It’s every small business’s dream to be profiled not only by mainstream media flagships like the New York Times and The Economist but also trendsetting outlets like “The Colbert Report” and Fast Company. And by this measure of media attention, d.light design, provider of solar light and power products for the developing world, is a resounding success.
But as any enterprise knows, generating buzz about your product is not the same as having customers actually buy it.
d.light represents that most ambitious of social enterprises: One that aims to turn a profit while solving a social problem. Dubbed “hybrid” organizations by Harvard Business School professor Julie Battilana, these businesses differ from other social enterprises, who often rely on grant-based funding, rather than revenue, to sustain operations.
The defining criteria of success, however, is not whether these organizations come up with innovative ideas for reaching the bottom-of-the-pyramid market. It’s whether they can actually turn a profit by selling products to that market.
And despite widespread enthusiasm among policy makers, investors and the entrepreneurs themselves for this hybrid model, the instances of success in the field are few and far between, making the media attention seem out of proportion or at least premature.
‘Like asking Google to invent the Internet’
“The reality on the ground for social enterprises is not quite in line with the rhetoric we hear in the media,” said Harvey Koh, an associate partner in the India practice of Monitor Inclusive Markets, which describes itself as a “social action unit” within Monitor Deloitte, a global consulting firm.
“We struggle to see enterprises that are making a lot of money,” said Koh. “Margins are typically modest, and these enterprises typically take 10-to-15 years to reach a threshold scale, where they have an impact and prove their model.”
MIM’s data on the social enterprise landscape in India and Africa has revealed the uphill battle social enterprises wage to reach profitability. The group’s first research project in 2007 looked at 270 market-based solutions in India and found that those achieving “meaningful scale” were “very much the exception.”
In a 2012 report, From Blueprint to Scale, Koh and fellow authors described a sample of more than 400 enterprises in Africa and reported: “Only 32 percent were commercially viable and had potential for scale, and only 13% operated at scale.”
Beyond the much-lauded cases of ground breakers such as the Grameen Bank in Bangladesh and India’s Amul dairy cooperative, large scale commercial success has remained elusive for most social enterprises.
Even d.light, which some have called a “development darling” due to its popularity in the media and at development conferences, has not yet reached profitability, though the company said it is close. When asked, one professional deeply involved in this space could not name a single large-scale social enterprise that has become profitable.
With so few successful examples to point to, social enterprise supporters often turn to other measures of success, for example, the amount of money raised through philanthropy, venture capital or crowd sourcing as a proxy for future profitability.
So why is it so difficult for social enterprises to become profitable?
Those who work closely with these enterprises say they face challenges far beyond those that most entrepreneurs face.
“It’s as if investors asked Google to not only create a company but invent the Internet itself,” said Simon Dejardins, program manager at Shell Foundation, a U.K.-based charity that invests globally in enterprise-based solutions to poverty, including d.light.
“These social enterprises are trying to establish themselves without the benefit of the infrastructure that many other businesses have coming in,” said Desjardins
In spite of these challenges, leaders of hybrid enterprises have continued to work toward profitability. And while none have solved all the challenges, many have solved a particular problem, according to Oliver Kayser, the founder and managing director of Hystra, a consulting firm that works with social sector “pioneers.”
In order to collect and disseminate these hard-won lessons, Hystra studied 15 social enterprises globally, looking deeply into their financials and field operations, and their report, “Marketing Innovative Devices for the Base of the Pyramid,” synthesized 10 best practices for social entrepreneurs.
While recommendations from Hystra and others may sound like old hat to those who work in mainstream marketing, they often represent breakthrough solutions for social enterpreneurs looking to serve the world’s poor.
Marketing to aspirations, not problems
While entrepreneurs from developed countries may have assumed that the very poor are looking only for functional products, enterprises have discovered that, in fact, these customers often want to buy products that reflect their aspiration for a more affluent lifestyle.
“The most common mistake among unsuccessful market-based solutions is to confuse what low-income customers or suppliers ostensibly need with what they actually want,” wrote Koh and his co-authors in the MIM report on India. “People living at the base of the economic pyramid will spend money only if they calculate the transaction will be worth their while.”
That’s a lesson that d.light learned in the field.
“An ah-ha moment that we had as a company was a switch from a marketing of needs to a marketing of aspirations,” said Anay Shah, who previously served as d.light’s business development manager. “The customer does not want to be reminded of the problems they have. They want to be reminded of the opportunities that are available to them.”
As a result of this insight, the company changed the images it included in its marketing material. Instead of showing relatively poor customers using solar lanterns, d.light images pictured “polished, middle class users,” according to Shah, who now works as a product manager at Remitly, an electronic payments company. “We wanted to create the message that our product can help increase your quality of life, and people really responded.”
While making that emotional connection with customers is important, Hystra’s Kayser said that poor customers also respond to rational arguments for a product – but only when they are pitched a certain way.
Clean cookstoves, for example, can significantly reduce respiratory disease and fire hazards in a household. But successful enterprises in this sector, such as Ghana’s Toyola Energy, have found that emphasizing cost-savings is the most persuasive approach.
