset-heavy, benefits push product-based business. These risks We care about financially sustainable include developing the infrastructure and scalable businesses serving the BOP to produce and distribute the product, because we want to improve the quality as well as the labor needed to educate of life of the poorest on the planet and customers and create sales in the market. because we want to have more development The four companies that did not require a impact. The enterprises studied in this grant or patient capital were KGFS, BIMA, report have considerable impact in their Urban Planet Mobile, and Zoona. Of these, target areas, as we have outlined extensively BIMA, Urban Planet Mobile, and Zoona in each case study. Collectively though, are all digital products that scaled quickly they are also creating an impact that goes through their technology platforms. All beyond the direct products and services have similar profiles to traditional venture they offer. They are creating broader capital investments in developed markets. opportunities for employment, filling While KGFS has a network of physical existing gaps in public services and social bank branches, they do also have a goods, and creating more inclusive and technology platform and digital financial resilient families and communities. We have recommendation engine that significantly outlined a number of these benefits below. lighten the asset intensity and are helping them to scale into new markets. In addition, all four of these companies provide a relatively desirable product. In particular,

32 Reaching deep in low-income markets

Expanded economic opportunities: While a well-functioning economy—an economy we intentionally chose to study enterprises capable of generating a sufficient number focused on delivering goods and services of jobs that provide good livelihoods—and to the BOP, as opposed to those focused they are generally provided by governments on creating livelihoods for the BOP, we (because, as noted above, the entity still found that our cases generated providing public goods generally cannot considerable employment and economic capture the full value of these goods and opportunity at the base of the pyramid. so for-profit organizations tend not to For example, BIMA’s distribution force offer them). comprises local agents who deliver product education and support, and Patrimonio Many of the enterprises we looked at, Hoy has trained and employed more than however, are offering public goods or other 3,000 “promoters” from local populations services generally provided by government that drive housing sales within their own and are doing so in a financially sustainable communities.16 way. These public or government goods reach across a broad spectrum of what In addition to direct employment, we experience in daily life: housing, health, several enterprises also leverage local sanitation, nutrition, and education. microentrepreneurs as part of their business model. While this transfers some of Patrimonio Hoy and Echale both provide the risk of success from the enterprise to the low-cost housing, a good that is typically microentrepreneur, it also creates economic provided to some extent by governments for opportunity for the microentrepreneur, people who are not able to afford housing. who not only accesses stable employment, These affordable housing solutions offer but also has the potential to build up low-income populations safe, affordable his or her own business and workforce places to live while helping to reduce the within the context of the enterprise. While severe overcrowding conditions in Latin these microentrepreneurs were typically America. Patrimonio Hoy has provided new low-income, they are not usually from or improved housing for 527,000 families, the lowest-income ranges because some reaching 2.5M individuals, while Echale has capital is required up front to purchase reached more than 180,000 families and the materials to start their franchise. For 1M people.18 example, Zoona has generated employment opportunities for more than 900 agents In health care, Livewell Clinics has served (microentrepreneurs) who in turn employ 250,000 patients since inception and more than 1,800 tellers (most likely Swasth has improved treatment compliance BOP employees).17 by two times the market average.19 The cookstove providers are also, in a sense, Provision of public goods and quasi- health care providers as they are mitigating government services: To some extent, the a major cause of illness for the BOP (i.e., poorest people in the world are as poor exhaust from charcoal fires in the house). as they are because they live in places that For example, Envirofit’s cookstoves reduce generally lack public goods. Transportation smoke and toxic emissions by 80 percent.20 infrastructure, communications infrastructure, water and sanitation, reliable There are also fairly successful examples power, health care, education and workforce in sanitation. Lack of access to hygienic training, rule of law and the enforcement sanitation leads to diseases, death of of contracts, and the like are weak or children, and lost GDP and productivity. missing. These public goods are critical for To combat these problems, Sanergy has

33 Reaching deep in low-income markets

installed more than 800 Fresh Life Toilets example, KGFS provides savings programs with 37,000 daily uses from 25,000 users in that enable customers to generate a Nairobi, and eKutir has installed toilets for savings asset base that will protect them more than 80,000 BOP customers in India.21 in a downturn. Over time, KGFS customers have experienced a 48 percent increase in Education is also an area where these assets.24 BIMA provides access to insurance enterprises were making a significant (75 percent of customers access insurance impact, both in sheer numbers and in for the first time through BIMA), which how education is financed and delivered. represents a significant safety net, especially Urban Planet Mobile, through their for a family where an unexpected death nonsmartphone English language platform, occuring leaves them without income.25 has reached 750,000 customers who MicroEnsure has paid out $28M to its downloaded 23M lessons per month across customers, many of whom have never had 45 countries.22 FINAE, which provides loans insurance previously.26 for students to attend higher education programs, distributed more than $55M in For-profit enterprises serving BOP student loans to almost 10,000 students; of customers also improve overall financial these students, 2,000 have graduated and security by providing products that are 60 percent of graduates are first-generation cheaper substitutes for currently expensive students.23 products, often products that are required for daily living. For example, Envirofit’s These enterprises are stepping in where cookstoves reduce fuel use by 60 percent, government is under resourced and which increases annual income by 15 failing, helping to upgrade the enabling percent. Over time, Envirofit’s customers environment in these poor communities. have saved $138M in fuel costs.27 Freeing As these sorts of dual-purpose enterprises up this extra cash flow enables customers grow and spread, they will tend to make it to either purchase additional goods and easier for yet more enterprises—socially services that improve their lives or to start oriented or not—to operate successfully, saving money and building assets. provide livelihoods, and improve the quality of life of those at the BOP. In addition, we noted several instances where for-profit enterprises were enabling Improved resiliency through financial future access to expanded financial security and inclusion: Income and cash inclusion. For example, once an M-KOPA flow volatility are significant problems for customer has successfully paid off their BOP populations in developing countries. solar home system on credit, he or she These populations are subject to significant then has a formal credit history, which financial shocks stemming from macro M-KOPA allows them to use to finance the events such as weather and currency risks purchase of additional follow-on products— and life events such as the unexpected for example, cookstoves. Half of M-KOPA death of the sole breadwinner in the family; customers have already paid off their initial or more generally, from having informal solar system purchase and are eligible employment that does not generate steady to finance follow-on goods. In another income or stable cash flow. Living conditions example, Livewell Clinics has an adjacent can deteriorate drastically and suddenly— financial inclusion impact to its core health including losing access to food, shelter, and care clinic business by ultimately improving water—as a result of any of these financial insurance rates for its BOP customers from shocks. five percent to more than 30 percent in five years.28 Several enterprises profiled in this report directly improve the overall financial security of BOP customers and reduce the immediate impact of financial shocks. For 34 Reaching deep in low-income markets

Enterprise Development Impact29 Aldeia Nova 1.7M customers receiving vital protein in their diets; 700 farmers active in program, with average net profit increase of $500 per month; 510 people directly employed and 3,100 indirectly employed. eKutir Participating farmers cut costs by 50 percent and increased productivity by as much as 75 percent. Incomes of participating farmers were 2x non-participating farmers. FINAE More than 55M in student loans to almost 10K students; of these students, 2K have graduated; 60 percent of graduates are first-generation students. Urban Planet Mobile Reached 750K customers who have downloaded 23M lessons per month across 45 countries. Burn 54 percent reduction in sick days per household due to less smoke; households save on average $120 per year; overall, Burn has helped customers save more than $15M in reduced fuel costs. Envirofit Cookstove reduces fuel use by 60 percent, which increases annual income by 15 percent; reduce smoke and toxic emissions by 80 percent; 2,400 jobs created and $138M in fuel costs saved. Husk Power Use of electricity instead of kerosene and diesel saves small business roughly 40 percent and households 30 percent of energy costs; created 300 jobs in India. M-KOPA Customers save an entire year’s income within three years; 50 percent of customers have already paid off initial solar system purchase. Off-Grid Electric An average increase of 149 percent in study time once home is connected to off-grid power system; 800 jobs created in Tanzania. IFMR/KGFS Customers, on average, have experienced a 48 percent increase in assets, 200 percent increase in asset value, and a 254 percent increase in household income. Zoona Generated employment opportunities for 900+ agents and 1,800+ tellers, many of them female; safely moved over $1B. Aakar Innovation Reached 50K low-income women customers; use of product decreases school dropout by 90 percent; generated $2M in revenue for 750+ workers in minifactories. Livewell Clinics Served 250K patients since inception; adjacent impact of improving insurance rates for BOP customers from five percent to more than 30 percent in five years. Swasth Foundation Reduced out-of-pocket expenditures by $1.15M; improved treatment compliance by 2x market average. Echale 30K new homes; 150K home improvements; and more than 200K temporary jobs. Reached more than 180K families and 1M people. Patrimonio Hoy New or improved housing for 527K families, reaching 2.5M individuals; training and employment for 3K BOP promoters. ACRE Africa Participating farmers generated 17 percent more in total income than uninsured farms, based on a 2012 survey of 630 farmers. BIMA 75 percent of customers accessing insurance for the first time; 47 percent of customers were completely unbanked. MicroEnsure $28M paid out to MicroEnsure’s customers, many never had insurance previously. Sanergy 400 operators now managing more than 800 toilets; 37K daily uses from 25K users; 800 new jobs created.

Finally, it is worth pointing out that the increasing penetration of technology-enabled financial services helps with the development of rule of law and contract enforcement. These technologies create more trustworthy mediums of exchange because available cash can be checked in advance, credit histories are established and more transparent, and service can be cut quickly due to non-payment—so the costs of taking the risk of making a transaction are reduced. Historically, trust in these sorts of transactions is established in an expensive way via laws, regulations, effective enforcement, and the like. The spread of these financial tools, therefore, is helping provide a public good that governments have had trouble providing in the past.

35 Reaching deep in low-income markets VII. Implications for the Field

The 20 case studies and the broader heavy businesses selling push products findings on how enterprises are reaching (which as noted constitutes much of what the BOP provide a window into the potential we want to do in development) to reach that exists in serving BOP customers, deeply down the income ladder, to those the possibilities related to developing living around $2-$4 per day. Our subsequent for-profit and scalable businesses, as well research, however, tended not to support as delivering social goods that are beyond that expectation, and the resulting the reach of government capacity. We implication is that donors, foundations, conducted in-depth interviews and reviewed impact investors, and even governments secondary sources to gather data on the would do well to consider supporting these financial performance of companies, the sorts of enterprises as one way to achieve income levels of the customers they are their development goals. serving, the characteristics of their business that enable them to operate successfully, This having been said, a second implication and the impact their businesses are making of the research is that this path to impact in the communities they serve. We were probably requires some sort of financial encouraged by the level of engagement from subsidy. With the exception of the asset those leading the enterprises, a reflection light business selling pull products, virtually of the desire to learn from others in the field. every organization received a subsidy of some type, be it grant funding, patient We found that many enterprises are able capital, or brand and back-office support. to reach fairly deeply down the income The implication is that development pyramid, and often seem to be able to organizations ought not to reject prima do so sustainably and at scale. While the facie the idea of subsidizing a for-profit sample size is not large, we even found enterprise. While they certainly need to cases of asset-heavy businesses selling fully understand the opportunity, and not push products reaching the BOP. This pay for something that the company would having been said, financial subsidies are have done anyway, various forms of subsidy common, and may be needed to get these to for-profit enterprises would seem to be sorts of enterprises off the ground and legitimate tools for achieving development onto somewhat more solid footing. Finally, impact. in addition to their direct social impact, organizations also generated corollary Similarly, a third implication is that development impact, including creating development organizations ought not economic opportunity, providing public to insist that a certain percentage of an goods (i.e., health and education) and other enterprise’s customers be at a certain government services, and improving the level of poverty in order for that enterprise resiliency of individuals and communities. to be eligible for donor funding. Serving populations at somewhat higher-income These findings imply a number of levels does not seem to prevent enterprises implications for the field. First, and from also reaching much lower-income most obviously, supporting for-profit levels. In fact, given how widespread the enterprises that provide needed goods practice is, it might be a near necessity. and services to the poor is a viable way to Any stipulations along these lines should drive a development agenda. Our going-in probably be oriented around the absolute expectation was that these sorts of for-profit numbers reached per dollar granted. enterprises would be able to reach the very poor under some conditions, but likely not A fourth implication coming out of the under others. In particular, our concern was research is that these enterprises can be that it would prove very difficult for asset- used to help deliver public goods and other

36 Reaching deep in low-income markets

services typically provided by government. Finally, a fifth implication is that educating customers about the value of a Enterprises studied provided power, governments and donors might consider product category (e.g., preventive health sanitation, health care, education, and even investing in public education campaigns to care, insurance, and improved agricultural some limited enforcement of contracts. For promote certain product categories that inputs) is a public good and can legitimately governments, these enterprises could be a they would like to see used more widely. be taken on by government and other useful supplement to government services. Enterprises spend considerable resources development organizations. Doing so For donor organizations, they could serve educating customers on the value of would likely free up some resources for the as a useful alternative to supporting their products in an effort to make them individual enterprises and enable them to governments when governments have more pull than push. Any spending to get focus more on achieving social impact. proven incapable of providing desired customers to buy one brand of a product services. category over another should of course be shouldered by individual organizations. But

37 Reaching deep in low-income markets VIII. Conclusion and next steps

The report underscores several areas where make to purchase a new product versus reaching deeply, it is hard to identify there is an opportunity for further research, maintain existing spending patterns; best practices for how to reach deeply. analysis, and support of enterprises serving what are the buying constraints due to Gaining better access to data on the the BOP. These opportunities span a wide fluctuations in cash flow and how should income level of the customers being range of topics, from data availability enterprises adjust their go-to-market served, through information on a range to better understanding how for-profit strategy; how customer education and of customer attributes, would no doubt enterprises go to market within the context marketing makes a push product more be helpful in better understanding what of other development programs. Based of a pull product; and what incentives is working and what is not in reaching on our interviews and research with the work best to create repeat customers. the BOP. enterprises, as well as feedback we received from leading experts in the field, three Better understanding customer There is a broad consensus that specific areas are particularly important behaviors and customer segments could collecting and analyzing customer for advancing our understanding of how potentially have a lasting influence on and enterprise data is needed for to effectively serve the BOP: 1) improved how enterprises serve the BOP. From an the continued advancement of the information on BOP customers, their needs enterprise perspective, this information field. However, enterprises face many and behaviors, and the customer segments would help inform company leadership limitations, most notably the resources they form in the market; 2) advancing how on what types of products, business to collect and organize the data in order data is collected, analyzed, and shared for models, and financing options would to share it more broadly. Enterprises, enterprises serving the BOP; 3) further most effectively reach their customer as we often heard through our analysis of how subsidies play a role in the base; who makes up that customer interviews, are also hesitant to share launch and maturation of enterprises, in base; and how that customer segment the information they do have in that particular for asset-heavy enterprises who evolves over time. From a development it could undermine their competitive are providing push products. These three perspective, having this information advantage or have a negative influence areas have implications for future research will allow investors, government on raising capital. Governments and and technical assistance that is needed organizations, and other stakeholders foundations play an important role in from governments, foundations, and BOP to make more informed decisions about helping to achieve the balance of these investors. what types of enterprises will likely be desired outcomes, by both providing successful in reaching the BOP and what technical assistance for data collection, 1. Customer Segmentation: Many of the types of assistance are most effective. as well as a safe place where data can leaders we interviewed for the case Customer information would also help be anonymized and analyzed at the studies identified the need to better these organizations better understand industry or sector level. Improved data understand the customers they serve at the limitations of for-profit enterprises collection would also allow for better the BOP, both as individual actors and in reaching the BOP and where benchmarking between different as collective segments interacting in a government and non-profit enterprises programs and approaches to serving broader market. Enterprises often had are best suited to provide critical public the BOP. Over the long term, this would limited customer knowledge, particularly goods and services. allow for more accurate measurement at the launch of their enterprise, and of the real costs to reach the BOP and many had limited insight into their 2. Data Collection and Analysis: Good the level of impact created by different customers even for businesses that were data on for-profit enterprises’ depth BOP-focused programs, whether run well established. Several gaps seem to of reach into the BOP, as well as their by governments, non-profits, and for- exist, including the need to understand financial sustainability and scale are profits aiming to achieve a similar set of buying behaviors, such as what financial lacking. Because we as a field do not outcomes. trade-offs BOP customers are willing to know which enterprises are successfully

38 Reaching deep in low-income markets

3. Use of Subsidies: A secondary goal of the There is also a need to look more research was to understand the use of closely at the intersection of subsidies different types of investments into these and specific industries, for example, enterprises—grants and subsidies, household energy (e.g., solar), health patient capital, and a myriad of other services, or financial tech. This analysis types of support that are highlighted will help us understand what subsidies in each case study. The use of are most effective in creating a set of subsidies and their impact on for-profit outcomes desired—how can investors enterprises was of particular interest and government organizations best use to many of those we interviewed. subsidies to stimulate, scale, stabilize, Based on our findings, it appears that or support long-term maturation of a some subsidization is almost certainly particular industry or type of enterprise a good idea, but how much, when, serving the BOP.30 Understanding the and for what purposes is not well effective use of subsidies, as well as understood. Future research should when they should not be used, will further examine the question of when provide an important insight for future is it appropriate to subsidize a for-profit support of enterprises working at the business to encourage them to serve BOP, as well as those organizations that a poor customer segment. A narrower invest in those enterprises. question, but equally intriguing, is the use of subsidies to support enterprises Questions like those outlined above— with asset-heavy, push products—a questions that are critically important business model that is often critical to for helping us understand how to better delivering BOP goods and services (e.g., reach those living at the BOP—remain education and health care), but usually unanswered, and getting those answers will with significant up front costs and risks. depend upon more investment by those most interested in sustainable market interventions to serve the BOP.

