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  • 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.

    Go to Source

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    Categories: Social Innovation

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

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