Kenya Sustainable Cities - Growth Before Profits or Pay-as-You-Go (PayG)?
Inclusive business is one of the governing tenants of sustainability. The challenge to be overcome - How do we successfully create inclusive business models?
In order for products to be affordable to customers with hardly any disposable income, we have to think in fractions. For example, a wealthy individual with 20% disposable income might be able to afford $2,000/mth. For a lower middle class person 20% might be $20/mth. For a base of the pyramid person earning less than a dollar a day, 20% can be 20cents a month. As you can see, the ratio (20%) remains constant but the business revenue model has to change dramatically for each income segment.
Environmentally friendly products began by targeting wealthy consumers who are focused on legacy. Now the challenge is to include approximately 4 billion customers at the base of the pyramid and with the same legacy concerns.
Christensen's disruptive innovation theory could just as easily be called inclusive innovation theory if we focus on the two characteristics of:
1. Developing products for a new market segment
2. Making a high priced product affordable to a large new market segment.
Both approaches force us to approach businesses in a new way.
When we think of innovation using an inclusive lens, we are less focused on creating new systems that wreak havoc on competitors (lest we forget any business including ours is a competitor to someone else) and more focused on finding new ways to seamlessly integrate new market segments.
Digitized models and micropayment business models can help us understand the difference.
Growth Before Profit (all that glitters is not gold): Digital platforms such as Facebook and Google introduced the freemium business model to industry. Instead of struggling to figure out how to enable billions of customers to be able to afford a digital platform, give customers free access and then see who is willing to pay to access this massive customer base.
Challenges such as data privacy issues are being contested through consumer advocacy groups and court battles. Notwithstanding, with a digital product, if it fails, the only visible side effects are typically faded memories. Digital models are very easy to redesign and reassemble in virtual reality.
However, once we cross over into the physical world, the effects of growth before profits business models are shockingly visible. China’s bike sharing graveyards are a perfect example. Bike sharing programs have been very successful in many countries. However, try and get billions of customers subscribed without paying attention to fundamentals such as actual demand or customer needs and you end up with garbage heaps that are both a physical and environmental hazard.
Bike Sharing business fundamentals are critical for successful outcomes.
Bike sharing is great for sustainability because human peddling is a zero emissions energy source.
Sooo, we tried fremium with bike sharing and solar but the model does not work. A look at solar helps us understand market dynamics using a cross-sectorial approach. The costs of the panels and the distribution of the panels are too high for investors to wait around until billions of customers have a solar panel. The complexity of using solar panels guarantees you will not have masses beating down your door to sign up by the millions daily. Instead you will have a slow but steady incremental (hundreds per year) stream of converts. Freemium software gives us insights on why growth before profits is not a one-size-fits-all solution.
How do we design better business models?
Pay-as-You-Go (PayG): working for solar but what about biomass fuels?
Most of us know the PayG model as pre-paid mobile phones. The dynamics are slightly different. Pre-Paid you buy a fixed amount of usage in advance and if you consume less you lose the extra you paid for. PayG you agree to purchase a fixed usage amount at a fixed price. You still loose money as a customer if you consume less than what you paid for. The advantage for the customer is you acquire the device and your consumption of the service is not governed by a contractual subscription. Instead, you are able to insert the SIM card of your preference, you pay whatever you have available in disposable income, when you have disposable income. Hence, if you cannot guarantee that you will have $20/mth available to spend, Pre-Paid and PayG are often cheaper than defaulting on contractual agreements or being forced to pay what you cannot afford.
The PayG model is typically heralded as very pro-consumer (hence very inclusive) and it challenges business service providers to improve their revenue forecasting models. However, some argue Pre-Paid / PayG models are not pro-consumer because the per unit pricing is often significantly higher. Others argue higher pricing is a convenience fee to ensure operating costs are covered despite irregular demand and lower individual consumption rates.
For example: in a Post Paid model or in a Fixed Plan model if it costs a business $50,000/mth to deliver mobile service, a business can instruct managers to ensure there is some combination of 1,000 customers consuming $50/mth. However, using the Pre-Paid and PayG models a business can have 1,000 customers of which only 500 are active in a month and, of those who are active, 80% are consuming less than $10 a month so the business is operating at a loss.
More details on the different models:
Tailoring mobile internet tariffs for prepaid users — a balancing act - GSMA
Customer base management in a prepaid mobile market: Usage risk and usage opportunity model (open access)
The first significant difference in demand dynamics between solar and biomaterials fuels is market fragmentation. With solar, yes there are variations between solar panels but, in the end, you are buying a solar panel. With biomass fuels, the technology varies based on the raw material source. Cookstoves that work well for agriwaste pellets are not likely to be efficient when burning unprocessed twigs. Similarly, a bioethanol cookstove needs a different design from a biodiesel cookstove. Issues such as variations in moisture content, flash points and calorific value all affect cookstove design and best of breed technologies have not yet emerged.
Handbook for Biomass Cookstove Research, Design, and Development
A case study from Uganda offers greater insights
Ugandan off-grid energy market
accelerator: Mapping the market
A second challenge is there are more substitution opportunities for the same technology. Although improving energy efficiency and lowering emissions on cookstoves typically requires PhD level skills (formally trained or not), the basic cookstove design principles can be easily replicated by the Do-It-Yourself community. Unlike solar panels, materials for production and assembly of cookstoves are easy to find.
A third challenge for the consumer is irregular supply of fuel source and a lack of industry standards.
For example, a consumer may live in a rice production region and purchase a cookstove that offers the highest cooking efficiency using rice husks as fuel. The consumer is excited because she is a rice farmer and can now meet her energy needs using the waste from her rice harvest. However, this year the rains did not come and her entire crop failed. Now she has no rice to sell or eat and no fuel. She has some savings so she decides to look for pellets because they are small like rice husks but she cannot figure out why some pellets cook for 10 minutes while others cook for 30 minutes and they all cost the same amount per kg. Unlike with solar, she has no way to control her fuel expenses and she needs every cent of her disposable income so she can feed her family until the next rice harvest.
Countries are working on local standards as well as international harmonization. However, the development of standards will take time and, until standards are uniform and ubiquitous, the consumer will be hesitant regardless of the business model. Base of the Pyramid consumers are savvy shoppers because they need to be extremely price sensitive.
What we learn from these examinations is that business in the digital age/green economy /blue economy /circular economy / knowledge economy / trust economy still shares the basic principle of industrial era businesses: fundamentals and market dynamics govern the business model.
There is no single inclusive business model "to rule them all." We cannot wish away market challenges or industry and industry sector variations. If we proceed without understanding market dynamics we magnify failure instead of magnifying success.
Business-for-Good becomes feasible when we pay as much attention to economics as we do to innovation.
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