39 Reaching deep in low-income markets

40 Reaching deep in low-income markets

Case Studies

41 Reaching deep in low-income markets

Aakar Innovations

Sector Year founded Geography Health 2011 India and Bangladesh

Company background Business performance: Path to Opportunity: In India, the use of sanitary profitability and scale pads is scarce among the BOP due to a Financially sustainable and investing lack of awareness, limited access, and in scale Breakeven (BE) Analysis discomfort of use. In addition, roughly 70% Aakar has 44 minifactories employing 750 of families cannot afford brand-name pads women, reaching 50K BOP customers and 20 19 18 and do not have a healthy alternative. This has expanded to Africa. BE—18 leads to numerous problems: 1) limited •• Revenue ’15: ~$109K with 60% two-year 10 empowerment for females due to the social 4 4 compound annual growth rate (CAGR) stigma associated with menstruation; 2) 0 decreased livelihood options by reducing •• Revenue ’16 (Sept.): $192K; typically 70% 2013 2014 2015 2016 a woman’s ability to work and attend of revenue realized in last quarter based school for roughly 50 days each year; 3) on past three years No. of operating units in hub major health problems, including urinary BE point •• Profit Margin: Profitable in early pilot tract and sexually transmitted infections, years ’12 and ’13; lost money in ’14 and ’15 and bacterial vaginosis; and 4) the lack of from investing in growth; will be profitable disposal options for existing pads, leading to in ‘16 environmental challenges.

Income pyramid reach Customer Base Income Levels Solution: Aakar has a sustainable, Aakar is reaching deep on the income microenterprise model, led by women, to pyramid with 100% of customers earning produce and sell compostable sanitary pads below $4/day. at a low cost to BOP populations. This model also: To successfully reach very low-income •• Allows women to leave the house during customers, Aakar operates two legal entities: menstruation and provides jobs as 1) Aakar Innovation sells the minifactories microentrepreneurs, increasing livelihoods to women and purchases outputs for resale to local NGOs, and 2) Aakar Social Ventures •• Increases access to remote areas in a raises menstrual hygiene awareness to sustainable way educate consumers on product benefits. •• Creates an entry point for conversations In addition, Aakar focuses its R&D efforts 25% earn less than $1/day/capita to normalize menstrual hygiene on innovative technology and inputs with 75% earn $1 to $4/day/capita management (MHM) the goal of decreasing product prices for low-income customers. The combination •• Eliminates health risks associated with of these efforts allows Aakar to sustainably disposal with a 100% compostable, reach remote areas and customers deep on environmentally friendly product the income pyramid.

Main Product(s): 1) Sell low-cost machines, Methodology: Aakar completes baseline raw materials, and training services studies to understand consumer profiles, to enable sanitary pad production at which include earnings/disposable income “minifactories” and 2) purchase pads from for menstruating family members. minifactories and sell in bulk to government and NGOs.

42 Reaching deep in low-income markets

Aakar Innovations (cont.)

Factors affecting reach Business model design Low-Income Key factors Narrower Wider Machines & Customers Cust. Base Cust. Base materials Mini Asset Pull Pads Factories light Push Aakar Payment Payment Asset- Pull heavy Push X Payment Outputs Push vs. pull Asset light vs. (pads) Bulk heavy purchasers Pads •• Difficult-to- •• Tangible Pads overcome products and Payment Payment cultural centers to disapproval of manufacture Business model characteristics to reach Critical success factors and barriers sanitary pads. machinery. deep on the income pyramid •• Female-Only Workforce: A “no-men” •• Significant •• Rural distribution BOP As Employees BOP women sales channel minimizes cultural stigma of consumer has high employed in both menstrual hygiene. education about transportation production and benefits required and labor costs. door-to-door sales •• Competitive Pricing: Aakar’s pads are to sell. 12.5% cheaper per pack than the closest •• Labor-intensive Vertical Integration Model competitor due to streamlined operations •• Need high market outreach incorporates and low-cost minifactories. frequency of is costly. production and purchase to distribution of •• Innovative Product: Use indigenous benefit. pads raw material derived from local plant and Financing Options Partner with MFIs agricultural waste, creating a compostable, Narrower vs wider: While Aakar is to help women effective sanitary pad. currently serving a narrow customer secure loans for •• Operation of two separate legal base with 100% customers earning minifactories entities: In addition to for-profit entity less than $4/day, it is in the process of Microentrepreneurs Franchise responsible for sales, Aakar Social shifting wider due to rising demand for model—women Ventures provides educational programs compostable pads in urban areas. It is purchase and own to promote awareness of women’s health expanding the brand by creating a new, minifactories needs/risks and to generate awareness higher margin product that will cost twice as Pay per use Pads are sold in and acceptance of products. much as its existing pads. The new product packets of eight, so is 100% compostable and targets the less •• Barrier: Cultural Taboos: Considered women purchase price conscious, more environmentally unacceptable to discuss menstruation as needed focused user. It is available for sale, but and female hygiene in Bangladesh, pricing and commercial distribution are still Paraskilling Simplified factory complicating marketing efforts. being tested. technology—easy to operate and maintain Price Discrimination Creating higher priced, rebranded product for higher- income levels End Customer Does Portion of sales Not Pay to NGOs who distribute free pads to customers

43 Reaching deep in low-income markets

Aakar Innovations (cont.)

Value capture Development impact achieved from Millennium Alliance (incl. USAID, For Aakar, revenue comes from different Aakar Innovations is improving menstrual UKAID, World Bank, Govt. of India, and sources: hygiene and health for 50K low-income FICCI) women in rural areas by selling pads at •• 60% from minifactory machines with 60% •• India Institutes of Management— affordable prices. The use of pads: paid in advance and financing available to undisclosed investment in December 2014 purchaser •• Increases number of working days by at least 30 days for women each year, Key Learnings •• 25% from raw materials and maintenance leading to increased income •• To stabilize the company’s profits, Aakar •• 10% from bulk pad sales to government •• Generates $2M in revenue for more focused on addressing one key customer and NGO than 750+ low-income women owning pain point in one geographic area for •• 5% from training services provided to BOP and working in minifactories first three to five years. employees •• Funds taken as compulsorily convertible Aakar Social Ventures, the education affiliate, preference shares have helped Aakar by For Minifactory Owners: raises awareness of menstrual hygiene 1) increased accountability to improve products, increasing cultural acceptance. •• An eight-pack of pads is $0.44 for rural performance and 2) improved valuation, customers ($1.17 for urban); nearest leading to less equity dilution. Investments overview competitor charges $0.48 As of 2016, investors provided debt and •• Aakar found debt funding challenging in •• Minifactories must sell 260K pads to break equity totaling $0.15M over five years, the early days given volatile cash flow to even; on average, owners profit ~$300 to including: service the debt. $400 USD/month •• Raised $150K in ‘14 with an expected •• Investor’s focus on performance 15% IRR from Rianta Capital, CIIE-IIMA, milestones helped Aakar improve the and multiple angel investors “hub and spoke” model (minifactories reaching the BOP), proving that this model •• Obtained $550K, two year grant in ‘16 has provided Aakar with a path for future for pilot in Africa and expansion in India expansion.

Data and information in this case study gathered and confirmed via interviews with, and documents provided by, executives at the enterprises. 44 Reaching deep in low-income markets

Aldeia Nova

Sector Year founded Geography Agriculture 2012 Angola

Company background Business performance: Path to Opportunity: Angola suffers from profitability and scale pervasive poverty (70% of population) Total enterprise profitability and and undernourishment (41%); half of continuing to scale households have insufficient calories per Supporting 700 farmers to produce 250K capita and many more lack diet diversity. eggs/day for 1.7M customers annually. Breakeven (BE) Analysis Protein shortage is a particular problem, •• Revenue and Profit Margin:Not public; with average daily consumption of 43g/ 10 however, IRR (defined as net [posttax] 6.3M person (versus 104g to 133g/person in the financial return) is >20%. developed world). Finally, Angola has chronic 5 3.3M underemployment. •• Other: Aldeia Nova broke even in March 0 2013 and continues to operate profitably 0 2012 2016 Solution: Aldeia Nova’s agrocommunal to date. model fuses agricultural production with service provision and social development. Income pyramid reach Its principal service is supporting local Aldeia Nova has limited customer data, but Egg sales per month (M) communities of farmers for poultry given that it sells eggs in different parts of BE point and dairy production, simultaneously the market, it likely reaches both low- and addressing local dietary protein shortages slightly higher-income levels. and underemployment. Note: Poultry sales include all products from chicken (e.g., eggs, Consumer behavior indicates low- ready meals, and pate). income customers purchase via informal markets (accounting for 66% of sales). To Main Product(s): Aldeia Nova operates a be conservative, Aldeia Nova estimates vertically integrated agroindustrial center 50% of these customers are likely low- focused on two activities: income (33%). To reach customers, Aldeia Nova requires farmers to purchase inputs •• Agriculture production—Provide that improve quality of outputs (e.g., animal farmers with inputs that are produced feed at quality nutrient levels). It encourages (e.g., crops for animal feed and hatchery this ongoing investment by extending chicks) or imported (e.g., equipment). farmers’ credit against outputs to address •• End Product Distribution—Buy outputs cash flow issues. This limits a farmer’s up from farmers (i.e., poultry and dairy) front costs and makes participation feasible Customer Base Income Levels (per capita) and process, package, and distribute to for all income levels. 67% estimated to earn above $24/day customers in Angola. Note: The remainder 33% estimated to earn less than $24/day of the case focuses on egg sales because Methodology: Define low-income it is the most significant source of revenue customers by Impact Reporting and for Aldeia Nova. Investment Standards definition of below- median per-capita income in Angola ($24/ day); Microincome data is unavailable in Angola.

45 Reaching deep in low-income markets

Aldeia Nova (cont.)

Factors affecting reach Business model design Key factors Narrower Wider Cust. Cust. Base Egg & Poultry BOP Farmer Agrocenters Base Consumers Farming Asset Pull outputs light Push Asset- Pull X Farming heavy Push inputs Eggs sales via formal and Push vs. pull Asset light vs. informal retail channels heavy •• Egg protein has •• Tangible • Strong leadership and management clear health products made Business model characteristics to reach • (including experienced western CEO): benefits and is an at agroindustrial deep on the income pyramid Willing to make heavy investments in new affordable meat centers increases BOP As Hire BOP in logistics value-added activities (e.g., machinery substitute. unit production Employees centers and as farmers and complementing products) and costs. to supply eggs •• Eggs in high demonstrated ability to build relationships Vertical Support egg production demand—they •• Labor-intensive with local/national leaders. Integration with farmers and are widely egg distribution distribution in market inaccessible to retailers, •• Barrier: Competition from imports: Occasionally, Aldeia Nova faces reduced outside of local decreasing Financing Farmers obtain inputs demand due to foreign imports. production. margin. Options on credit against egg outputs •• Barrier: Currency shortage and Narrower vs wider customer base Pay per use Customers continuously production limitations: Low access to Aldeia Nova is reaching multiple income purchase eggs based on USD to purchase required imports (e.g., levels through its egg sales. An estimated consumption needs feed supplements and packaging) creates 34% of eggs are sold through formal retail Up-sell/Cross- Sell eggs, poultry, and egg production limits that could otherwise outlets (i.e., grocery stores) that reach sell Products other items to same reach 400K eggs per day. higher-income levels, while 66% are sold retail partners through informal outlets, (e.g., road stands) Price Packaging, branding, Value capture that reach lower customer levels. Of sales Discrimination and pricing varies for Aldeia Nova generates 75% of revenue in informal channels, an estimated ~50% of high-/low-end channels from poultry sales, mainly eggs, and customers earn below the median income 25% from dairy sales to consumers. of <$24/day. Other critical success factors and Revenue from inputs is not significant, but barriers they are still an important model aspect— quality inputs impact the quality of farmers’ •• Create positive and negative incentives: outputs. Pricing info: Mechanisms prevent farmers from reselling agri-inputs and reward farmers •• Inputs sold to farmers for cost + 10% for producing quality outputs. margin.

•• Communicate long-term value to •• Outputs priced at market prices, but farmers: Farmers see the path to are often sold for higher rates in formal sustainability, which decreases the value markets (e.g., a dozen eggs ranges from of immediate gains from input sales. $0.82 USD in the market to a $2.80 official retail price). •• Generate revenue by turning waste into products: Pursue creative initiatives (e.g., use damaged eggs for cookies and older chickens for prepared meals).

46 Reaching deep in low-income markets

Aldeia Nova (cont.)

Development impact achieved chemicals, etc.

•• 1.7M customers in rural and urban areas •• Aldeia Nova is a GIIRS (Global Impact are regularly receiving vital protein in Investing Rating System)-rated company their diets, thanks to egg sales. and receives a third-party evaluation of its development impact, benchmarking its •• Aldeia Nova’s egg supply represents 25% performance relative to other enterprises of local production, a significant portion in its environmental, social, and of the market share. governance practices. •• 700 farmers are active in an outgrower Investments overview scheme and provided with electricity, Aldeia Nova started as a government water, and social/agricultural services; settlement initiative to provide retired farmer income increases to $900/ soldiers with economic opportunities. month (~$30/day), or six times the Individuals from Vital Capital involved Angolan minimum wage. in the initial project decided to make an •• 510 people are directly employed investment based on the potential for future in the centers and another 3,000+ success. indirectly, alleviating unemployment and •• In 2012, active investors from the underemployment simultaneously. Vital Capital fund committed $10M in •• Other benefits bestowed on local backing to Aldeia Nova with the goal communities include 4K hours of of making it a sustainable business employee training (in 2015 alone) venture. and information sharing on farming •• Vital Capital’s investment agreement techniques. includes an exclusive management •• Aldeia Nova makes $23M in purchases contract to run Aldeia Nova. from local, independent suppliers •• The large investment allowed Aldeia Nova located within 200 miles of agrocenters, to pursue scale, which is critical for the including $8M in direct egg purchases system to succeed. from farmers as well as parts, supplies,

Data and information in this case study gathered and confirmed via interviews with, and documents provided by, executives at the enterprises. 47 Reaching deep in low-income markets

BIMA

Sector Year founded Geography Fintech/Insurance 2011 16 countries across Asia, Africa, and Latin America

Company background Business performance: Path to Opportunity: Those living very low on the profitability and scale income pyramid are among the most at risk Financially sustainable and investing in of illness and personal injury due to poor scale Ability to Scale: living and working conditions, and they are •• Revenue ’15: $11.3M. prone to feel the economic burden of these Subscriber Growth shocks immediately. Despite the risk, very •• ’15 growth: 113%. (Thousands) few individuals have protection in the form •• Scale: 16 countries reaching 24M of insurance due to a lack of information 23,953 subscribers, is currently profitable in three +58% about the benefits, a skepticism that claims to four markets. will be paid, or simply a lack access. 17,617 •• One to seven new markets per year is the Solution: BIMA leverages high mobile key hurdle to overall profitability. 9,590 penetration and mobile technology to •• Expects to double number of profitable create a new way to access low-income markets in near future. consumers. BIMA partners with MNOs 2013 2014 2015 and local insurers, creating value through Income pyramid reach expert product design, driving distribution, BIMA is currently adding 500K BIMA is reaching deep on the income and managing the customer experience. subscribers per month pyramid with 53% of customers living under A trained, managed sales agent force $2.50/day. distributes products, providing vital education and executing registration of BIMA has reached very low-income customers via BIMA’s front-end mobile apps. customers with services, distribution Back-end technology platforms link with Customer Base Income Levels models, and payment channels tailored MNO systems and local financial service for these consumers’ needs. providers to facilitate payment, service delivery, and claims management. BIMA is successfully penetrating a market that was previously unserved. Main Product(s): Low-cost, simple On an average, more than 70%3 of insurance built around the needs of the the population in BIMA’s markets was customer. The current portfolio includes previously underserved, lacking access to personal insurance and recently launched or information about insurance. BIMA has m-Health services. BIMA customizes successfully communicated the value of its products to meet the needs of each product to a broad range of customers. operator, and to match the behaviors of customers in the local market. The payment Rigorous External Methodology: BIMA 53% live below $2.50/day model has evolved from “freemium”—cover uses a variant of the PPI methodology2 to 40% live from $2.50 to $9.99/day earned in exchange for loyalty to MNO—to a segment its customers. BIMA surveyed 7% live above $10/day paid model. The dominant payment channel more than 400 randomly selected is via deduction of small daily amounts respondents per geographic market and of prepaid airtime credit. BIMA now also worked with the economist who designed collects payments via mobile money PPI to define specific segments in their and postpaid billing for higher-income study. customers.

48 Reaching deep in low-income markets

BIMA (cont.)