“Toyola’s slogan is ‘don’t burn your money,’” said Kayser, who previously spent nearly two decades at consulting firm McKinsey. “They emphasize the economic argument instead of the health and safety benefits.” Why is this strategy effective? In part because the potential benefit in terms of cost-savings is huge, he said. “If you invest a few dollars today in a cookstove, and in four years you’ll realize a 5,000% return on your investment.”
Social selling across the last mile
As entrepreneurs report, nothing is easy about reaching poor customers in emerging markets, and both marketing and distribution require hefty investments.
Sam Goldman, d.light’s founder and “chief customer officer,” said those realities were a wake-up call to his young enterprise.
“When we first started out, we thought lantern sales would be a ‘no-brainer.’ Customers would save money, have energy and an improved quality of life, and things would just skyrocket from there,” he said.
“What we rapidly discovered was that regardless of how good a fit the technology is for the development need, it takes an incredible amount of work to make it both make it available, wherever the customer is, and to drive adoption.”
As a result, said Goldman, d.light shifted from being a “product-centric” organization to one that was focused on distribution and marketing, often targeting influential local leaders – such as teachers or health professionals – as initial customers.
According to Hystra’s research, these type of “below the fold” campaigns, which involve direct contact with consumers rather than producing billboards, leaflets or other collateral, are most successful, because they help overcome skepticism many consumers bring to a potential transaction.
“Does that customer believe me when I say this product is going to change their lives? It’s hard for people at the bottom of the pyramid because they have been cheated too many times,” said Kayser. What poor people are looking for, he said, is a “risk-free solution, not a cheap product.”
One way to lower the perceived risk the customer is to marketthrough existing social networks. That’s an insight used by many large companies in the developed world, and it turns out to be just as applicable in the developing world.
Kayser pointed to the success of the BRAC WASH program in Bangladesh that established a committee of local community members to go house to house using friendly peer pressure to encourage their neighbors to install latrines.
“When there is a good deal to be had, news spreads,” said Kayser. “The most effective marketing happens after the sale, when someone is pleased with the product.”
Anish Thakkar, co-founder and CEO of Greenlight Planet, which markets energy products to the off-grid rural poor, said that social selling models bridge communication gaps found in impoverished areas.
“In America, if you want to buy hiking boots, you can go online and find trusted opinions. There is an efficiency in information sharing that doesn’t exist in the developing world.”
Scaling an organization
But scale is not only about sales. It’s also about creating an organization that can function effectively while retaining its profitable social impact vision.
Passionate and energetic founders and early employees often get social enterprises on their feet, but a crucial turning point comes when an organization decides whether or not to invest in a more highly paid, professional staff, said d.light’s Goldman.
“Your team drives your performance and your capabilities,” he said. “At the early stages, we needed to bootstrap it. But over the past couple of years we have made a big investment in the team, and it paid off for us.”
Shell Foundation’s Desjardins said the quality of a social enterprise’s management is, to him, a key indicator of whether that enterprise will eventually succeed and become profitable. “We’re backing people not business plans.”
Desjardins said that Shell Foundation chose to invest in d.light in part because it has a professional management structure, rather than a more informal start-up culture that may be hard to scale.
“Some social entrepreneurs out there are, crudely speaking, widget makers; they have a product they are trying to sell,” said Desjardins. “D.light is looking long-term, asking, ‘How do we build a company around solar technologies for the poor?’”
Thinking positively while managing expectations
In many ways, the difficulty of making social enterprises profitable has not deterred the true believers. Indeed, the enormity of the challenge, combined with the potential for impact, may be part of what drives these enterpreneurs to tackle such a difficult market.
“The work was so difficult,” said Shah of his time at d.light. “No one had successfully done what we had done, which was take a new brand and a new product and sell it to the poorest people in the world. The obstacles were so great, but there’s something powerful about selling a product that you love, believe in, and that you know is helping people.”
Until the profitability of the bottom-of-the-pyramid is proven in tangible ways, however, Monitor’s Koh recommends keeping expectations in check.
“Moderation, clarity, honesty – Call it whatever you want but we need to say: ‘This is hard and risky, and it doesn’t have great returns.’ If we make promises that we can’t keep, we are going to attract the wrong kind of capital and set ourselves up for failure,” he said.
Koh praised the dogged determination of social entrepreneurs working over the last decade and a half who have made “real progress” in proving successful models. Those impatient with the progress of social entrepreneurship should recall how long microfinance took to catch on as an effective model, he said.
“Everyone takes it for granted that you can invest money and get returns through microfinance. People forget it took the Grameen Bank 17 years and thousands of cycles of trial and error to get the model right and break even.” Once other bottom-of-the-pyramid models mature, he said, it will be easier for newcomers to break in.
For this reason, well-publicized enterprises like d.light designs have many hopes riding on them.
“I look forward to the day when d.light or a company like it has a spot on the Fortune 500, and can serve as a beacon for others,” said Becky Bailey, chief operating officer at Agora Partnerships, a nonprofit that supports social enterprises worldwide. “Then I’ll know the shift we’re hoping to accelerate has really arrived.”
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