A Framework for Shared-Channel Distribution Models for BoP Access
An excerpt from the book Base of the Pyramid 3.0 edited by Stuart L. Hart and Fernando Casado Caneque. The author of this chapter explores challenges companies face in distributing products to the base of the pyramid which are often located in difficult to serve locations. He further suggests a framework to evaluate opportunities of partnerships with organizations already active in those locations.
Asian Social Enterprise Incubator, The Philippines
Distribution challenges in the Philippines
“Organizations have different skills and values embodied in their DNA.”
“25% of Filipinos lack access to electricity. Most of these people without electricity are located in isolated villages in coastal or mountainous areas.”
Owing to the Philippines’ geographical features, distribution channels for the BoP market experience challenges of delivery of goods to far-flung areas such as mountain or island barangays (villages). Notably are the lack of physical infrastructure as only 14% of roads are paved and regular water transport services are either not available, or expensive and weather-dependent as well as power supply, water supply and internet services as well as warehouses, offices, banks or cash dispensers. All the distribution challenges contribute to the “BoP penalty”. According to the World Resources Institute, the BoP often pays higher prices for basic goods and services than wealthier consumers, either in financial or transaction costs, and often receives lower quality.
The BoP penalty is expressed in multiple forms:
- Lack of access to essential goods and services
- Higher prices for goods and services
- Poor quality of goods and services
An illustration of the BoP penalty is the municipality of Culion in Palawan province. The municipality is composed of 37 islands and most of the basic commodities in Culion are shipped by a sole company from Manila by boat thrice per week. Travel time for this route is two days. The BoP penalty in the pricing of basic commodities for Culion can be as high as 67%. Additionally, Culion has very limited access to basic commodities that require cold-chain logistics and refrigeration.
The Shared Channel Assessment Framework (SCAF)
To overcome these challenges four distribution models are employed in the Philippines. First, formal distribution channels such as supermarkets and convenience stores, secondly direct sales forces, thirdly, multilevel marketing and fourthly, the shared-channel distribution model. In such a model, companies partner with commercial partners, MFIs, NGOs and cooperatives—organizations that have a strong presence in the rural areas—in engaging the BoP market. In the Philippines, especially, there are about 22,000 cooperatives,[1] 330,000 NGOs, and about 15,000 MFIs[2].
The widespread presence of these organizations and their established network with the BoP offers big potential for companies to gain access to the BoP market. Companies can piggyback on the networks of these organizations to deliver their products and services to the BoP market while reducing distribution costs, increasing consumer awareness, improving after-sales services and so on.
Based on ASEI’s consulting work and interviews with key stakeholders, the Shared Channel Assessment Framework (SCAF) was developed as a tool for companies in evaluating shared-channel partnerships. The framework is based on three main categories: alignment between the partners, value add by the channel partner and market development status, each evaluated on three dimensions.
It is proposed that the level of alignment along three dimensions—product/service, organizational skills and values and supply-chain management—between the shared-channel partners is an important indicator for the partnership’s success and highlights areas to which time and resources have to be allocated to achieve better alignment.
Alignment dimensions
Product and service dimension
Evaluating the alignment of products and services is the most important alignment dimension. It has been shown that the closer the new product or service is aligned with the existing offering of the proposed shared-channel partner, the easier the integration will be, increasing the likelihood of a successful partnership.
Organizational skills and values dimension
Organizations have different skills and values embodied in their DNA. As an example, a city-based, multinational company can be very fast-paced and aggressive, while a rural-based NGO may opt for a relaxed stance in doing business. In addition, a company cannot penetrate a BoP market without considering how the BoP and the partner transact. Otherwise, there will be a wide misalignment between the two that will affect the entire engagement.
Supply-chain management dimension
Managing the supply chain is a complex task wherein both the company and shared channel partner have to work hand in hand. This is the part where the partnership itself operates, from acquiring the products to delivering them to the BoP market and providing after-sales services.
Value-add dimensions
Financing support
The ability of a shared-channel partner to provide access to financial products for the BoP as its added value is important to make products accessible and affordable and thereby the partnership successful. This is especially the case when the cost of the product is above the BoP’s financial capacity for outright cash purchases. In this situation it is beneficial when a company partners with an MFI since these organizations can develop specialized financial products for the new products and services or can integrate them into their standard portfolio.
Business location
Companies have to evaluate a shared-channel partner in terms of the location and geographic areas of activities of the partner. The physical presence of a shared-channel partner in the specific BoP market is often assumed; however, its constituency might not have the need that the company can fill, for example, an MFI operating in a poor but electrified area is not a good choice to distribute solar lanterns.
Market access
The ability to access the market as a trusted partner of the BoP is an important dimension for the choice of a distribution partner. MFIs, NGOs, cooperatives and social enterprises, the premier organizations to serve as shared-channel partners, have staff or employees working directly, often on a long-term basis, with the BoP market. This helps the partnership to introduce new products to the BoP because of the leverage brought by the shared-channel partner’s identity, which has been established already in the BoP.
Market development dimensions
Market readiness
The framework also considers the conditions of the BoP market itself. The BoP’s readiness for new products is an important success factor for the products and services to be distributed by the partnership. The need of the market does not establish automatically the fact that there is a demand.