Factors affecting reach Key factors Narrower Wider Business model characteristics to reach Cust. Cust. Base deep on the income pyramid Base BOP As BIMA distribution force Asset light Pull Employees is made of local agents Push X who deliver product Asset-heavy Pull education & support. Push Shared Partnerships with Channels MNOs are essential to Push vs. pull Asset light vs. the revenue model and heavy achieving necessary •• Due to lack of •• Mobile-driven scale. familiarity and model reduces Brand BIMA often uses MNO trust, there is a need for brick Partner partners’ brands lack of inherent and mortar sales to build trust in the demand for assets. product. insurance in low- •• Partnerships with Optimize Digitized processes, a income markets. MNOs diffuse Internal mobile-based product, As a result, BIMA some fixed costs Processes and tech-enabled back- is differentiated for infrastructure. end platform enable by its agent streamlined operations. salesforce. Pay-per-use Primary revenue is Narrower vs wider customer base driven by prepaid BIMA’s model works by targeting large coverage in small volumes of very low-income customers amounts. and segmenting its offering to also Product Different coverage reach higher-income customers. The Segmentation amounts at different combination of high volume from the BOP prices for different and the growing revenue share from higher customers. earners are critical to success.

Plan for growth

•• Continue to launch in several new markets yearly

•• BIMA will continue to scale its telehealth offering

49 Reaching deep in low-income markets

BIMA (cont.)

Endnotes Other critical success factors and Development impact achieved6 1. GSMA 2016 Mobile Economy, http:// barriers BIMA creates opportunities to access www.gsma.com/mobileeconomy/#. financial services.It is often the only 2. PPI is Grameen’s Progress out of Poverty •• Successfully align incentives: source of insurance coverage for the Index. Organizations and businesses BIMA successfully identified win-win majority of its customer segments. with a mission to serve the poor use the arrangements with MNOs to drive Moreover, its insurance coverage is likely index to help them measure poverty consumer behaviors that benefit both amongst one of the first formal financial outreach, improve social performance, partners. services these customers will have ever and track poverty over time. •• Strategic partnerships are critical accessed: 3. BIMA Customer Demographics Report, to growth: MNOs have been key in 2016. •• Access to insurance—In 2015, 75% of identifying new product opportunities and 4. BIMA Customer Demographics Report, BIMA customers were accessing insurance guiding geographical expansion. 2016. for the first time. 5. BIMA Management Interview, 8/19/2016. •• Adapt products to geography: New •• Broader Financial Inclusion—In 2015, 6. BIMA Customer Demographics Report, product testing to understand local 47% of BIMA users were completely 2016. regulatory landscape and customer unbanked. habits.

•• Build trust with customers: Motivate Investments overview low-income customers to see value To date, BIMA has raised $75 million in of insurance with a simple product capital from both strategic and financial before upselling and invest in educating investors, including: target customer base with distribution •• Kinnevik—Holds a 40% stake, investor salesforce. since 2011. •• Successfully identify adjacent markets: •• Leapfrog Investments—Holds a 23% stake, BIMA quickly recognized the opportunity investor since 2012. of moving into the health insurance and telehealth market spaces. •• Millicom (MNO)—Holds a 27% stake, investor since 2011. Value capture5 •• Digicel (MNO) —Holds a 7.5% stake, •• BIMA captures value through effective investor since 2014. revenue-share agreements with MNOs. Revenue from underwriting revenue BIMA closed a Series C round in 2015 goes to BIMA (where it is a licensed for $38M, with all existing investors microinsurance company) or is shared recommitting proportionally. with local underwriting partners, where necessary. Key Investment Learnings

•• Unit economics, scale, and active user •• Strategic investors are critical to long- base are all key to profitability. BIMA’s term success. BIMA wants strategic active user base—individuals who qualify partners to enable further scale by lending for insurance coverage in any given expertise in emerging markets, insurance, month—represents nearly 50% to 60% telecoms, and digital. of the total user base. These customers generate earnings of roughly $1 USD per customer, per month.

Data and information in this case study gathered and confirmed via interviews with, and documents provided by, executives at the enterprises. 50 Reaching deep in low-income markets

Burn Manufacturing

Sector Year founded Geography Energy—Cookstoves 2011 Kenya/East Africa

Company background Business performance: path to Opportunity: Indoor air pollution from profitability and scale Breakeven (BE) Analysis open fires and traditional stoves will kill Financially sustainable and investing roughly 4M people this year. Up to 25% in scale 16 of black carbon emissions come from Began operations in 2013 15 burning solid fuels for household energy. Revenue ’15: $2.1M 10 10 7 Most urban households in East Africa cook Revenue ’15 growth: 60% 5 on charcoal, despite its increasing cost Profit margin ’15 (Kenya):38% 5 3

and damaging effects on one’s health and (Thousands) •• Scale: 200K stoves sold. environment. 0 No. of stoves/Month 13 14 15 16 •• Selling 10K stoves/month; break even at Solution: Burn Manufacturing (Burn) 16K stoves/month. Year designs, manufactures, and distributes fuel- •• 50% CAGR over the past three years, as BE point efficient cookstoves in order to improve lives well as planned expansion in Uganda and and save forests in Africa. Eighty percent No. of stoves/month (thousands) Tanzania, and two new product launches of Burn’s sales are in Kenya, and 20% are suggest Burn will break even in 2017. spread across Uganda, Tanzania, Somalia, DRC, and Nigeria. •• Profitable in Kenya.

Main Product(s): Burn has one product on Income pyramid reach the market, the Jikokoa, which is a clean, Burn is reaching deep on the income fuel-efficient charcoal stove sold to urban pyramid with 43% of customers living Customer Base Income Levels and peri-urban customers. The Jikokoa below $4/day. outperforms other cookstoves, cooks faster, and has a higher TRC rating. Burn has four Burn’s lower-income customer base cookstoves in the pipeline: a wood stove has grown over time. Those earning >$4/ targeted at rural customers, a large charcoal day were early adopters because they stove, an ethanol stove, and a pellet stove. could afford to take the risk of trying a new . product. Those earning <$4/day only began to purchase the Jikokoa at scale once Burn’s brand and reputation were proven; this portion of Burn’s customer base is growing.

Rigorous External Methodology: Income 24% live below $2.50/day level data is from an Acumen Lean Data 20% live between $2.50 and $4/day study, which used Grameen’s “Progress out 56% live above $4/day of Poverty” five-question tool to estimate consumption levels, per person, per day. The sample size comprised 355 phone interviews with a randomly selected group of customers who registered their Jikokoa warranties between August 1 and 17, 2016.

51 Reaching deep in low-income markets

Burn Manufacturing (cont.)

Factors affecting reach Business model characteristics to reach •• Committed Leadership: Committed team Key factors Narrower Wider deep on the income pyramid of “problem solvers” across various areas Cust. Cust. Base BOP As An estimated 70% of of expertise, including engineers willing to Base Employees the manufacturing work for below-market rates. Asset light Pull team, as well as some •• Barrier: Brand recognition/trust is a key Push distributors and barrier to success for many cookstove Asset-heavy Pull customer care agents, companies; Burn’s design, manufacturing, Push X are BOP when hired. and distribution are all done in country, Shared Partnerships with which increases brand recognition/trust. Push vs. pull Asset light vs. Channels banks, MFIs, and pay- heavy as-you-go solar (e.g., Value capture •• Difficult to •• Tangible product M-KOPA and Mobisol) •• Revenue: Sole revenue stream is demonstrate requires physical provide access to cookstove sales. health benefits. manufacturing established consumer centers/high channels. •• Cheaper •• Product Pricing: $40 per cookstove with production costs; substitute to Financing 30% of Burn’s sales several financing options available, for sales, distribution, kerosene, but Options utilize credit; MFI example: and follow-up roughly 11-week partnerships are a key ––Six-month energy-specific loan through customer payback period. path to growth; goal to equity bank. service is labor be 50% cash and 50% ––Purchase via Burn’s partnership with •• Does not intensive. credit sales. Kenya Women Microfinance Bank. increase Vertical Integrated from ––Purchase at $0.40/day via M-KOPA. economic Integration performance/ ––Purchase through Chamas (new output, only durability testing and partnership/channel currently in trial/ savings. manufacturing to sales, testing phase). •• Cost to educate which brings the best consumer. product to market Development impact achieved quickly while keeping •• Customers reported health benefits, Narrower vs wider customer base costs low. including a 54% reduction in sick days per Burn is leveraging multiple customer Product Launching new stove household; 89% attributed health benefits types and products to achieve scale Segmentation targeted at commercial to less smoke in the house. and improve financial sustainability. customers. Customers deep on the income pyramid are •• Jikokoa reduces PM2.5 emissions by 65% widely dispersed, and the market is limited Other critical success factors and as compared to the “improved ceramic in size; by also selling to higher-income barriers jiko”. customers, Burn has been able to scale •• Up front Market Research: Consumer- •• Jikokoa households save ~$120/year, more quickly, driving financial viability. focused design process and field testing including a 57.7% reduction in household ensure Burn’s products are “aspirational” charcoal expenditures. Plan for growth and meet consumer needs. •• In total, Burn has helped consumers save •• Expand across East Africa in both urban •• Best-in-Class Product: Carefully chosen more than $15M in reduced fuel costs and rural markets and, in 2017, also staff, training programs, incentive and 465K tons of wood. expand to West Africa. payments to assembly line teams, and •• Creates local jobs with more than 60% •• Key Considerations For Market quality control checks ensure high quality. female employment. Expansion: Availability of fuel options and •• Postsales Support: The Jikokoa comes cost of fuel (i.e., fuel mix and prices), which with a two-year warranty, which helps affects competitiveness. de-risk the purchase for the customers deep on the income pyramid; 47 (and growing) service stations spread around the country; customer care centers make repairs; <1% return rate.

52 Reaching deep in low-income markets

Burn Manufacturing (cont.)

Investments overview working capital loans. Investors have provided debt and equity totaling $5.5M over six to seven years, Key Learnings including: •• Burn Manufacturing split from a •• General Electric—Six-year investment of nonprofit (Burn Design Lab) in order to $1M in 2013 with expected returns of 10% have access to larger sums of capital via to 12% p.a. equity investments.

•• US Overseas Private Investment Corp •• Investor requirements prevented Burn (OPIC) —Six-year investment of $3M in from investing in a local manufacturing 2013 with expected returns of 6% to 8%. facility immediately, which slowed the path to profitability but enabled Burn •• Acumen Fund—Seven-year investment to prove its model; investors wanted of $1.5M from 2014 to 2016 with expected additional data proving the market returns of 10% p.a. prior to making a full investment in the manufacturing facility. GE, OPIC, and Acumen have fully disbursed their committed funds; moving forward, •• Burn is currently raising money from Burn is focused on financial restructuring investors seeking financial returns and in order to reduce debt overhang and allow social impact. for the inflow of new equity and access to

Data and information in this case study gathered and confirmed via interviews with, and documents provided by, executives at the enterprises. 53 Reaching deep in low-income markets

eKutir

Sector Year founded Geography Agriculture and Sanitation 2009 India, Cambodia, and Bangladesh

Company background Business performance: path to Ability to Scale: Opportunity: Rural farming communities profitability and scale Breakeven Analysis in India have limited access to high-quality Total enterprise profitability and 2015: $539K products and services and counterfeit continuing to scale 500 products are rampant, especially in 400 •• 2015-16 Revenue: $625K from operations. agriculture and sanitation. Low-price 300 realization, fragmented ecosystems, and •• 2015-16 Revenue Growth: 16%. 200 dilapidated sanitation conditions keep 100 BE (Reached 2012) •• 2015 Gross Margin: 11%. smallholder farmers and families at the 0 brink of poverty. •• Slow growth since 2009 due to focus on 1 2 3 4 5 6 7 8 9 10 building infrastructure for sustainable Year (1-2009) Solution: eKutir has established a network growth, conducting pilots and securing of ~700 microentrepreneurs operating profitability at the unit level. High revenue several types of franchised kiosks that growth for 2015-2016 driven from tapping provide services & products to improve into higher margin sectors: Sanitation and sanitation and agricultural outputs. A retail. critical component is the back-end software •• # of Units Sold in fiscal year 2015: platform, which gives microentrepreneurs 16,000 toilets and $1M worth of veggies. access to knowledge, inputs, raw materials, and buyers. eKutir identifies and trains •• Scale: 700 microentrepreneurs, entrepreneurs, who engage consistently 70K farmers, and 102K end-product Estimated customer base income levels and reliably with the communities providing consumers. them need-based products and services, •• Geography: Primary operation in India such as crop inputs, advisory, market access, with additional sales in Bangladesh and crop sales, and toilet facilities. Cambodia via software licensing and

knowledge share. Main Products: Kiosks that serve as a “one-stop shop” for farmers are providing * Numbers refer to India operation only information and advice to improve yields, buy quality inputs, and sell crops. Kiosks Income pyramid reach for eKutir are existing physical hubs within While eKutir does not formally the community, such as neighborhood track income, it is estimated that stores, micro-retail outlets, and unorganized the majority of customers are BOP. vendors. As eKutir evolved, it set up Sani- Customers earning under $4/day Higher-income customers support the kiosks to provide needs-specific toilets (farmers and those living in urban slums) enterprise and include veggie buyers and and veggie kiosks at the other end of the microentrepreneurs Urban, educated veggie customers agriculture value chain to sell quality farm earning above $4/day fresh veggies, enabling higher realization for •• 70K farmers estimated to earn between the farmers. Kiosks can be existing stores $1-$2.75/day. that connect to eKutir digital platform in •• 80K toilet consumers and 25K veggies addition to existing operation, or new shop customers that live in urban slums. that eKutir helps to set up. •• 77K middle-to high-income veggies consumers .

Impressionistic Internal Methodology: eKutir’s microentrepreneurs work closely with customers to help eKutir estimate income levels.

54 Reaching deep in low-income markets

eKutir (cont.)

Factors affecting reach Business design Key factors Narrower Wider Cust. Cust. Base eKutir Low-income Base Micro- Asset light Pull Knowledge and entrepreneur Push access to buyers Agri-products,and veggies toilets, (crops) and Asset-heavy Pull X sellers (inputs) Discount Push product prices

Access to Revenue share transaction High income Commission for for Commission and software Veggies

Push vs. pull Asset light vs. aggregated BOP

buyers and sellers license fee (Kiosk) heavy Premium product prices •• Agri-inputs are •• Kiosks and toilet Vendors and buyers desirable because raw materials are they increase costly tangible *Urban, educated veggie-kart consumers (online and offline) farmers’ yields products. Business model characteristics to reach and income. •• eKutir’s sales deep on the income pyramid •• Toilets are and distribution Price Discrimination Vegetables are aspirational networks are sold at a premium because they are labor intensive. price to high- a status symbol income customers and also increase and at a discount health and quality to lowest-income of life. customers. Optimize Internal Digitized Narrower vs wider customer base Processes processes While eKutir initially targeted smallholder streamline value farmers in rural India, they have more chain and optimize recently extended to higher-income buyer-seller vegetables consumers to increase connections. profitability for farmers and reach Microentrepreneurs Local economies of scale on heavy assets. They entrepreneurs remain focused on serving low income, are connected to farmers and customers. a digital platform,

selling agri-inputs, vegetables, and toilet services. Reputation partners Contracts with financial institutions, credit bureaus, fair trade organizations, and leading consumer products companies.

55 Reaching deep in low-income markets

eKutir (cont.)

