The Embedded Enterprise

February 18, 2015 Editor 0

By Ted Ladd

Entrepreneurs who operate in
impoverished regions of the
world face a quandary: Even
though the need for their products
and services is enormous, the challenge
of bringing those products and services
to market can be nearly insurmountable.
Without access to mass media or even mass
communications, entrepreneurs have no
established channels through which to reach
potential customers. Few of those customers,
meanwhile, are accustomed to evaluating
new products. But a handful of ventures
that serve communities at the base of the
pyramid (BOP) have overcome this challenge
by embedding their solutions into the
circumstances that define and give structure
to their customers’ lives.

Take, for example, the field of electricity.
There are 1.6 billion people in the
world without consistent access to electrical
power. Centralized power grids, moreover,
are groaning under the pressure of
inadequate capacity and chronic under-investment.
In response to those conditions,
hundreds of entrepreneurs have started
companies that offer “distributed” electricity.
These companies use sources like solar
and hydropower to generate electricity and
then deliver it directly to homes or even entire
villages without touching a central grid.

In 2013, I began a research project with
the goal of exploring business models that
would explain successful ventures in the
distributed electricity field. For the project, I
interviewed 30 entrepreneurs who sell electricity
in some form to customers in remote
rural regions of Africa, the Caribbean, East
Asia, and South Asia. They might offer a
solar-powered lantern for a single room, for
example, or a generator that uses discarded
agricultural waste to generate power for an
entire village.

I started with the Business Model Canvas,
a popular tool for teaching high-growth
entrepreneurship
to business school students.
Using the tool involves a multi-step
process: Define discrete customer segments.
Analyze the product benefits that will appeal
to each segment. And specify the channels,
revenues, and costs that will enable a venture
to target those segments. As I conducted interviews,
it became clear that this process did
not match the experiences of BOP-oriented
electricity entrepreneurs. Indeed, one entrepreneur
told us that he doesn’t engage in segmentation
at all; instead, he simply focuses on
serving any customers he can find.

That response proved to be typical, and
the logic behind it soon became evident:
Because the market for distributed electricity
is so vast, new entrants can easily find
unoccupied market space and therefore face
almost no competition. Similarly, most people
in BOP communities are already familiar
with electricity and its potential to provide
increased output, comfort, and safety. So
entrepreneurs do not need to place a heavy
emphasis on honing and communicating a
core value proposition. Electricity, unlike
many other products and services, already
enjoys significant pent-up demand within
BOP markets.

Perhaps the most unexpected insight to
emerge from these interviews involved the
entrepreneurs’ view on pricing. In developed
markets, pricing strategies typically focus on
value, cost-plus-margin, or a reference price
set by competitors or substitutes. Ventures
that sell electricity in BOP markets, by contrast,
tend to emphasize affordability: They
strive to keep prices low by making changes
to their business model or their product
design (or, in some cases, by tapping outside
funding sources).

From this project, in short, I learned that
theories and strategies that apply to mature
markets are often ill-suited to the realities
of entrepreneurship in BOP markets. After
reviewing the first set of interviews that I
conducted, I recalibrated my
expectations. Instead of trying
to verify what I already
believed, I resolved to look
at the interview data from a
“blank slate” perspective. In
that way, I was able to derive
new principles for developing
business models that would
be relevant in a BOP setting.

Novel Models

As I analyzed the content of
my interviews with social
entrepreneurs in the electricity
field, a theme began to
emerge: Successful BOP ventures,
I concluded, embed
their solutions into customers’
lives in one of four ways.

Social networks | Some entrepreneurs
design business models that rely extensively
on social networks to generate demand, to
deliver products, to collect payments, and
even to conduct post-sales service. Solar
Sister, for instance, employs more than
850 women in remote villages in Nigeria,
Tanzania, and Uganda to sell solar lanterns
to their neighbors. These micro-entrepreneurs
go to a central location where they
purchase the lanterns from the company at a
wholesale price. They then distribute those
products to customers using their personal
connections. Katherine Lucey, founder and
CEO of Solar Sister, explains how the process
works: “We help them do a map: ‘Here’s
you. Now, who is in your family? How about
your husband’s cousins? Draw a picture of
your social network.’”