Customer awareness
The awareness of BoP consumers of the product or service has to be considered in evaluating a shared-channel partnership. The remoteness of location of rural BoP markets and the lack of information often contributes to a lack of awareness of the benefits of products and services a company wants to deliver to the BoP.
Geography
Evaluating the geography of the BoP market and aligning it with the coverage of the distribution partner is essential for a successful partnership. This evaluation helps the partnership to determine how to plan and execute the distribution plans as, for example, an extremely far-flung BoP market will require a great deal of resources from the partnership for the products to reach it.
The degree of the alignment, value add and market development dimensions contributes to the success of the shared-channel partnership. The SCAF can be used to identify the best partner and to evaluate an existing partnership in case of misalignments or shortcomings in the dimensions that are inevitable in a shared-channel model. Misalignments, low levels of value add or low state of market development do not necessarily indicate that a partnership is not feasible. Rather, they highlight the areas where actions need to be designed and implemented in order to enhance the partnership.
Rating the dimensions to fill in the SCAF has to be done objectively and in partnership, with consideration to the parameters that apply to each shared-channel partnership. These parameters may vary according to the partners, products and services.
Example of shared-channel distribution
According to the Philippine government’s latest statistics, 25% of Filipinos lack access to electricity.[3] Most of these people without electricity are located in isolated villages in coastal or mountainous areas.
Seeing the need for a safer and more economical source of light, HSSi took this opportunity to market its solar lantern products. The SunTransfer is a durable, high-capacity solar lamp designed for off-grid use. It enables users to safely light their houses without any risk of fire, save money spent on kerosene and batteries, and generate income through enhanced productivity.[4] But since the target markets are in the off-grid rural areas, HSSi recognized the challenge of making the products available and affordable for the BoP in a profitable way.
HSSi partnered with Negros Women for Tomorrow Foundation (NWTF), a large microfinance institutions, to distribute its solar lanterns. Although there was a need for NWTF to equip its staff with knowledge about solar products, selling non-financial products for NWTF was already established business practice. The cooperation between the organizations went smoothly as well since both are experienced in dealing with the BoP.
In order to make the products accessible and affordable for the BoP, NWTF sells the solar lanterns by instalment, particularly to its members. NWTF sends its loan officers to the BoP communities to support the selling of solar lanterns. This strengthens the presence of the partnership in the BoP market through remote front-line employees who implement programmes conducted by both NWTF and HSSi. This is a very strategic move for the partnership because the product is new to the market.
As HSSi’s way of establishing and nurturing partnerships that involves its shared-channel partner and the BoP market, the ACCESS programme was conceived. ACCESS stands for Advancing Citizen and Community Empowerment through Sustained Solutions.
Through the ACCESS programme, HSSi was able to solve the distribution challenges in bringing solar lanterns to the rural un-electrified BoP market. HSSi ensures that the buyers understand what they are about to buy, how they will be assisted at the point of purchase and about after-sales support. The programme is the partnership’s solution to raising market readiness and awareness for the solar lanterns and the entire concept of solar energy.
Assessment of shared-channel partnerships
It is important for companies planning to engage the BoP market through shared channels to carefully review and determine the best partner to engage with. Every shared-channel partner (corporates, NGOs, MFIs and social enterprises) has its own pros and cons. And every company seeking to share channel with an organization has its own set of strengths and weaknesses. Since there is no perfect shared-channel partnership, the Shared Channel Assessment Framework is proposed to give guidance on what to expect and consider when discussing different possible shared-channel partners. The framework enables companies and shared-channel partners to establish a well-rounded partnership with a multi-dimensional approach evaluating all aspects of delivering products to the BoP. Considerations should not be limited to whether a shared channel partner can be a good distribution partner and can go along with the “corporate” attitude of urban area-based companies and whether the company can provide leverage for shared-channel partners to fully widen their portfolios and strengthen their presence in the BoP market.
Conclusions
The BoP market in the Philippines is still greatly untapped, but there are a number of organizations that have taken up the challenge and obtained positive results. As stated by the Asian Development Bank (Dietrich 2013), the inclusive business sector in the Philippines is still in the nascent stage.
Given the poor infrastructure conditions in the rural areas, engaging the BoP is posing a considerable distribution challenge. Based on the experience and the case studies presented, it can be concluded that the shared-channel distribution model is a viable and scalable option for organizations engaging the BoP market.
The Shared Channels Assessment Framework is suggested to serve as a decision-making tool for companies and shared-channel partners. The framework provides an instrument for these organizations to evaluate an existing or a future partnership. Possible pitfalls can be identified so that remedies can be prepared beforehand or the pitfall itself be avoided. The aim of the framework is to lead decision-makers towards cost-efficient solutions in their engagement with the BoP market and ultimately in a reduction in the BoP penalty, making products and services more accessible and affordable for the BoP. As SCAF is still in its infancy more research is required to test and improve the framework.
Bibliography
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[1] Cooperative Development Authority Masterlist of Cooperatives as of November 2012.
[2] Microfinance Sector Data by Microfinance Council of the Philippines as of June 2010; data includes NGOs, banks, and cooperatives with microfinance services.
[3] Partner’s Briefer for the ACCESS Program by Hybrid Social Solutions, Inc.
[4] http://www.hybridsolutions.moonfruit.com/#/suntransfer/4553662505