Other critical success factors and Product Pricing: Agri-kiosks sell input Key Learnings barriers bundles, plus advice and information for •• While a for-profit entity, eKutir has raised farmers at a ~20% discount to market •• Robust digital platform—Organizes and less than 10% through equity investments price. Microentrepreneurs pay $100/year shares information, e.g., market data, risk and patient capital; angel investors hold for software license. Veggie-kiosks sell planning, and pricing to improve business 30% of company without expectation for vegetables at market or premium prices for for all stakeholders. financial return. middle- to high-income customers and at a •• Community trust via local employees— discount for low-income customers; toilet •• Venture philanthropy was necessary The microentrepreneurs are often trusted prices range from $120 to $450 per toilet. as a risk capital to support innovation members of the local community, which and enhance value for customers and drives trust and increases sales. Development impact achieved beneficiaries without risking the core business. Operation revenue was invested •• Rural infrastructure development— •• According to a study conducted by IFPRI back to the core business to achieve scale. The Indian government has invested in and McGill University, farmers who worked connecting rural areas to the Internet, with eKutir cut their costs by 50% and •• eKutir is focusing on investments from providing access and higher connection increased their productivity by as much strategic partners that provided quality in rural areas and allowing more as 75%. This enabled them to earn twice additional value in addition to money. people to connect to eKutir platform. the profits relative to farmers who did not work with eKutir. •• Government sanitation campaign and funding—The Indian government •• eKutir has provided toilets for 80K BOP reinitiated a sanitation campaign (2014) consumers. that provided a matching subsidy for households to install toilets. The subsidy Investments overview is matched by both central and state Investors and donors have provided governments. different forms of support totaling $1.8M over three years since 2013: Value capture •• Angel Impact Investors—Equity Revenue: eKutir and kiosks share revenue investment of $100K in 2013 with with percentage’s split determined expected returns of only the principle separately per kiosk. Typically, eKutir captures 50% to 60% of revenue. eKutir’s •• Yunus Social Business Fund—Patient primary revenue source is commissions Capital (debt) of $15K in 2013, paid back in from buying crops or selling agri-inputs, 2015, no interest or returns toilets, and vegetables. •• Unilever UK and Hindustan Unilever— Working capital of $550K in 2013 with expected returns in the form of future Breakdown markets

5% •• Total awards and venture philanthropy—$1.8M

95%

Commissions from transactions Software license fee Data and information in this case study gathered and confirmed via interviews with, and documents provided by, executives at the enterprises. 56 Reaching deep in low-income markets

FINAE

Sector Year founded Geography Education 2006 Mexico

Company background Business performance: path to Opportunity: Mexico has a growing profitability and scale Breakeven (BE) Analysis demand for higher education. Of 11M young Total enterprise profitability and 20 people between ages 19 and 24, 8M cannot continuing to scale BE—3.7K continue their studies due to financial 15 •• Projections ’18: $10M in revenue, constraints. Few lenders will engage these 10 increased margins, and 18K accumulated lower-income students given the little 5 11 loans 5 7 9 experience/historic data available, perceived 0 risk levels, and high interest rates required •• Revenue ’15: $4.1M USD with three year 2012 2013 2014 2015 2016 for a loan. This is supported by macrodata CAGR of 37% that demonstrates only 20% of low-income •• Net Profit Margin ‘15: 1% youth enroll in higher education. BE point

* Note: Historical margins in ’12 and ’13 were No. of accumulated loans (K) Solution: FINAE is a financial institution that 12% and 10% respectively, but faced losses provides student loans to university-age, in ’14 from unhedged USD lines of credit; low-income Mexicans seeking a bachelor’s today FINAE is 100% hedged and back to degree or other postgraduate studies. To profitability. provide affordable interest rates, FINAE creates risk and cost-sharing agreements Income pyramid reach with university partners: FINAE is reaching different income levels on •• Risk Sharing—A portion of all the pyramid with 49% of customers earning disbursements to the universities are <$20 per day. invested in a First Loss Liquid Guarantee Trust; if student reachs 180+ delinquent FINAE is able to reach the $4-$20 income days, the trust acquires the loan. FINAE is levels successfully by 1) sharing costs and able to continue collecting payments and risk with universities, and 2) balancing its any proceeds remain in the trust. risk portfolio by providing ~50% of loans to lower-risk, higher-income segments. •• Cost Sharing—Mainly marketing and Initially, FINAE provided loans to students infrastructure. earning <$4/day, but faced high default rates because the term and monthly payments Main Products: FINAE’s customers for students were too high given volatile can request a loan from 24 of the top incomes. This led FINAE to target students universities across 102 campuses in 21 one step up the income ladder. states in the Mexican Republic in which FINAE has an agreement. Once students Rigorous Internal Methodology: Income apply, submit paperwork, and identify a levels are required when students apply guarantor, they obtain a 12%-18% interest to loans and FINAE is able to verify them rate loan (compared to 30%-50% market during the loan approval process. rates).

57 Reaching deep in low-income markets

FINAE (cont.)

Factors affecting reach Business design Key factors Narrower Wider Cust. Cust. Base Risk/Cost-Sharing Base Student loans Asset light Pull Partnership Push Loan repayment Asset-heavy Pull X Push FINAE Universities Low-income Push vs. pull Asset light vs. Pay delinquent loans to FINAE students heavy •• Loans are initially •• Loans are First loss Percentageinvested of disbursement in fund is push because intangible Gurantee Trust cost limits products with purchasing power. limited fixed costs. •• Over time loans Business model characteristics to reach •• End-to-end student engagement become pull due •• Reaches students deep on the income pyramid increases likeliness of long-term to long-term via universities, Shared Target students through success—University recruiters identify ability to benefit decreasing channels university partners optimal students and customer service from better jobs/ marketing and teams provide ongoing financial support Reputation Use brand of university more money. distribution costs. to help students renew loans. partners to reach students and build initial trust Narrower vs wider customer base •• Customized repayment plans based FINAE targets multiple customer types Financing Student loans with on individual student needs decrease to distribute risk, achieve scale, and options customized repayment default rates—Students can choose improve financial sustainability. While Price Higher-income students repayment plans that start low and lower-income customers have higher levels Discrimination subsidize lower-income increase over time, stay steady, or start of risk, by also selling to higher-income students by paying the high and go low. These options increase customers, FINAE can balance its risk profile same price even though student’s flexibility to make payments. and decrease the overall discount rate they have a lower risk •• Support for students to make it to available to lower-income populations. profile following semester increases loan renewal rates—If students are able to Other critical success factors and continue with schooling through the first barriers year, the likeliness of dropout significantly decreases. •• Require guarantor for 100% of loans —Loans are made directly to student, but •• Barrier: The largest barrier to success is guarantor decreases risk. being able to predict dropouts of students with FINAE loans. •• Partnerships with universities for risk/ cost sharing—Enable low interest loans and help FINAE reach optimal students by leveraging university brand.

58 Reaching deep in low-income markets

FINAE (cont.)

Development impact achieved Investments overview Key Learnings FINAE has raised $8.8M USD (Pesos $117M) •• In seven years, FINAE has granted more •• Shareholders support FINEA in reaching in equity over several rounds of financing than $55M in student loans to almost low-income students by authorizing the with numerous investors, including Omidyar, 10K students, 99% earning between organization to grant loans with both a Calvert, Osasis, Elevar Equity, Adobe Capital, $4-$140/day. Of these students, 2K social and financial return; with that said, Mexico Ventures, etc.: have successfully graduated and 60% of clear financial targets are agreed upon for graduates are first-generation college •• 2006—Initial round of $1.1M USD (Pesos management. students. These loans have a 12%-18% $21M) was funded by friends and family. •• To support growth out of start-up interest rate, compared to the typical •• 2009—Seed round of $700K USD (Pesos phase, FINAE is strengthening corporate ~30%-50% rates elsewhere in the market, $13.5M). governance, general processes, and loan with a typical payback period of 3-12 years. products to push toward sustainability. In the future, FINAE is planning to open a •• 2011—$99K USD (Pesos $1.9M). philanthropic association to support even •• In 2017, FINAE will begin a Business Model •• 2013—$2.8M USD (Pesos $54.7M); lower-income students with high potential. Transformation Endeavour to transition Note: First securitization was in 2013 to the digital era to improve the general •• FINAE leads the private student and was the first ever student loan student’s experience. lending market in Mexico and has won securitization in Latin America history. international recognition from B. Corp., •• 2014—$1.3M USD (Pesos $25.9M) the Inter-American Development Bank, GIIRS Impact Rating, Opportunity for the •• FINAE’s second securitization was done Majority, and others. in 2015 and expect to do a third in 2017.

Data and information in this case study gathered and confirmed via interviews with, and documents provided by, executives at the enterprises. 59 Reaching deep in low-income markets

KGFS/IFMR Holdings

Sector Year founded Geography Financial Services 2008 India

Company background Business performance: Path to Customer Base (000s) Opportunity: A majority of people in profitability and scale 662 478 India still lack access to financial services. Financially sustainable and investing in 204 Without access to credit products, many scale 80 poor Indians are unable to avoid cash flow problems or invest in income-generating The KGFS model serves more than 680K 2010 2012 2014 2016 businesses. Without savings and insurance, customers across 236 branches. Four of they are unable to absorb the financial six KGFS business units have broke even 11 9 impact of a health or economic shock. or made a profit. KGFS has scaled to assets 5 under management of $68M1 Solution: The Institute for Financial 2014 2015 2016 Management and Research (IFMR) Income pyramid reach developed the Kshetriya Gramin Financial KGFS is reaching deep on the income Profitability:KGFS expects profitable Services (KGFS) model to address these pyramid with 70% of customers earning results in 2017.2 issues and promote financial inclusion below $5/day. for every individual by providing a holistic KGFS successfully reaches the BOP by suite of financial services and products actively focusing operations in remote rural Customer Base Income Levels to individuals living in rural Indian areas; areas. Although KGFS branches can serve the model is an adviser-driven wealth anyone within their geographical limit, management approach that uses a financial roughly 70% are considered the lowest well-being report to link the product and income level customers; an additional 26% service to the needs of the household. are also from relatively deep on the income pyramid.3 Main Products: KGFS offers a comprehensive set of financial products Methodology: IFMR uses a proprietary and services designed to be simple, user- methodology to track the holistic financial friendly, and tailored to the needs and goals health of its customers’ households. The of each customer. The offering includes survey tracks a comprehensive set of a range of credit products (joint-liability variables, including demographics, income 70% earn less than $5/day group loans, enterprise term and working sources, household expenses, assets (e.g., capital loans, livestock loans, etc.); savings property and jewelry), and liabilities such as 26% earn between $5 and $10/day and investment products (SB accounts, formal and informal loans, as well as long- RD, pension, and gold investment); and term financial goals. 4% earn more than $10/day insurance products (personal accident insurance, term life insurance, and shopkeeper’s policies).

60 Reaching deep in low-income markets

KGFS/IFMR Holdings (cont.)

Factors affecting reach Business model characteristics to reach •• Willingness to partner: KGFS originates Key factors Narrower Wider deep on the income pyramid directly and also leverages partnerships Cust. Base Cust. Base Pay Per Use Microloans, savings with other financial institutions to provide Asset light Pull products, and insurance insurance, lending, and investment Push coverage designed for products. Asset- Pull X high volume and small heavy Push X investment amounts. Value capture Paraskilling Advisers generally have •• Revenue: Revenue derived from interest, Push vs Pull Asset light Vs no background in the premiums, and other liability product fee Heavy financial services sector income (e.g., remittance, insurance, and •• Some financial •• Currently uses or higher education savings products). products, like a network and receive training and •• Product Pricing: Prices vary for different credit, have of brick and technological support types of credit, savings, investment, and natural demand; mortar branches from KGFS. insurance products however, others with advisers; Business Other IFMR subsidiaries such as insurance however, the within a contribute to the KGFS –– Overall, the rate for classic joint liability and savings delivery is highly Business model’s success (e.g., group loans is 25%. and investment technologically IFMR Rural Finance –– The average loan size is typically $300 products require enabled with the provides seamless tech- to $4005. educating capacity to go enabled processes and customers. asset light. the wealth management •• By comparison, the MFI industry average tech platform). in FY16 was 25.5%.6 Narrower vs wider customer base Product Different products With a diverse suite of products, KGFS Segmentation offered based on needs Development impact achieved is able to serve the entire population of and goals of individual remote rural villages, including the 4% •• Significant household financial well- customer. earning more than $10/day. However, KGFS being improvements—In KGFS’ most products are designed to focus on the vast mature branch, customers, on average, Other critical success factors and majority (96%) of customers who earn less have experienced: barriers than $10/day. Having a broad product suite –– 48% increase in assets enables KGFS to remain relevant as their •• Emphasizing customer centricity to low-income customers graduate to higher- build relationships: KGFS is differentiated –– 200% increase in asset value income brackets. because of closeness to customers. –– 254% increase in household income5 Developing a holistic understanding of PLAN FOR GROWTH customers’ lives and financial needs is key •• Preliminary results of an ongoing impact •• Digital delivery of wealth management to making better recommendations, which study also suggest households in KGFS products: KGFS is planning to layer digital creates lasting customer relationships. branch areas use more financial distribution of financial products and This is a primary source of competitive services: services on top of the existing field-based advantage against potentially lower-cost –– 40% higher incidence of formal distribution model. The new channel MFIs. borrowing will enable ID authentication, customer acquisition, underwriting, transaction •• Investment in wealth managers: –– 20% increase in number of formal loans Substantial investment in hiring, training, approval, document storage, and –– Households with informal loans were transaction execution all to be conducted and developing wealth managers from the communities they serve is critical to 11% lower and the average informal or enabled digitally. 7 building customer trust. loan amounts were 17% lower

61 Reaching deep in low-income markets

KGFS/IFMR Holdings (cont.)

Investments overview Endnotes Investors and donors have provided 1. IFMR Holdings Management Interview different forms of support totaling $1.8M 2. Ibid. over three years since 2013. 3. IFMR Holdings Overview Presentation; IFMR Holdings Management Interview •• Public and private investors have 4. IFMR Holdings Management Interview provided both debt and equity to 5. KGFS Case Study; IFMR Holdings facilitate the growth of the KGFS model Management Interview over the past eight years. Types of 6. Weighted average from Micrometer investors have included: Issue 17; IFMR Holdings Management –– Strategic investors for equity: Accion, Interview LeapFrog, Proparco, and Sarva Capital 7. KGFS: Impact on Lending Patterns, Preliminary findings Impact Evaluation –– Debt capital from public and private Study by Center for International domestic banks, and other domestic Development at Harvard University and foreign financial institutions and Center for Micro Finance at IFMR Research Key Learnings

•• IFMR found it critical to select investors with aligned interests, particularly those that shared the view that a multiproduct wealth management approach was critical to fostering financial inclusion.

Data and information in this case study gathered and confirmed via interviews with, and documents provided by, executives at the enterprises.

62 Reaching deep in low-income markets

Livewell Clinics

Sector Year founded Geography Health 2009 Kenya

Company background Business performance: Path to Breakeven (BE) Analysis Opportunity: In Kenya, 40% of health profitability and scale 20 services are provided by private facilities, Financially sustainable and investing in 12 many of which are rife with problems, scale including unlicensed providers and 10 8 8 7 7 •• Most growth in 2012/2013 was too rapid 5 counterfeit drugs. When available, 4 and a result of investor pressure; Livewell 2 high-quality services are expensive and has now reorganized to break even with 0 inaccessible to most low-income customers. ‘09 ‘10 ‘11 ‘12 ‘13 ‘14 ‘15 ‘16 fewer outlets (roughly five clinics).

Solution: Livewell Clinics is a network of •• Broke even in ‘14; has maintained the BE point health centers, focused primarily on quality position since. No. of clinics and efficiency, that serve as a “one-stop •• Scale: >250K patients seen (since ’09); shop” for low-income customers seeking seven operational clinics with the plan to primary health care services in urban Kenya. add one minihospital this year.

Main Product(s): Health centers offer •• Five well-performing clinics are required comprehensive preventative and primary to break even; clinics must attain high care services under one roof, including enough volumes (~15 patients/day) and consultation, laboratory, and pharmacy sell enough higher margin services to be services. Livewell also brings specialists sustainable (e.g., it is not the number, but into the center on an as-needed basis (e.g., rather the performance of clinics that is OBGYN and pediatrics). most critical to break even).

Income pyramid reach Estimated Customer Base Income Levels While exact customer income levels are unknown, Livewell is likely reaching very poor customers, as ~60% of customers are uninsured.

To reach lower-income customers, Livewell tailors its offerings.Livewell provides lower-income customers with inexpensive pharmaceuticals and promotional offerings. Higher-income customers tend to purchase Livewell’s more expensive services (e.g., radiology).

Methodology: Livewell estimates customer 60% live below $4/day income using average rent in Livewell communities, which ranges from $20 to 40% live at or above $4/day $300/month; this translates to an income of ~$60 to $900/month per family. Assuming an average family size of four, this is $0.50 to $7.50/day per capita. Roughly 60% of Livewell’s customers are uninsured and in the lower portion of this range (e.g., <$4).

63 Reaching deep in low-income markets

Livewell Clinics (cont.)

Factors affecting reach Business Design Key factors Narrower Wider Cust. Cust. Base Health Health Base Clinic Clinic Asset light Pull Push Asset-heavy Pull Push X

Push vs. pull Asset light vs. Health Central Management Office Health heavy Clinic Clinic •• Difficult to •• Labor-intensive demonstrate consumer Livewell operates a network of clinics Other critical success factors and risks of disease education via free with a central management office. Each barriers and long-term clinics. clinic is transitioning to clinical officer (CO) benefits of care. •• Network of clinics with central •• High real estate ownership, which Livewell views as more management: Provides consistent •• Consumer and medical sustainable long term. Today, three clinics quality and enables cost sharing, which education equipment are CO-owned. helps Livewell compete with stand-alone required; costs. Business model characteristics to reach providers that struggle to reach quality promotional •• Doctors/experts deep on the income pyramid standards and manage high costs without offerings (e.g., free are expensive No Frills Clinics have fewer economies of scale. clinics) spread resources. amenities than other awareness. •• Quality doctors/staff sourced locally: private clinics. Enables doctors/staff to better connect BOP as Clinic employees are Narrower vs wider customer base with patients and understand their needs; Employees from the communities Livewell locates clinics in densely reputable doctors/staff are a critical Livewell serves. populated urban centers with brand-building/marketing technique. populations that represent a range of Optimized Uses an electronic •• Customer loyalty: Livewell relies on income levels; this enables high volumes, Internal medical record system repeat visits and word of mouth referrals as well as some slightly higher-income Processes to send patient to keep marketing costs low. customers, to cover fixed costs associated information out of with Livewell’s asset-heavy model. network, and an •• Barrier: Physical infrastructure is a Furthermore, roughly 40% of Livewell’s early detection and potential barrier to success; Livewell customers that are insured (>$4/day) prevention system to establishes clinics in poor urban centers generate approximately 60% of the revenue diagnose and suggest at the edge of slums where it has access to and are critical to financial sustainability. treatment. roads, running water, and formal property Product Affordable drugs and ownership, as well as high volumes Segmentation free clinics for lower- necessary to sustain low margins. income customers; more expensive Value capture products and services •• Revenue: Livewell’s services have varied for higher-income prices and margins, and there is some segments. cross-subsidization. For instance, child End Customer Contracts with National immunizations are sold at a loss and Does Not Pay Hospital Insurance Fund covered by higher margins on more (NHIF)/government for expensive services (e.g., radiology). Ninety maternal health clinics, percent of Livewell’s revenue comes from cancer screenings, etc. patients in the communities it serves, while the remaining 10% comes from contracts with the NHIF/government; however, these contracts are expensive due to long credit cycles. 64 Reaching deep in low-income markets

Livewell Clinics (cont.)

