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How social enterprises are making products affordable to rural customers

Jun 20 2013, 17:35   |   By SME Mentor

Khyati Dharamsi

Social enterprises are gradually making an impact in rural India but their biggest concern is balancing affordability against profitability. Meeting this challenge is a bunch of social enterprises that are working in the area of clean energy solutions, which are well-suited to rural households. But how can a daily-wage earner who gets Rs 50-100 a day afford, say, a solar lantern that costs Rs 3,000-5,000?

And that's the least of it. What happens when the solution is a capital-intensive installation such as a micro-grid supplying electricity or solar pumps to irrigate fields? As they say, where there's a will, there's a way, and the answer lies in innovative pricing models.

Pay By Use Model

One way to avoid high upfront fees is to take a modest deposit and structure small weekly or monthly payments. "Enterprises like Simpa Networks have introduced time-based pricing models for solar lighting products, where a customer buys days of usage of the solar home systems (say Rs 500 for 25 days @ Rs 20 a day) instead of per watt usage of the system," says Balaji Thangaraj, Director - Research Business at Intellecap.

According to Simpa Networks' Progressive Purchase pricing model, a down payment is made during purchase of the solar system (usually 20 per cent of the actual price), while the energy usage is pre-paid. That way, every energy payment includes a quantum of the product price as well as the energy usage fee.

Although this appears simple enough, monitoring the weekly or monthly usage of each customer means deploying technology proficiently.

Claro Energy, which installs solar water pumping and purification systems in villages, also uses the pay-by-use model. "Farmers and other users are charged according to usage and a fraction of the solar system's price is built into the monthly fee. Mobile phones are used to meter usage and maintenance of the pumps," shares Kartik Wahi, Co-Founder and Director of Claro Energy.

Rural micro-electricity grid provider Mera Gao follows the same model and collects a weekly fee of Rs 25 from every household that avails its services. Each micro-grid costs Rs 50,000 to 60,000 and produces 1.5kwh/day, enough to light 50 rural households.

Cross-Subsidies

If your target audience belongs to varied income groups, you can use the method employed by companies such as the Institute for Quality Skill Training IQST. The company offers vocational guidance for a very small fee to Below Poverty Line (BPL) candidates and recovers the difference from those who can afford to pay. "We offer subsidies against our course fees to those who possess BPL cards, beneficiaries of reputed NGOs other backward candidates who can produce income certificates," reveals Aditya B Mallik, CEO and Director of IQST.

Typically, subsidised candidates pay 10-20 per cent of the fee, he says. Even though this method works fine, Mallik is exploring other innovative solutions like skill vouchers and micro-finance for educational loans.

Healthcare companies also use the cross-subsidising model to make services affordable. LifeSpring Hospital, which provides lower-cost maternal services to women, has three different categories of wards, each one charged differentially.

Study Now, Pay Later

This is a simpler though effective model that works for companies like Pipal Tree Ventures, a vocational training institute that equips students to work in construction companies. The company doesn't ask for any fee while the student is studying but recovers a small, monthly sum toward the training fee once the candidate is placed.

Renting vs Selling

Some products, even relatively inexpensive ones such as stoves, are amenable to renting rather than outright sale. So, instead of selling stoves that reduce carbon emission, Sustaintech provides tea vendors and local restaurants a rental facility and a nominal deposit that is collected upfront.

"Social enterprises that offer solar-based lighting products typically use the recharge-for-a-fee model while those that offer biomass-based cooking stoves typically use a rental model," reveals a report 'Pathways to Progress' released by Intellecap recently.

Sharing infrastructure

Another innovative way to make products affordable to rural folk is the concept of sharing. Thus, if a single component in a device raises the product cost and can be commonly used by a group, the cost of that component can be shared.

Thangaraj explains, "Enterprises like SELCO and Nuru Energy sell clean energy lighting products, which typically cost less than Rs 1,000 per lamp, without the charging equipment. This reduces the cost of products. Here, charging is offered by micro-entrepreneurs for a fee, which promotes local entrepreneurship."

Educational social enterprises too cover costs by using common infrastructure, observes Thangaraj. Vocational and skill development institutes like Gram Tarang tie up with universities and colleges to utilise their existing infrastructure. Affordable private schools are run after regular classes and so do preschools such as Hippocampus.

What About Accounting?

Making products and services affordable is one thing but summing them up in your books of accounts is quite another. Here's one way of working it out. "The subsidised fee reflects as lower recoveries in our books of accounts and we reduce the surplus that we create through candidates who pay the full fees," explains Mallik of IQST. 

The good news is that social enterprises are making sure that the benefits of modernisation trickle down to rural households. But no one said it was easy and companies must have checks and balances in place. Thus, while allowing users to make deferred payments for products and services, they must ensure that money is trickling in when it should. They must also understand the difference between deferred and delayed. "Thus, when payments are delayed, companies must make sure this does not impact their operations," suggests Thangaraj.

Here's another thing to watch out for: In addition to the actual cost of the product, enterprises must take into account the recurring cost of the product incurred in terms of service and maintenance, he adds.

You can send your feedback on smementor@moneycontrol.com or simply post comments below


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