This model has some interesting benefits.
The micro-entrepreneurs don’t follow
a set script. Instead, they draw on their
knowledge of a potential customer’s circumstances
and tailor their marketing message
accordingly. They might emphasize the
value that a solar lantern provides in allowing
people to work after dark, or they might
stress how safe the product is in comparison
with kerosene lamps. Because they live near
their customers, moreover, they are able to
handle repairs, returns, and other forms of
post-sales service more efficiently.

Activity cycles | Successful BOP ventures
don’t try to alter the daily habits of potential
customers. Instead, they work to integrate
their products into customers’ existing routines
and activities. That’s what Jamie Yang,
CEO of EGG-energy, did in rolling out an
early version of his business. In the villages
of Tanzania, people have traditionally purchased
kerosene a few times per week: They
travel to a village marketplace and refill
their kerosene jug when they have enough
disposable income to do so. Following that
model, EGG-energy sold solar-charged batteries
that consumers could connect to an
electrical device at home. Each battery had
enough power to last a few days, and customers
would then have to return it—just
as they would return an empty kerosene jug.
(Later, as customers began to understand
the potential of solar energy, EGG-energy
shifted its model to one that involves selling
residential solar kits.)

Mental models | Effective entrepreneurs
who serve BOP markets understand the
need to accommodate their customers’ mental
models—the preconceptions that shape
how customers view and describe their needs
and desires. Instead of attempting to alter
such mental models, these entrepreneurs
adapt their business models to fit what customers
are used to. Simpa Networks, for
instance, sells home solar systems in India
at a very low upfront cost and then charges
customers a fee for each hour of light that
a system delivers. To design and sell this
“light time” model, the company has drawn
on the established model of selling cellular airtime.
Simpa even borrows language from
cellular carriers’ marketing and service messages
to communicate with its customers.
“The closer that you mimic what either the
telecom operators do with prepaid mobile
airtime or the satellite TV companies do
with their pricing model, the easier it is for
people to understand,” says Jacob Winiecki,
cofounder of Simpa.

Indeed, as the cost of residential solar
panels declines and as the usage of cell
phones increases, several firms that sell electricity
services are shifting to this model.
EGG-energy (cited earlier) is one example.
Another is Angaza Design, a company
that has created a platform to support “pay
as you go” energy products. The platform
allows customers to use their cellphones
to buy electricity in small, prepaid increments.
Victoria Arch, director of strategy
at Angaza, had initially expected customers
to balk at adopting that payment model. But
because of customers’ comfort level with
using their cellphones, she reports, that has
not been a problem.

Product constellation | No commercial
offering exists in isolation. For that reason,
companies that succeed in reaching BOP customers
often take care to fit their solution
into the constellation of products that customers
already own. One firm in my study,
Bboxx, offers electricity-generating equipment
that works seamlessly with electricity-consuming
items that are already common
in the BOP households that form its target
market. Electric power on its own, after all,
is worthless; only when customers also have
appliances that use electricity does that service
become life-altering. Bboxx provides a
catalog of appliances—from cellphone chargers
to refrigerators—for purchase alongside
its generator products. Christopher
Baker-Brian, a cofounder of the company and
its CTO, notes that high-efficiency lights,
mobile device chargers, and television sets
are among the more popular purchases
that Bboxx customers make. “We initially
focused on lighting and phone charging,”
he says. “But people wanted TVs and power
shavers.” The company’s largest market, he
adds, includes “people who want to generate
an income from these products.” Bboxx also
focuses on selling generators and appliances
that will be interoperable with other devices
that its customers might already use.

Beyond “BOP”

Creative entrepreneurship in BOP markets
is vitally important not just because it can
help lift billions of people out of poverty, but
also because it generates lessons that apply
to social ventures in the developed world.
Entrepreneurs everywhere, for example,
should consider structuring their ventures
around in-person social networks that give
them access to high-value, high-touch referral
systems. Instead of trying to alter customers’
habits, entrepreneurs could adapt
their delivery and usage models to mesh with
customers’ routine activity cycles. Marketers,
meanwhile, should steer clear of newfangled
terms and should instead frame their value
proposition with reference to customers’
existing mental models. Designers, for their
part, should develop and test new products
in a context that reflects the current product
constellation of their customers. In sum, even
companies that operate in mature markets
can improve their performance by adapting
their business models to suit the habits and
behaviors of their customers.

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Categories: Social Innovation

Tags: Business model, business model canvas, Business process modeling, entrepreneurs, massachusetts institute of technology