•• Product Pricing: Most services have •• Availability of quality services for the BOP •• Other investors include USAID SHOPS and two associated rates—individuals that has led to an increase in insurance uptake Global Giving, among others “pay now” with cash/credit are charged among the BOP, as evidenced by an one rate, while individuals that “pay increase in Livewell’s insured customers Key Learnings later” through an insurance company from 5% to more than 30% over five years. •• Livewell has found that it is prudent to are charged a higher rate. Prices vary by build a solid foundation with slower, service and certain services are free (e.g., Investments overview organic growth at the start of the promotional offerings); consultation fees •• In 2011, Livewell received an equity investment and scale with a great deal of are $2 to $4. investment of $300K to scale to five clinics; care investors primarily included the original Development impact achieved •• The health care market is very fragmented, owners, family, and friends with most players making low profits or •• Served >250K patients since inception. •• In 2012, Livewell received a large equity losses; investors should consider the •• Brings low-cost medical consultations investment of ~$2M; the investor wanted benefits of funding consolidation and to market, as consultations are ~50% to see significant growth (more than 20 solutions to improve the overall market cheaper than market average. units added per year), which led to a huge dynamics investment in infrastructure to support •• Improved health outcomes due to a high growth; in 2013, however, the investor patient follow-up rate (e.g., patients, divested from the business, which caused especially those with chronic ailments, are significant disruption consistent with filling prescriptions, and diagnostic follow-up).

Data and information in this case study gathered and confirmed via interviews with, and documents provided by, executives at the enterprises. 65 Reaching deep in low-income markets

M-KOPA

Sector Year founded Geography Solar 2011 Kenya, Tanzania, and Uganda

Company background Business performance: Path to Opportunity: In sub-Saharan Africa, ~590 profitability and scale Breakeven Analysis million people lack access to electricity, Financially sustainable and investing in including 85% of rural populations; only one scale 500 450 in five has access to formal financial services. •• 83% solar sales CAGR from 2013 to 2016 400 +83% Solution: M-KOPA manufactures, sells, and •• Profitable on a per-unit basis 300 275 provides financing for solar home systems •• Currently focusing heavily on growth that provide electricity to rural households 200 160 (average size of 500 ft.2). Scale: 100 95 45 Main Product(s): M-KOPA’s main solar •• 410K total solar systems sold to date, 0 home system includes a solar panel, two including 400K introductory and 10K ‘13 ‘14 ‘15 ‘16 ‘17 LED bulbs, an LED flashlight, a rechargeable advanced systems Year radio, and an adaptor for charging a phone. •• Currently selling ~600 solar systems per M-KOPA’s advanced solar home system day includes a larger panel and battery, as well Actual •• Projected annual solar sales to reach 450K as a 16-inch television. M-KOPA also finances units in 2017 the sale of follow-on consumer goods (e.g., Projected cookstoves and bicycles) to customers •• Have also sold 100K units of follow-on that have entirely paid off their solar home goods systems. Geographic solar sales breakdown (year operations started): •• 79% in Kenya (2011) •• 18% in Uganda (2014) •• 3% in Tanzania (2015)

Income pyramid reach Customer Base Income Levels M-KOPA is reaching deep on the income pyramid with 82% of customers having a household income below $2/day per household member. M-KOPA reaches low through rural distribution channels, product pricing for affordability (including the removal of VAT), and flexible financing mechanisms.

Rigorous External Methodology: M-KOPA partnered with Gates and Intermedia to survey 704 randomly selected, active Kenya customers in Dec. ‘14. The survey asked customers to give a breakdown of their 60% live below $4/day average total monthly income by category, including formal and informal sources and 40% live at or above $4/day removing any income associated with loans. Surveys were designed/conducted to ensure a high level of consistency and data quality.

66 Reaching deep in low-income markets

M-KOPA (cont.)

Factors affecting reach Business model characteristics to reach •• Accounts for volatility of customer cash Key factors Narrower Wider deep on the income pyramid flows:By enabling flexible repayment; Cust. Cust. Base BOP as 1,000 person salesforce M-KOPA checks in when customers miss Base Employees hired from the payments and allows them to miss up to Asset light Pull communities M-KOPA 30 consecutive daily payments before Push serves. defaulting. Asset-heavy Pull X Reputation Co-branded with •• Barriers: M-KOPA may only expand to new Push Partner Safaricom for launch, markets with mobile payment platforms; which was critical to furthermore, vertical integration makes Push vs. pull Asset light vs. gaining initial market entering new markets difficult. heavy share. •• Although a •• Tangible product Shared Payments are made Value capture salesforce is with physical Channels through M-Pesa. required, it is manufacturing •• Revenue: M-KOPA earns 85% of its Financing 98% of customers relatively easy to centers. revenue from its introductory solar Options purchase solar systems demonstrate the system, 10% from follow-on products, and •• Labor-intensive on finance; once repaid, benefits of solar 5% from its advanced solar system. For salesforce they can use credit lighting because follow-on goods, which M-KOPA does not required to history to finance other it is similar manufacture, M-KOPA makes money on educate/support household items. to electricity, the wholesale-to-retail markup and the sales. increases Vertical M-KOPA manufactures financing spread. Integration and sells solar home productivity in •• Significant back- •• Product Pricing: M-KOPA’s introductory systems. the home, and is end technology solar system has a cash price of $175 and aspirational. systems Optimized SIM card in solar a finance price of ~$215 (a $35 up front investment Internal system allows M-KOPA •• Kerosene, phone payment + one year of $0.50 payments required to Processes to disable solar home charging stations, daily); 98% of customers pay the finance process ~50K systems remotely, and flashlight price. M-KOPA’s advanced solar system daily payments. which enables a more batteries are has a cash price of $435 and a finance effective/less costly expensive price of ~$535 ($80 up front payment + payment collection substitutes. one year of daily $1.25 payments); 7% process. of customers pay the cash price, which Narrower vs wider customer base Up-Sell/Cross 25% of customers have is more competitive in the market than Given requirements from its investors, Sell Products purchased follow-on the cash price of the regular solar home M-KOPA started with a low-margin product goods. system. Customers that have purchased aimed at customers earning less than $2/ Product Advanced solar system the introductory system may also upgrade day. In the future, M-KOPA will continue to Segmentation targets higher-income to the advance system for two years aggressively target those customers, while customers than the of $0.50 daily payments. M-KOPA also also growing its higher customer base to introductory system. finances nonsolar products, which have scale up and improve financial viability. varying prices, but often have a $0.50 daily M-KOPA projects sales of its recently Other critical success factors and payment plan and no up front payment. launched, high-margin, advanced solar barriers system to represent 30% of total sales by •• Local salesforce: Helps customers 2017 (currently it is only 2.5% of total sales). understand the savings associated with products; salesforce receives training, Plan for growth M-KOPA gear, marketing materials, and •• Immediate plan to scale in current commission. markets. Long-term plan to expand in •• Postsales customer service: Helps gain sub-Saharan Africa and South Asia. consumer trust; M-KOPA offers a two-year warrantee, and has more than 60 service centers in Kenya and a 24/7 care line.

67 Reaching deep in low-income markets

M-KOPA (cont.)

Development impact achieved •• Five rounds of equity funding, totaling Key Learnings at least $41.45M •• Consumer saves an entire year’s income •• Gates grant requires 50% of customers within three years. –– Oct. 2011—Series A (undisclosed to earn below $2/day, which has kept amount) M-KOPA aggressively focused on reaching •• Increased safety from elimination of deep on the income pyramid. accidental fires caused by kerosene lamps, –– Dec. 2012—Series B (undisclosed better health due to lower levels of indoor amount) •• Having demonstrated unit profitability, air pollution, and increased productivity. investors prefer that M-KOPA reinvest –– Feb. 2014—Series C for $10M in scale rather than seek immediate •• Customers build credit and gain access to –– Feb. 2015—Series D for $12.45M consolidated profitability. new markets: –– Dec. 2015—Venture for $19M •• M-KOPA’s next round of funding (~$30M) –– 50% of customers paid off the solar will likely come from DFIs, mainstream PE, system and are eligible to buy follow-on •• Two rounds of debt financing, totaling and other large investors, and will support goods; 50% of those eligible (100K total) $24M the growth of M-KOPA’s advanced systems have bought follow-on goods to date –– Feb. 2014—$20M products.

Investments overview –– May 2016—$4 Investors provided debt and equity funding totaling $65.45M over five years. Major Major investors include Acumen Fund, Shell investments include the following: Foundation, LGT Venture Philanthropy, Grey Ghost Ventures, and Generation Investment Management, among others.

Data and information in this case study gathered and confirmed via interviews with, and documents provided by, executives at the enterprises. 68 Reaching deep in low-income markets

Patrimonio Hoy

Sector Year founded Geography Housing 1998 Mexico & Latin America

Company background Breakeven (BE) Analysis Opportunity: Lack of affordable housing is Business performance: path to a severe problem for low-income families profitability and scale 527 in Mexico given 60% make less than $5 per Total enterprise profitability and day. Most homes are also overcrowded continuing to scale 400 with one to two rooms for six to ten family PH broke even in 2004 and has 117 selling members. Building is difficult due to limited points in 110 cities in Mexico and has 200 36 access to financing, affordable materials, expanded to Nicaragua, Colombia, Costa 45 and technical skills, all which leads to Rica, and the Dominican Republic. 0 2003 2015 material waste of ~30% and a build time of four to five years per room. Metrics represent PH as a stand-alone business unit and do not include increases BE point Solution: Patrimonio Hoy (PH) is a business in cement sales to Cemex. No. of solutions provided (K) unit of Cemex, the 7th largest building •• Revenue: Not public materials company worldwide, providing market-based, do-it-yourself housing •• Profit Margin ’15: Positive solutions to low-income families. Solutions •• Other: 28% growth of new customers in are based on need (e.g., one room and full ’15 house) and consist of four components: 1. Technical assistance via architect home •• Scale: 200K stoves sold visits to co-create design and develop Customer Base Income Levels customized building plan. Income pyramid reach 2. Building materials with guaranteed PH successfully reaches very low-income fixed prices through duration of customers with 29% making less than $8/ payment plan, including free delivery day/household. to homes based on owner’s scheduling preferences. To reach low-income customers, PH 3. User-friendly payment plans with provides access to materials on credit. no credit checks required that are Typically, customers save to buy a set customized based on client need; amount of materials and receive double that For example, a customer pays 70 amount, half paid and half on credit. Then, consecutive, weekly payments of ~$17 they pay off the materials on credit, save for materials to build about a 10 square up again, and repeat the process, receiving meter room. larger amounts on credit over time as trust 29% earn less than $8/day/household 4. Savings and credit schedule: is built. 63% earn $8 to $15/day/household Customers save to buy materials and 8% earn above $15/day/household then receive additional materials on Methodology: PH tracks income per NOTE: Data is per household, not per credit. household and targets families where one to person and does not include informal 5. For additional fee: Legal services and five members make the Mexican minimum income sources. construction labor. wage (~$4/day). On an average, 4.8 people live in one house, three of which have an Historically, 35% of families continue building income and two whom do not work and/or beyond one room toward a multiroom are children. Therefore, per capita income housing solution. is even lower than depicted in the chart. Proof of income is verified with paystubs during enrollment and no credit checks are required to start the process.

69 Reaching deep in low-income markets

Patrimonio Hoy (cont.)

Factors affecting reach Business design Key factors Narrower Wider Cust. Cust. Base BOP Farmer BOP Socios Base Asset light Pull Weekly payment Push Asset-heavy Pull Money for Housing Solution: Push X material •• Tech assistance orders •• Credit in materials Push vs. pull Asset light vs. •• Coordinate material orders heavy

•• Obvious benefits •• Tangible Delivery of materials to quality homes materials over 1.5 Distributor but high barriers yrs create high due to long-term production unit Business model characteristics to reach •• Design unique distributor payoff periods costs. deep on the income pyramid requirements – Select partners based on required for •• Sales promoters Reputation Leverage Cemex brand service level to clients and willingness to purchase. increase labor Partner to build trust with reduce margins given increases in volume. •• Limited intensity. customers and partners •• Build flexible management culture purchasing Note: In housing BOP As Job opportunities for – Adapt company processes/standards power given industry, PH is asset Employees local women hired as based on customer needs; ensure Cemex lack of product light because it promoters to drive sales leadership understands and supports transferability. does not build the Financing “Savings-credit” model operational differences to run an inclusive homes. Options to access housing business. materials on credit •• Embed social capital in model – Support Narrower vs wider customer base community needs through initiatives and PH reaches a wide range of low-income Business Operate as stand alone adaptive products. customers, where some make up to Within a business unit within •• Barrier – Meeting different needs of $2.5 more per household. Over time, Business Cemex BOP clients was a barrier in early years of PH has shifted from a “one-size-fits-all” Up-Sell/Cross- Customer can purchase operation - PH was able to shift its model approach to customized payment/ Sell Products one room at a time and to provide more customized solutions. delivery plans to meet various needs. continue to add onto This increases flexibility for families to house over time Value capture manage cash flow volatility along with other competing expenses. PH targets customers Other critical success factors •• PH Clients – Example, payment option in urban/semi-urban areas, but not rural, to and barriers for a 10 m2 room is ~$20/wk for 70 wks ensure they are within reach of distributors. •• Develop deep empathy – Understand totaling $1.4K, but can be as low as $17/ the BOP’s habits, needs, and obstacles week with option to pause payments if and adapt products accordingly (e.g., needed. increased customization available to •• Patrimonio Hoy - PH has two main clients). revenue sources: •• Shift in core product based on client’s ––Membership fees: ~21% of client needs – Focus on holistic housing solution payment for access to fixed prices and (e.g., work directly with client to provide tech assistance tech. assistance and customized payment ––Margins with distributors: PH creates plans) vs selling cement via retailers. demand for distributors by providing •• Build customer trust to increase access to a new, untapped customer sales (e.g., 60% from word of mouth) base; this enables PH to negotiate higher – Demonstrate long-term support (e.g., margins; amount varies by distributor guaranteed fixed pricing and materials and by client credit).

70 Reaching deep in low-income markets

Patrimonio Hoy (cont.)

Development impact achieved Indirect benefits of PH also include Key Learnings PH is improving the living conditions for increasing employment for the BOP Cemex provided immense support in early the BOP: based on the following: years, incl.: •• New or improved housing for 527K •• Training and employment of more than 3K •• Financing – access to funds to hire a team, families, reaching 2.5M individuals, totaling BOP promoters, 95% of which are women develop a BOP-focused model, and test it in the market 3.5M m2 of new space •• Increased hiring of builders due to •• Improved home quality from technical increase in local construction activity (65% •• Industry expertise and relationships – support leads to higher home values and of customers hire builders) access to all necessary experts to develop the model enhanced quality of life •• Long-term economic benefit for home •• Decreased average building costs by owners, given 29% use new space to •• Cemex brand – well-known and 30% and cut average time to completion develop their own businesses recognized brand decreasing the need to by 60% prove quality of materials to a naturally skeptical target market •• Improved social development and safety Investments overview for children (e.g., increased space, more PH started as business unit within Cemex, •• Distribution channels – access to privacy, decreased exposure to illness, and so it does not have an investor base. Today, distributors/suppliers with ability to adequate sleeping areas). PH operates autonomously within Cemex as leverage CX brand and volume discounts a profitable unit with its own set of internal •• Increased access to credit/financial •• R&D Support – ability to experiment in performance requirements. inclusion for BOP customers with letter of early stages recommendation from PH

Data and information in this case study gathered and confirmed via interviews with, and documents provided by, executives at the enterprises. 71 Reaching deep in low-income markets

Sanergy

Sector Year founded Geography Sanitation/Agriculture 2010 Kenya

Company background Business performance: Path to Breakeven Analysis Opportunity: 4.1 billion people lack access profitability and scale to hygienic sanitation options, leading to Not yet financially sustainable, but 10000 8K diarrheal diseases—the #2 cause of disease scaling moderately toward breaking even worldwide. Each year, 760K children die, •• Tons Sold in ’14 & ’15: 25 and 125; 124% and developing countries lose ~2% of GDP 5000 growth. (~$260B) due to health care costs and impaired productivity. This crisis is prevalent •• 2020 Projected Split: 67% fertilizer; 33% .5K 0 in slums due to high population density, animal feed. 2016 2020 limited space, and lack of resources. Most •• Moderate overall growth due to recent BE point of Nairobi’s 2M slum residents (8M total in shift in customers for agricultural Kenya) defecate in bags and use pit latrines. Tons of end product sold products. Environmental damage is also an issue, given that 90% of waste is untreated and •• Revenue Proxy: Waste collected ‘15: ~3K discharged into waterways. tons; 35% annual growth; 10:1 ratio of waste collected to end product produced. Solution: As of September 2016, Sanergy Note: Growing collection services to meet has a network of 400 franchisees called product demand; projected split is 25% Fresh Life Operators (FLOs) who purchase, from FLTs and 75% from other waste maintain, and operate more than 800 sources. hygienic Fresh Life Toilets (FLTs) across slums •• Profit Margin: Negative, but growing. in Nairobi. Sanergy provides FLOs with training, access to financing, and support NGO ’19 Projections: Cost/person/year to create a successful franchise business. It from $57 to $23 then collects the waste from FLTs, converts it into agricultural inputs, and sells these Income pyramid reach Customer Base Income Levels products to medium-sized farmers in Kenya. Sanergy is reaching deep on the income pyramid by building an integrated Main Products and Services: This sanitation value chain. integrated model has three distinct categories: 1) hygienic waste management To do this successfully, Sanergy’s mandate services, with toilets distributed through for its hygienic waste management services three channels (commercial, schools, and is to test ideas that reach the BOP; this landlords); 2) safe, professional waste process has led to increased FLT access collection and removal; and 3) agricultural via well-established school and residential inputs, including organic fertilizer and distribution channels. insect-based animal feed. 32% live below $2.50/day Rigorous External Methodology: Income- level data for FLT users is from an Acumen 58% live between $2.50 to $4 Lean Data study, which used Grameen’s PPI five-question tool. Survey results also 10% earn above $4/day showed FLT users were NOT wealthier than non-FLT users in the community. For the agricultural product business, Sanergy has three customer segments: large commercial farms (55%), smallholder farms (45%), and feed millers.

72 Reaching deep in low-income markets

Sanergy (cont.)

Factors affecting reach Business Design Key factors Narrower Wider Cust. Cust. Base Base Asset light Pull Push Asset-heavy Pull Push X

Push vs. pull Asset light vs. heavy •• Hygienic FLTs •• Tangible are low-cost products (FLTs amenities that and agricultural improve quality of inputs) require life, driving high higher production demand; sales costs; waste FLT Users Transport & Removal Treatment & Reuse teams educate collection and the FLO network management are Microentrepreneurs FLOs operate •• Government’s support of model: and agricultural labor intensive, FLTs as franchise Partnership required to obtain and keep customers on increasing businesses ownership of land for FLTs. product benefits. distribution costs. Up-Sell/Cross-Sell Sell fertilizer and •• Legal structure provides more Products animal feed to same flexibility to innovate to reach the BOP Narrower vs wider customer base farmers (e.g., less profit pressures for NGO). Sanergy created a hybrid legal structure Product Agricultural to support two customer types with Segmentation products for Value capture different income levels, across different farmers and FLT Sanergy is unique in that it captures revenue product categories. The NGO serves FLT fees for BOP from different activities along the value users (the majority of whom are in the BOP); chain, including: the for-profit (FP) sells waste collection Vertical Integration Own entire supply services and agricultural inputs to farmers. chain from waste •• At Sanitation Level: Sanergy receives collection to reuse revenue for the cost of the structure (~$240 to $350 paid up front) and an To reach sustainability, Sanergy must Other critical success factors and annual fee for service provision ($60 to achieve scale across both sets of barriers customers. High volumes of FLT users $120); incurs direct cost/use of $0.024 with •• Target locations based on level of create waste, which the FP uses as input for a five-year goal of $0.01. infrastructure and customer norms agricultural products. In addition, scaling ag •• At FLO Level: FLOs charge ~$0.05/FLT use (e.g., high-density areas help FLOs make product sales is main revenue driver. and receive 100% of revenue from users a profit, customers accustomed to paying (~$2K per year). Business model characteristics to reach for latrines, and microentrepreneurship is deep on the income pyramid accepted in culture). •• At Ag. Product Level: Sanergy charges farmers $350/ton. Pay Per Use Small payments (~5 •• Aspirational product focus is effective cents) selling point. No Frills Simple, low-cost FLT •• Adapt customer base with market design learnings: Shifted from commercial to BOP as Employees Employee FLOs medium-sized farmers to gain access to and company decision makers and decrease cash flow employees volatility. Financing Options FLOs can access credit to purchase •• Kenyan-based employees increase rate FLTs of learning: More than 90% of team is Kenyan, which drives innovation.

73 Reaching deep in low-income markets

Sanergy (cont.)

Development impact achieved Investments overview •• Series A and A2—Raised equity with Eleos, Sanergy has made significant, tangible Sanergy’s model gives the organization Acumen, and Novastar in ’13 followed by strides in providing the deep BOP with flexibility to deploy different types equity from Cornerstone Enterprise in healthy sanitation options. In September of capital based on business needs. Kenya in ‘16 2016, metrics included: Where there are clear, proven markets, •• Commercial grants for FP—USAID Sanergy’s FP attracts investment capital. •• 800 active FLTs in informal settlements awarded $1.5M grant and Gates awarded For less proven components, where there is $2.3M in ‘14 •• 400 FLOs in franchise network opportunity for high levels for social return, Sanergy’s nonprofit raised >$4M in Sanergy can obtain philanthropic funds •• 37K daily uses from community members philanthropic capital from 28 funders, through the NP. To date, Sanergy has raised (25K users) the largest of which included the Stone >$8M. Family Foundation and Vitol Foundation. •• 9K metric tons of waste safely removed and treated Sanergy’s commercial business has Key Learnings raised $4.4M in equity over two rounds •• 800 new jobs created of financing including: Developing a mutual understanding of •• 6% penetration of 550K Mukuru •• Competitions and fellowships—$250K funding goals is imperative for successful community from 2010 to 2011 relationships with funders (e.g., improve Sanergy’s commercial fertilizer business also hygienic options for kids in schools). generates positive impact for farmers by •• Seed round—Raised convertible debt with Sanergy must then demonstrate traction creating an average yield increase between Eleos (now global partnerships) in ‘12 toward these goals. 30% and 100%.

Data and information in this case study gathered and confirmed via interviews with, and documents provided by, executives at the enterprises. 74 Reaching deep in low-income markets

Swasth Foundation

Sector Year founded Geography Health 2011 Mumbai and India

Company background Business performance: Path to Breakeven (BE) Analysis Opportunity: India has limited high-quality profitability and scale 50 50 health care services, and malpractice Declared nonprofit is rampant. There are also no pricing Goal to break even on an earned income regulations on products/services, which basis to reduce donor subsidies 30 has caused high prices in health care. 15 18 •• Revenue ’16: $400K. 10 Furthermore, 80% of health expenditure 10 6 is out of pocket, making health shocks the •• Revenue ’16 growth: 40%. clinics of No. greatest cause of impoverishment in India. •• Other: Customer visits average 2.5/year, -10 ‘13 ‘14 ‘15 ‘16 compared to market average of one/year; Solution: Swasth Foundation (Swasth) Years Swasth customers visit the doctor more operates a nonprofit patient-centric health often/sooner, which increases cash flows. system that provides one-stop access to BE point high-quality health care services at half the •• Scale: 103K families registered and 455K No. of clinics market rates. visits (since ‘11).

•• Operating 18 clinics; break even at 50 Main Product(s): Swasth health centers clinics. offer primary care services, including dental, diagnostics, drugs, and referrals •• Project to break even in 2019, given to secondary/tertiary care. Community current cost estimates. Outreach via “health workers” expands •• Most clinics are cash flow positive, the reach of preventative-promotive care, averaging 40 patients/day and peaking at including health education, early disease 100 patients/day; break even at 35 to 40 diagnosis (e.g., diabetes and hypertension), patients/day. low-cost products, and follow-up treatment compliance. School Health Camps Income pyramid reach provide early diagnosis and detection Customer Base Income Levels Swasth is reaching deep on the income of high incidence and underdiagnosed pyramid with 90% of customers living on conditions (e.g., anemia, refraction error, and less than $4/day. undergrowth) to low-income student in the slums. Swasth targets lower-income customers by establishing its clinics in Mumbai slums. A typical family that Swasth serves consists of a full-time daily wage earner, an additional earning member at half this income, and three children. Ninety percent of customers make $100 to $450/family/ month. 90% live on $0.67 to $3/day

Impressionistic Internal Methodology: 10% live on more than $3/day Swasth uses customer occupation in combination with benchmark data (e.g., demographic data on Mumbai slums) to estimate per capita customer income.

75 Reaching deep in low-income markets

Swasth Foundation (cont.)

Factors affecting reach has initiated a pilot in Ahmedabad and will Other critical success factors and Key factors Narrower Wider target other cities based on the experiences barriers Cust. Cust. Base in Mumbai and Ahmedabad. •• Labor force incentives: Incentivizes Base doctors/dentists on volume and not Asset light Pull Business model characteristics to reach value so they do not overprescribe, which Push deep on the income pyramid reduces out-of-pocket expenditure. Asset-heavy Pull BOP as Women from Push X Employees community are trained •• Best in class: SHCs are better looking and equipped than other clinics in the Push vs. pull Asset light vs. as health workers, slums, which makes the centers desirable heavy physician assistants, dentists assistants, and for the BOP, contributing to Swasth’s •• Difficult to •• Doctors/ receptionists. 90% customer satisfaction; BOP expects demonstrate experts are paid products/services to be high quality risks of disease competitive rates. Shared Refers patients to despite low prices. and long-term Channels closed network of •• Labor-intensive benefits of care. secondary/tertiary care •• Barrier: Consumer health care outreach—health providers; members get preferences in India are different than •• Some outreach/ workers bring 20% to 40% discount. in the United States; Swasth completes education in one-third of Optimized Back-end innovation/ occasional surveys to better understand required. customers. Internal integration, including: consumer needs and tailors services •• Note: Treatment •• Medical Processes purchasing drugs accordingly to attract more customers and for chronic equipment costs directly from better meet existing customer demands. conditions are significant. manufacturers and requires more an in-house IT system Value capture •• Note: Swasth’s outreach than to store, manage, and model is “lighter” Revenue: treatment for analyze information than most health acute diseases (electronic medical •• Services have varied prices and margins clinic models; and dental; records and enterprise buildings are Product Pricing: Swasth relies resource planning). leased, and the primarily on the •• Swasth Health Centers total investment is Financing Customers to pay for latter for revenue. <$1/person in the Options higher-priced dental –– SHCs offer comprehensive health catchment area. services over time; other services in department of family financing options being medicine and dentistry. Price of services Narrower vs wider customer base explored. range from $0.15 to $100. To maintain its mission to maximize lives Vertical Established its own –– $0.50 for a family physician impacted, Swasth spun out as a nonprofit Integration supply chain and set consultation. to continue delivering affordable health up a central laboratory, services to lower-income customers. warehousing facility, –– $0.33 for a dentist consultation. As part of the for-profit, Swasth had a dual and in-house tech team –– Average spend per visit, including purpose—maximize profits and impact; to minimize costs and prescription medicines, tests, and however, Swasth found a tension between better meet customer procedures, as required: these two objectives, including pressures demands. to quickly raise profit margins through Up-Sell/Cross After customers receive •• Family Medicine: $1.50 price increases, which would have reduced Sell Products free/low-priced care •• Dental: $4.50 the number of lives impacted, as price is a from the community barrier to access care. outreach or school •• Community Outreach and School health program, they Health Camps Plan for growth often visit a Swasth –– Most offerings are free (cost covered by Health Center (SHC) for In the short term, Swasth will expand donors or Swasth), but some are priced follow-up, higher-priced primarily in Mumbai. In the long term, at ~$1 per customer. care. Swasth will target other Indian cities. Swasth

76 Reaching deep in low-income markets

Swasth Foundation (cont.)

Development impact achieved Investments overview Investors provided grant funding of ~1.9M, •• Health care priced at ~50% of market rates including: •• 77M INR ($1.15M USD) reduction in out-of- •• USAID—Three-year grant of $900,000 in pocket expenditure, which reduces health 2015 shocks in vulnerable populations •• Tata Trusts—Three-year grant in 2016 •• Improving quality of care, as exhibited by: 1) a treatment compliance (i.e., medicine •• Arvind Ltd.—Two-year grant in 2016 adherence) level of 60%, which is twice the market average of 30%; 2) a patient Key Learnings recovery rate of more than 90%; and 3) a •• Swasth India’s investors were supportive patient satisfaction rate of more than 90% of Swasth’s decision to spin out as a nonprofit, and they still support Swasth in an advisory capacity today.

Data and information in this case study gathered and confirmed via interviews with, and documents provided by, executives at the enterprises. 77 Reaching deep in low-income markets

Urban Planet Mobile

Sector Year founded Geography Education 2007 45 Countries

Company background Business performance: Path to Breakeven Analysis Opportunity: In countries with large BOP profitability and scale populations, there is limited, affordable Total enterprise profitability and 1000 BE-750 access to English lessons, which are crucial continuing to scale to obtaining higher-income jobs (e.g., •• Revenue ’14: $900K with a 34% two-year tourism). In India, English speakers earn 34% 500 CAGR higher wages than others, which is evidence of a strong market need. •• Profit Margin:30% 100 0 •• Other: Could have broke even in ‘13 but 2011 2014 Solution: Urban Planet Mobile (UPM) decided to reinvest in business BE point cooperates with local MNOs to provide affordable, daily educational content •• Acquisition: UPM purchased by Sibling No. of daily users (K) via phones/Internet to BOP customers. Group for ~$6M in equity and cash UPM spread to 750K users downloading Customer Base Income Levels 23M lessons/month across 45 countries, Income pyramid reach (Per Capita) including East Asia, the Middle East, and UPM is reaching deep on the income Latin America, before its acquisition in ’15. pyramid by tailoring its model specifically for these customers. Main Products: The main product, Urban English, provides BOP learners with access To successfully reach the BOP, UPM to daily English lessons, delivered as a focuses all aspects of its model on highly compressed audio file, via basic, customer affordability.For example, UPM: prepaid phones. Users can choose between •• Designs products for prepaid phones used 12 courses (out of 25 UPM developed, by the BOP with various difficulty levels. Each course includes 60 to 90 daily lessons, including •• Requires MNOs to cap pricing at 25% vocabulary and grammar content. Users pay of the average mobile revenue per unit a subscription fee of USD $3/month (based (ARPU) and waive data fees. 80% had ARPU less than $12/month on local context), and can prepay daily or weekly. This fee is split between UPM and Methodology: Estimated customer 20% had ARPU above $12/month MNOs. income levels based on average mobile phone spending by customers (ARPU) and marketed to migrant workers in countries with high ARPU; also use type of mobile phone as proxy for income levels (e.g., low- income users buy prepaid phones) and did NOT market to postpaid or smartphone users.

78 Reaching deep in low-income markets

Urban Planet Mobile (cont.)

Factors affecting reach Business Design Key factors Narrower Wider Cust. Base Cust. Base UPM BOP Product development and MNO Education content and no Asset light Pull X Learners market-entry strategy data fees Push Asset-heavy Pull Push Marketing costs and Push vs Pull Asset light vs access to customers Heavy Subscription fees •• English lessons •• Intangible mobile are seen as products require a necessary low production economic input to unit costs; access Business model characteristics to reach •• MNO partnership development increase earnings, to customers deep on the income pyramid process: Required for success, but MNO more directly than through MNO Pay Per Use Small payment options must agree to a set of affordability best traditional math/ partners available (~10 cents per practices; UPM also found working with English language decreases labor day) MNO product leads was more effective (ELA) courses, intensity and than the corporate social responsibility No Frills Standard courses with driving customer distribution costs. (CSR) divisions because they viewed the small data file for basic demand. BOP as customers. phones Shared Leverage MNO partner •• Barrier: UPM faced significant problems Narrower vs wider customer base Channels to access customers if MNO partners were not willing to follow best practices. For example, in Thailand, UPM focuses on selling exclusively to Optimized Mobile product with UPM gave the MNO more control over low-income users. While some higher- Internal digital distribution go-to-market strategy—200K users signed income customers buy the product, Processes up immediately and this dropped to 18K they are not required to help UPM reach Vertical Used MNO brand to in two months, because MNO priced sustainability, indicated by the scale Integration build customer trust products too expensive for users. achieved with low-income users. UPM Up-Sell/Cross- Sell multiple courses to may have faced long-term difficulty Sell Products existing subscribers Value capture maintaining its focus on BOP customers. For instance, UPM invested in smartphones Other critical success factors and •• MNO Profitability—Receive 40%-60% products to stay relevant in the market (e.g., barriers of user fees, but must waive product data smartphone penetration doubled from 1.3B charges to drive scale; own marketing •• Labor force incentives: Adapt products in ’13 to 2.6B in ’16). This shift was necessary, costs; estimated 90% profit margin to geography: Conduct product testing in but would have likely resulted in a material every country to understand local context. •• UPM Profitability—Receive remaining increase of higher-income customers. 40% to 60% of subscription revenue; own •• Leverage first-mover advantage: First training and product development costs; to push education content through MNO prioritized scale because MNO collection (music was common). rates were only 12% to 15% with prepaid •• Government’s support of commercial phones model: Find market with limited regulatory •• Product Pricing—Target 20% to 40% access/content barriers. of local market ARPU (average mobile •• Build trust with customers: Allow low- revenue per user), which UPM found to be income users to test products for free desirable price point for BOP (~$3/month) before purchase.

79 Reaching deep in low-income markets

Urban Planet Mobile (cont.)

Development impact achieved Investments overview Key Learnings

UPM has limited visibility into direct impact Private investors, mostly tech-focused, •• Investors expected ROI from 30% to metrics (e.g., English improvement) given provided both debt and equity totaling 200% depending on time and stage of its indirect relationship with customers. ~$4.5M over seven years, including the investment; all investors were liquid The best impact proxy is performance as a following: with common and preferred stock upon value-added service (VAS) relative to other merger. •• 2007: Funded by founders options. •• US investors had limited understanding of •• 2008: $250K from international tech firm Results show that UPM was the highest the value of an aspirational product and performing VAS across MNOs, which •• 2009: $350K from US tech firm and tech were skeptical of the BOP’s willingness to indicates that users found UPM valuable to angel pay. The first US investor had experience learning over extended time periods. in emerging markets and others were able •• 2010: $375K from US tech angel group to review strong performance as proof •• User engagement—Average subscription •• 2011: $1.25M from international tech angel points. length of six months, which was twice that group and a US repeat investment of any other MNO VAS •• Profitability and scale were the primary •• 2012: $1M from US/global super angels goal for private investors who helped UPM •• Product use—Users responded to MNO maintain this focus. marketing messages at double the rates •• 2013: $750K from international tech group of other VAS products, and 20% to 25% •• 2014: $500K from US/global tech angel subscribed to a second UPM product group

Data and information in this case study gathered and confirmed via interviews with, and documents provided by, executives at the enterprises. 80 Reaching deep in low-income markets

Zoona

Sector Year founded Geography Fintech 2009 Zambia, Malawi, and Mozambique

Company background Business performance: Path to Ability to Scale: Opportunity: In developing economies, profitability and scale cash transactions dominate the economy, Financially sustainable and investing in Subscriber Growth (Thousands) 762 and the majority of people are unbanked scale relying on informal financial service Zoona broke even in 2014 and is now 401 providers. In particular, an immature focused on investing in scaling the business financial infrastructure coupled with high before returning to profitability at some 165 +134% transaction costs and physical distances point in the future. makes money transfer between individuals •• Revenue (’15): $8.1M. 56 both inefficient and insecure. Yet, there is a strong demand for these services as •• ’11 to ’15 Revenue CAGR: 84%. 35 05 18 families’ breadwinners require a mechanism •• Growth Ambitions: Zoona has expanded for sending money home and small business from Zambia to Malawi and Mozambique ‘09 ‘10 ‘11 ‘12 ‘13 ‘14 ‘15 owners need to make payments to suppliers with the target of reaching 70% market who may not be locally based. Year share.

Solution: Zoona addresses this problem •• Currently developing an international by managing a network of more than 1,500 remittance product. mobile-enabled money-transfer outlets across Zambia, Malawi, and Mozambique. Income pyramid reach Customer Base Income Levels The core offering is an agent-based or over- While Zoona does not formally track the-counter (OTC) mobile money-transfer customer income, a recent survey platform. Agents are entrepreneurs who indicates they do reach low-income effectively act as franchisees of the Zoona customers (24%), while also attracting brand. They operate Zoona-branded a significant portion of higher-income kiosks where end users can conveniently earners (51%). transfer money over the Zoona platform via the mobile device of the agent. Value is Zoona users do not need a formal bank transferred between the mobile wallet of account or even a mobile phone to transfer the sending entrepreneur and is redeemed money, making the product accessible to by the recipient at any Zoona outlet. The very low-income customers. Those making OTC model enables a secure and efficient less than $5/day comprise primarily traders transfer of funds without the need for the and those who receive money only. Those 24% earn less than $5/day customer to have a bank account, mobile earning above $5/day are business people wallet, or even mobile phone of their own. and other high-income earners. 51% earn more than $5/day

Main Products: Domestic and international Impressionistic Internal Methodology: 25% students with unknown earnings money-transfer service. Zoona segments customers based on their purpose for using Zoona, and whether they send or receive funds on the Zoona platform. Income level data is based on a limited survey and focus groups in 2015 in Zambia. Zoona is currently revisiting its customer segmentation and income levels.

81 Reaching deep in low-income markets

Zoona (cont.)

Factors affecting reach Plan for growth Key factors Narrower Wider •• Enter new markets across Southern Africa, Cust. Cust. including recent launch in Mozambique in Base Base September 2016 Asset light Pull X Push •• Explore markets that create synergies Asset-heavy Pull with existing geographic reach (e.g., high Push frequency of international remittances or lack of similar product) Push vs Pull Asset light vs Heavy Business model characteristics to reach •• There is a strong •• Technology- deep on the income pyramid demand for driven mobile BOP as Employees Tellers at Zoona remittances and money service kiosks employed money-transfer coupled with a by agents are services in franchise model often sourced Zoona’s markets that limits fixed from local BOP and significant costs attributable communities. unmet demand to agents and Pay Per Use Zoona’s beyond the firm’s shares in the transaction fees current capacity. benefits of their are small and upside potential. affordable to even very low-income Narrower vs wider customer base customers. Fees are a percentage As the company grows and user base of monetary value expands, Zoona has also started to reach transferred. more higher-income segments. For example, Financing Options Zoona provides higher-income family members living in working capital urban areas send money home to a poor financing to relative living in a rural village. agents to reduce cash flow risk and ensure liquidity. Microentrepreneurs Zoona has built a large network of independent entrepreneurs who are franchisees of Zoona.

82 Reaching deep in low-income markets

Zoona (cont.)

Other critical success factors and Development impact achieved barriers •• Generating employment opportunities— •• Invest in distribution force As of summer 2016, Zoona generated development: Significant investment in valuable employment opportunities for providing a superior customer experience 906 agent entrepreneurs and 1,809 tellers. is critical to building awareness and trust. •• Creating opportunities for females— •• Willingness and Ability to pivot Zoona provides employment, business business focus: Recognize when certain and financial literacy training, motivation, partnerships and products (e.g., SABMiller and a positive physical environment. distributor payments and utility payments) •• Secure payments and savings—Zoona’s were not well suited to the core value money-transfer service has enabled proposition and pivoted to focus on the individuals to safely and quickly move domestic remittances and franchisee more than $1 billion without having to model. travel long distances, thus giving them •• Design sophisticated incentive additional time to focus on income- structure: Increased monitoring and generating activities. Zoona is also piloting leverage over agent performance by a product to help users grow their savings. introducing agent performance reports and bringing key infrastructure (e.g., Investments overview kiosks) onto the balance sheet as a means Zoona has raised $19 million in equity to sift out lagging performers. and $3 million in debt throughout the last seven years. Series A equity round in •• Cultivate regulator support: Develop 2012 raised $4M and Zoona closed its Series understanding of regulatory requirements B in 2016 raising $15M. and include them as a partner in building financial inclusion. Investors from the public and private sector, •• Carefully sequenced geographical including: expansion: Target fragmented markets to •• Omidyar Network avoid battles with dominant incumbents (e.g., M-Pesa). •• Accion

•• International Finance Corporation (World Value capture Bank Group) •• Zoona sets fees for its money-transfer •• 4Di Capital business based on competitor activity and agent profitability. •• Patrick Pichette (former Google CFO):

–– The average transaction fee is between Key Learnings 3% and 4%. •• Choose investors with aligned •• Of that fee, Zoona collects a share, philosophies—Zoona carefully chose and the agent receives a share as investors with an impact and development commission. orientation to obtain patient capital. •• Rather than pricing lowest in the market, •• Use Series A to lay a strong Zoona attempts to differentiate its service foundation—Successfully raising a from competitors based on its distribution substantial Series A from key investors network, as well as focus on creating a was critical to build a high-quality team positive customer experience. and invest in the infrastructure needed to scale the business.

Data and information in this case study gathered and confirmed via interviews with, and documents provided by, executives at the enterprises. 83 Reaching deep in low-income markets

84 Reaching deep in low-income markets

Snapshots

85 Reaching deep in low-income markets

ACRE AFRICA

Sector Year founded Geography Insurance/ 2009—Started as Project Kilimo Salama within Syngenta Foundation; June 2014—Created Three countries in Africa with Agriculture for-profit called ACRE Africa, short for Agriculture and Climate Risk Enterprise, Ltd. (ACRE) majority focus in Kenya

Company Overview: index-based approach, grounded in data Customers Served: ACRE Africa designs ACRE Africa works with local insurers from weather and yield-based indices, its products for farmers with less than and other stakeholders to link farmers to to develop products that reach the BOP. two hectares while still serving some microinsurance products to lower their risk This use of objective, evidence-based data higher-income farmers—totaling 2% of of investing in quality farming inputs, overall decreases the need for human-centered customer volume—to mitigate against the productivity, and access to loans. ACRE processes. For instance, excess rain risk associated with serving low-income Africa views the following as critical to the and drought insurance uses a proxy to populations. Originally, ACRE Africa focused success of its model: quantify loss (e.g., rainfall in millimeters solely on the deep BOP, but discovered based on local rain gauges). This reduces that farmers with a purely subsistent mind •• Partnerships along the full agriculture visits required to farms and, therefore, set needed more education on agronomy insurance value chain to reach unit costs. Also, as more data is collected, best practices and financial literacy before farmers—The ACRE Africa team premiums will continue to decrease. insurance could be introduced, significantly undertakes a risk assessment, product increasing unit costs for digitized products. development, and risk monitoring •• Highly customized products based on This led ACRE Africa to widen its customer while building numerous additional local populations’ needs—For instance, base to slightly higher-income farmers who partnerships to get its insurance products premiums can be paid in congruence with view farms as a business (e.g., something to BOP farmers. Some examples include cash flow from growing season and claims worth protecting), not just a means for relationships with insurance companies, triggers can be set based on need. consumption. financial service providers (for savings and credit), off-takers (for produce purchases), Successful Low-Cost, High-Volume Performance: ACRE Africa has a four-year and extension service providers (for good Products: The Replanting Guarantee CAGR of 66%, starting with approximately agricultural practices). Product, an offering that bundles seeds and 86K farmers insured in 2012 and growing insurance, is a mass-market product that •• Distribution through farmer to roughly 390K in 2015. It has generated uses a simple mobile platform to register aggregators (e.g., banks, MFIs, large- $1.5M in premiums paid and must reach farmers for a seed replacement cover. scale farms, and agribusinesses) $4.2M to break even. While the company is The farmers are trained to “activate” the to reach scale in a cost-effective not yet profitable, it is scaling moderately insurance at the point of sale by registering manner—Direct education is expensive toward sustainability. a unique code placed in the bag of seed. and not feasible to reach the BOP, so ACRE Payouts are triggered using satellite data Africa targets organizations to reach large Development Impact: ACRE Africa for an aggregated location based on poor volumes of farmers at the point of sale. surveyed 630 farmers in 2012, which rainfall at the germination phase. The seed showed that insured farmers invested 16% •• Digital, index-based insurance company covers the cost of the insurance more in inputs per acre and generated 17% products to streamline processes— premium as part of its marketing strategy more in total income than uninsured farms. With traditional indemnity-based crop to demonstrate additional product value in insurance, it is costly and difficult to reach the form of free insurance to farmers. This the BOP because it typically requires four product is an introduction to insurance for visits/season to each farm (e.g., initial many farmers, and ACRE Africa plans to assessment, check-ins, and damage invite farmers to increase their premium for review). Given this, ACRE Africa uses an coverage of the entire crop season.

Data and information in this snapshot gathered and confirmed via interviews with, and documents provided by, executives at the enterprises. 86 Reaching deep in low-income markets

Envirofit

Sector Year founded Geography Energy – Clean Energy 2003 (operational in 2007) Multinational – 45 countries in Asia, Africa, and Latin America Products and Services

Company Overview: Envirofit’s domestic products retail from Development Impact: Envirofit cookstoves Envirofit International is a social enterprise $20 to $50, and commercial products range reduce fuel use up to 60%, which increases that innovates smart energy products and from $85 to $1K, depending on product and annual income by up to 15% due to services, which can improve lives on a global location. To make its products affordable efficiency savings. Envirofit cookstoves also scale. Envirofit launched its first cookstove for customers at the base of the income reduce smoke and toxic emissions up to in India in 2007 and has since expanded pyramid, Envirofit partners with MFIs, NGOs, 80%. Additionally, Envirofit has supplied globally. Envirofit currently offers 11 different and other last-mile distributors that provide tens of thousands of cookstoves to relief cookstoves (seven wood/biomass, three financing for its cookstoves. The majority efforts in Sudan, Somalia, Nepal, and Haiti, charcoal, and one liquid propane gas of Envirofit’s cookstoves are purchased as well as to a refugee camp in the DRC model line) with varying fuel types and via consumer-financing channels. Finance to explore how cookstoves could reduce performance levels to target customers partners are Envirofit’s main distribution gender-based violence. Furthermore, in across a range of geographies, cultures, and channel because they not only make selling more than 1M cookstoves, Envirofit income levels. Envirofit also sells a limited cookstoves accessible, but also are more has saved consumers $138M in fuel costs selection of lighting and accessory products likely than standard retailers to “push” the and 18 working weeks, and created more that serve as additional follow-on income product. Retailers typically rely on walk-in than 2,400 jobs. from cookstove customers. Envirofit has customers and are agnostic about how grown from a business with one product customers spend money in their stores. to a global company serving more than 5M people, with over a dozen user-designed Customers Served: Envirofit’s tiered products and regional headquarters in East product offerings enable it to sell to both Africa, West Africa, Asia, and Latin America low- and high-income customers across that offer the local production, distribution, both urban and rural channels. Envirofit and customer care. also reaches customers deep on the income pyramid through government programs, All of Envirofit’s products are designed refugee camps, and aid and relief programs. with the end consumer in mind through Higher-income customers in emerging thousands of consumer surveys and focus markets’ middle class are critical to business groups that ensure products meet the success because their increased expendable needs of the end consumer. Furthermore, income makes them more likely to be early all products come with a one- to five-year adopters, which in turn makes the product warranty (depending on the product) that aspirational for poorer customers. helps establish consumer trust, which is particularly critical in low-income markets Business Performance: Envirofit is where customers are very discerning with financially sustainable and investing in scale. what limited funds they have. While BOP Envirofit is profitable on a unit economic consumers are price sensitive, Envirofit basis, but is currently prioritizing scale over found that quality is also an important consolidated profitability. Envirofit projects factor in choosing a product as consumers approximately $30M in 2016 revenue and, to want a durable product that will deliver date, has sold more than 1.2M cookstoves, value for their money. Customer care is as well as lighting products and accessories. also integral to Envirofit’s model. Envirofit provides sales and marketing training to support distributors, and a toll-free line for customers to gain clean cookstove awareness and adoption.

Data and information in this snapshot gathered and confirmed via interviews with, and documents provided by, executives at the enterprises. 87 Reaching deep in low-income markets

Ecoblock/Echale

Sector Year founded Geography Housing 1997—Created foundation; 2006—Registered as private company; 20 states in Mexico; trials in South Africa 2013—Created community financing company and Colombia

Company Overview: Building Process: Building a 40m2 Echale Performance: Echale is profitable and Echale offers an affordable and sustainable house takes approximately six months broke even in 2011 with average returns “self-build” housing solution for vulnerable start to finish and costs $10K. The process of more than 4% over the last five years. communities through the creation of three consists of the following major steps: The organization is also scaling, generating separate legal entities: more than $6M in revenue in 2014, with a •• Savings plan—Families must save 10% 10%, four-year CAGR. Echale is piloting a •• Nonprofit Foundation—Provided early of the cost of house before starting the social franchise model in South Africa and R&D support to develop new, ecologically building process. Colombia to expand internationally. friendly adobe bricks called Ecoblocks, as •• Build process—Echale provides training well as a Terrapress machine to build the to five local builders and rents out Impact Created: Since its launch in 2006, Ecoblocks. The bricks are 95% clay and Terrapress machines to create Ecoblocks Echale has built more than 30K new homes, 5% cement, making them a lower-cost on-site. The $10K cost to purchase a house completed 150K home improvements, and alternative to a typical 100% cement includes the cost of technical assistance, created more than 200K temporary jobs for house. and materials and labor for the community home builders, reaching 180,000 families •• Private Company—Provide families with builders. Once a customer has started the and 1M people. In addition, Echale creates the robust housing solution—technical building process, it takes approximately six additional cost savings for families through knowledge to design homes, how to save months to complete a home. more efficient home designs. For example, money for projects, and construction rainwater tanks reduce water purchased •• Payment Period—The customer pays off training to create Ecoblocks and execute by 20%, efficient stoves reduce firewood the remainder of the cost of the house the “self-build” operation. During this purchased by 70%, and efficient lighbulbs over five years in monthly installments of process, customers work closely with reduce energy usage by 10%. $113. community housing committees who help oversee the design while also ensuring Customers Served: Echale targets families builders earn a decent wage. in rural areas making between $8 and •• Community Finance Company—Provide $21 per day, per household for its full low-cost financing solutions that blend housing solution, but it can also serve household savings, government subsidies, lower-income levels by offering smaller and low-interest loans (its loans are homes or home-improvement projects. usually 30%, versus an 80% market rate). Echale captures customer income levels Echale negotiated with the government by surveying customers using standard to help its customers obtain access to surveys developed by the National Housing a housing subsidy that covers 30% of Committee (Comisión Nacional de Vivienda). housing costs. For the roughly 30% of Echale focuses on communities where families eligible, Echale coordinates these most people live in tin houses with no payments with the government to ensure water, electricity, or bathrooms, and it has customers can maximize financial support. maintained this focus over time. In fact, Echale abandoned its pilot in Guatemala when architects started focusing on higher- income clients.

Data and information in this snapshot gathered and confirmed via interviews with, and documents provided by, executives at the enterprises. 88 Reaching deep in low-income markets

Husk Power Systems

Sector Year founded Geography Electricity 2008 Bihar and Uttar Pradesh, India, and Tanzania

Company Overview: Husk’s energy prices vary based on several Business Performance: Husk is financially Husk designs, manufactures, and installs factors: 1) time of day: most expensive after sustainable and investing in scale. Husk 25 kW-250 kW “mini power plants” in 10 PM, 2) volume: usage discounts, and 3) reaches profitability on a unit economic villages, that households, businesses, and customer type: businesses pay a 15% to basis in four months after a site goes small factories connect to on a pay-per- 20% premium over household prices. live. Husk has roughly 15K customers use basis. Husk operates 84 minigrids in While rural utility is Husk’s core business and provides electricity to more than India and Tanzania (76 in India and eight and focus for growth, Husk has two other 200K people. Husk temporarily reached in Tanzania), of which 10 are hybrid plants critical business lines: consolidated profitability in January 2016. and 74 are a combination of solar DC Husk will be able to maintain consistent •• Biomass power plant sales—Husk sells microgrids and biomass plants. In 2015, consolidated profitability once it has 100 biomass power plants for $25K to $75k Husk launched its proprietary hybrid power total sites in operation; its transition to to agroprocessing units (e.g., rice mills) plant that synchronizes biomass gasification hybrid plants will enable it to break even and entrepreneurs, who run the plants to technology (converts abundant agricultural with fewer total plants than it would with electrify their community. waste into electricity) and solar photo voltaic only biomass plants. technology to deliver 100% renewable •• Incense sales—Husk turns the waste power 24 hours per day, seven days per products from its power plants into Development Impact: By connecting week in rural areas. Going forward, all Husk incense sticks, which are in high demand customers to electricity, Husk effectively plants will be hybrid. in India. Approximately 10% of Husk’s displaces kerosene and diesel, which revenue comes from incense sales. increases small business savings by roughly Husk’s transition to hybrid plants is a 40% and customer household savings significant pivot in response to increasing Customers Served: Husk targets customers by 30% (approximately $50 per year, per consumer demand for 24-hour power. across a wide range of income levels in rural household). This also reduces indoor air Hybrid plants use solar power during the areas. According to an Acumen survey, 28% pollution in rural communities—thereby, day and biomass at night to provide 24- of customers live on less than $1.25 per improving health—and eliminates 150 hour power at a cost of ~$300/customer person, per day and 76% on less than $2.5; tons of CO2 per year, per biomass plant (onetime CapEx), which is significantly lower and 91% on less than $4. That said, Husk’s and 250 tons of CO2 per year, per hybrid than competitors’ costs because the hybrid customer base consists of both households plant. Husk also contributes to economic approach reduces the plant’s battery size by and businesses and small factories. development by enabling businesses to approximately 70%. During rainy seasons, Businesses and small factories, which make stay open at night and children to study competitors often have to run on batteries up 30% of Husk’s customer base and are after dark. Furthermore, Husk employs 300 for three to four days, which is extremely typically the higher-income customers, local community members in India, most of expensive, while Husk can rely primarily on are critical to the model because they use whom are BOP. biomass gasification. three to four times more electricity than households and account for approximately Prior to setting up a power plant in a village, 70% of revenue. Small business customers salespeople sign up customers to connect to will become increasingly important as Husk the Husk minigrid by educating them on the launches more hybrid sites because the product, specifically its greater reliability and high daytime demand generated by these lower price than alternatives. Consumers customers is required to cover the higher up using solar home systems or unreliable grid front costs of the hybrid plant. electricity are often early adopters because they are already accustomed to electricity, familiar with its benefits, and aspire to have 24/7 reliable power.

Data and information in this snapshot gathered and confirmed via interviews with, and documents provided by, executives at the enterprises. 89 Reaching deep in low-income markets

MicroEnsure

Sector Year founded Geography Insurance 2002—Pilot within Opportunity International microfinance institution; 2005—Became separate 15 countries in Africa nonprofit entity; 2012—Became for-profit with Omidyar Network and IFC investments and Asia

Company Overview: Freemium Products to Support Path Performance: MicroEnsure is financially MicroEnsure designs, implements, and to Scale with MNOs: To leverage its sustainable and is currently focused on operates affordable life, health, accident, distribution partnerships, MicroEnsure investing in scale to reach consolidated and other types of microinsurance for creates “freemium” products to bundle with profitability. A majority of operating people living on less than $4 per day. mobile phone minutes at no cost to the countries are profitable month over month, To successfully reach such low-income customer. The insurance amount is based and the company has scaled rapidly. In 2009, populations, MicroEnsure has formed two on the total airtime a customer purchases MicroEnsure reached 4M customers, and critical types of partnerships: each month and is communicated by text today it has roughly 28M active customers, message. After several months, customers having reached 43M in total over time. •• Partners with insurance or reinsurance have the option to upgrade to premium companies who bear the risk of coverage for as little as $1/month; 20% to Development Impact: $28M in claims have insuring customers while MicroEnsure 40% continue with a paid plan. This also been paid out to MicroEnsure customers handles the front-end product design benefits the MNO by creating customer who have had little to no previous access to and back-end implementation— loyalty—in most BOP communities, insurance protection. MicroEnsure takes on services, including customers frequently switch SIM cards to product design, marketing, risk selection, get the best airtime rate. Therefore, MNOs operations, pricing, and payment are willing to pay MicroEnsure and the local management (e.g., claims). MicroEnsure underwriter a fee for basic coverage. The also analyzes customer data, which company piloted its first freemium product has led to developing more than 200 in 2009 with telecom company Tigo Ghana insurance products. These combinations and was able to successfully scale in 2010, are created for different regions based reaching 1M people in 14 months. on local market needs so customers are most likely to receive claims payments. Customers Served: MicroEnsure started MicroEnsure receives a commission from with a BOP focus, but as it began to the insurance/reinsurance companies for distribute through MNOs, its products each policy sold. were made available to a wider range of •• Bundles products with companies customers, mostly in the middle 70th already reaching target customer percentile of income levels, to meet MNO segments, e.g., MNOs and micro requirements. For instance, to incentivize finance institutions—This distribution loyalty, MNOs require users to spend at least model allows MicroEnsure to better $2/day to access the freemium insurance. reach customers by 1) leveraging a strong Many customers fall below this spend level, partner brand to build immediate trust, 2) which naturally sorts out customers in the offering innovative enrollment options and bottom 20% of the income pyramid. The top payment methods to simplify processes, 10% are also not a focus given the volume and 3) decreasing the cost to reach each of competition at this level. With that said, customer by eliminating sales agents and MicroEnsure is still reaching a significant using mobile phones. percent of BOP customers. In Kenya, for example, Grameen’s “Progress out of Poverty” tool showed 6% of customers make <$1.25/day and another 24% make <$2.50/ day. This is representative of the middle 70%, given that people making $10/day fall in the 80% to 90% income decile.

Data and information in this snapshot gathered and confirmed via interviews with, and documents provided by, executives at the enterprises. 90 Reaching deep in low-income markets

Off-Grid Electric

Sector Year founded Geography Energy – Electricity 2011 Tanzania and Rwanda

Company Overview: Off-Grid’s customer-centric model Business Performance: Off-Grid is Off-Grid Electric sells solar systems to rural uses a proprietary software platform financially sustainable and investing in scale. customers in Tanzania and, as of early (Web, mobile apps, and SMS) to provide Today, Off-Grid is able to completely cover 2016, Rwanda. Off-Grid’s introductory solar efficient, personalized customer service operating costs in certain regions and in home system comes with two LED lights, from installations through upgrades. Off- other regions is still growing/progressing a radio, and a USB charger. Off-Grid also Grid focuses on deeply understanding toward financial sustainability. Due to its offers advanced solar home systems that market needs and pricing products scale, Off-Grid has also achieved profitability provide extra energy for charging additional similar to current market expenditure on unit economic basis. Off-Grid’s systems mobile phones and powering appliances (e.g., benchmarking to kerosene or grid currently light 100K households in Tanzania and televisions. In addition, Off-Grid sells electricity). Off-Grid is vertically integrated and Off-Grid is adding 10K new homes commercial systems that power small from design through postsales support per month. In Rwanda, it is approaching businesses, such as sports bars. To reach services, which help establish and maintain 5K homes and adding nearly 1K/month. customers in remote locations, Off-Grid consumer trust. Additionally, Off-Grid Although Tanzania (50M population) is much partners with last-mile distributors. employs community members, some of larger, Rwanda (12M population) is expected whom are BOP, in its factories, sales team, to be an important market for growth due to Off-Grid’s customers pay for their solar and 24/7 customer support call centers. its population density. system via mobile payment platforms (e.g., Vodacom, Airtel, Tigo, and MTN). Off-Grid’s Off-Grid has a track record of successfully Development Impact: For each household, introductory system costs approximately pivoting its business model as it continues Off-Grid’s solar system eliminates 140 kg of $10 to install and then $6 to $8/month for to learn more about its markets and CO2 and 1.45 kg of black carbon emissions 24 months, while one of Off-Grid’s more consumers. The company is currently per year. In addition, customers report an advanced systems, paired with a television making adjustments to 1) cost/pricing average 149% increase in study time once satellite decoder, costs roughly $25 to install structure, 2) technology/product offerings, their home is powered by Off-Grid. Off-Grid and then $12 to $15/month for 36 months. 3) distribution, and 4) product maintenance/ employs 800 people in Tanzania (adding ~30 Many of Off-Grid’s customers upgrade to support. As Off-Grid continues to evolve, to 40 new jobs/month). Lastly, repayment more advanced products, once they get it will maintain its focus on lower-income of Off-Grid’s solar system is often the first comfortable with Off-Grid’s services and customers; however, to grow the business formal financial service some customers know they are reliable. and meet investors’ scale expectations, have received and improves their likelihood Off-Grid will expand its advanced systems of financial inclusion in the future. Off-Grid has the ability to disable customers’ business, as well. solar systems remotely if they miss a payment. Off-Grid also has a four- or five- Customers Served: While the vast majority step escalation process where a customer of Off-Grid’s customers earn $2 to $4/ may intervene to prevent the removal of day (estimate based on census data), it the solar home system following a missed specifically targets customers across a payment; default rates have thus far been wide range of income levels so that the negligible. Off-Grid also offers customers higher-income customers with a more payment-time-length flexibility (e.g., an steady income stream mitigate for the immediate purchase, 24 months, or 36 volatility of cash flows at lower-income months). Furthermore, Off-Grid is working levels. Furthermore, by targeting higher- on ways to provide bridge payments and income customers, Off-Grid is able to address issues of seasonality/fluctuations sell higher margin products that buffer in income cycles. Based on a customer’s against currency fluctuations and changing payment history, Off-Grid’s software is tax structures, which negatively impact also able to accumulate a credit profile profitability. for customers, which helps inform future offerings.

Data and information in this snapshot gathered and confirmed via interviews with, and documents provided by, executives at the enterprises. 91 Reaching deep in low-income markets Appendix 1: Poverty levels of select countries mentioned in this report

National poverty line (USDs, 2011 Country Year Source of national poverty rate public-private partnership (PPPs)) Angola 2009 2.17 World Bank Brazil 2011 3.05 World Bank Colombia 2011 5.42 World Bank Costa Rica 2011 7.04 World Bank Dominican Republic 2011 6.66 World Bank Fiji 2009 4.49 World Bank Haiti 2012 2.15 World Bank Honduras 2011 6.43 World Bank India 2012 1.91 World Bank Kenya 2005 2.39 World Bank Macedonia, FYR 2006 4.69 World Bank Malawi 2010 1.27 World Bank Mexico 2012 8.02 World Bank Mozambique 2009 1.45 World Bank Nicaragua 2009 4.49 World Bank Pakistan 2006 2.05 World Bank Papua New Guinea 2010 1.92 World Bank Paraguay 2011 6.32 World Bank Rwanda 2011 1.46 World Bank Sri Lanka 2010 2.60 World Bank Tanzania 2012 1.44 World Bank Uganda 2012 1.46 World Bank

Note: All values are expressed in per capita terms, per day. Data not available for Bangladesh and Cambodia.

92 Reaching deep in low-income markets

Endnotes: 1. Matt Bannick, Paula Goldman, and Michael Kubzansky, Frontier Capital: Early 20. Interviews and correspondence with executives at the enterprises, as well as Stage Investing for Financial Returns and Social Impact in Emerging Markets, company documents (e.g., annual reports and organization financials). Omidyar Network, 2015. 21. Interviews and correspondence with executives at the enterprises, as well as 2. For purposes of the report, we define financial sustainability as: not reliant on company documents (e.g., annual reports and organization financials). any type of subsidy, increasing levels of profitability over time, moving quickly 22. Interviews and correspondence with executives at the enterprises, as well as toward breakeven or hovering around breakeven, or profitable on a unit basis company documents (e.g., annual reports and organization financials). but not yet consolidated basis. 23. Interviews and correspondence with executives at the enterprises, as well as 3. United Nations Development Programme. Creating Value for all: Strategies for company documents (e.g., annual reports and organization financials). Doing Business with the Poor. July 2008.http://www.undp.org/content/dam/ 24. Interviews and correspondence with executives at the enterprises, as well as rwanda/docs/povred/RW_rp_Creating_Value_for_All_Doing_Business_with_ company documents (e.g., annual reports and organization financials). the_Poor.pdf. 25. Interviews and correspondence with executives at the enterprises, as well as Jenkins, Beth and Eriko Ishikawa. Business Linkages: Enabling Access to company documents (e.g., annual reports and organization financials). Markets at the Base of the Pyramid. Report of a Roundtable Dialogue March 26. Interviews and correspondence with executives at the enterprises, as well as 3-5, 2009, Jaipur, India. company documents (e.g., annual reports and organization financials). Washington DC: International Finance Corporation, International Business 27. Interviews and correspondence with executives at the enterprises, as well as Leaders Forum, and the CSR Initiative at the Harvard Kennedy School. [https:// company documents (e.g., annual reports and organization financials). www.hks.harvard.edu/centers/mrcbg/programs/cri ] 28. Interviews and correspondence with executives at the enterprises, as well as Karamchandani, Ashish, Mike Kubzansky, and Nishant Lalwani, “Is the Bottom company documents (e.g., annual reports and organization financials). of the Pyramid Really for You?” Harvard Business Review, March 2011. 29. All the information provided in this table comes from interviews and Simanis, Erik, “Reality Check at the Bottom of the Pyramid.” Harvard Business correspondence with executives at the enterprises, as well as company Review, June 2012. documents (e.g., annual reports and organization financials). 4. We recognize that there are several ways for low-income populations to 30. This research could examine several categories of subsidy: (a) one-off subsidy be included as part of market-based solutions, specifically, as customers, to seed a new organization with a new business model in a new market; (b) employees, or suppliers. While all are important ways of helping poor an injection of subsidy to an established organization in a more established populations escape poverty, for purposes of this report, we focus on BOP as market to defray the costs of a capital-intensive innovation or expansion (e.g., customers in order to draw lessons learned in a comparable manner (though developing a new product line or expanding to a difficult but high-impact it is worth noting that many enterprises also use BOP so there is some mixing potential geography; or (c) ongoing subsidy to enable a business model to of approaches). In addition, we focus on for-profit enterprises where the BOP reach lower than it can sustainably do on its own. customers not only consume the goods and services, but also pay for those goods and services. This distinction is important because there are a number of for-profit enterprises where the BOP consumes products and services that are paid for by a third party, such as the government, a corporation, or NGO. 5. Bannick, Matt, Paula Goldman, and Michael Kubzansky, Frontier Capital: Early Stage Investing for Financial Returns and Social Impact in Emerging Markets, Omidyar Network, 2015. 6. For purposes of the report, we define financial sustainability as not reliant on any type of subsidy, increasing levels of profitability over time, moving quickly toward break even or hovering around break even, or profitable on a unit basis but not yet consolidated basis. 7. Of course, products that provide a low return, even promptly and at little risk, are not particularly desirable, especially for the poor. 8. The case studies at the back half of this report indicate in which countries the various enterprises are operating. For a sense of the relative poverty levels in those countries, please see Appendix 1. 9. Interviews and correspondence with executives at the enterprises, as well as company documents (e.g., annual reports and organization financials). 10. For example, for a useful framework on factors to consider assessing ability to reach deeply, see Harvey Koh, Nidhi Hegde, and Ashish Karamchandani, “Beyond the Pioneer: Getting Inclusive Industries to Scale” (April 2014). 11. There are a number of organizations that reach large BOP customer groups that focus exclusively or primarily on end customers that do not pay; however, we excluded those from our report as our focus was on goods and services that the BOP pays for directly. 12. Interviews and correspondence with executives at the enterprises, as well as company documents (e.g., annual reports and organization financials). 13. Note that detailed information about funding can be sensitive and we often were only given partial information about an enterprise’s funding. 14. This includes Patrimonio Hoy, which received considerable subsidy-like support from Cemex in its early years, including financing to hire a team, develop a BOP-focused model, and test it in the market; industry expertise and relationships; access to distributors and other suppliers with Cemex volume discounts; and R&D support. 15. Interviews and correspondence with executives at the enterprises, as well as company documents (e.g., annual reports and organization financials). 16. Interviews and correspondence with executives at the enterprises, as well as company documents (e.g., annual reports and organization financials). 17. Interviews and correspondence with executives at the enterprises, as well as company documents (e.g., annual reports and organization financials). 18. Interviews and correspondence with executives at the enterprises, as well as company documents (e.g., annual reports and organization financials). 19. Interviews and correspondence with executives at the enterprises, as well as company documents (e.g., annual reports and organization financials).

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