My reality of selling clean energy products in the ‘last mile’ to the bottom of the pyramid population in eastern Uganda
An article about what brought me to rural Uganda contributing to a clean tech social business being built, the challenges I face in designing an impactful business model for the low-income population, how I’m trying to solve those challenges and a big picture idea.
The abstract term ‘bottom-of-the-pyramid population’ becomes very vivid and touching through my stay in Uganda. What does the term bottom-of the pyramid describe? It describes the portion of the population that is occupied with the daily struggle to fulfill the lowest bar of the Maslow hierarchy of needs — containing basic physiological needs like food and water. People finding themselves there have barely any psychological motivation left for higher levels like safety, love, belonging or esteem. Not to mention the fifth and highest level of self-actualization. The fifth level is the level I and many people in the developed world have the luxury of dealing with. We have the luxury of reflecting on what self-actualization means for us. Such luxury and — in short — the decision to not rely on a stoic philosophy and to follow a more eudaimonic than hedonic pursuit of happiness is what brought me to the place I am right now. I am in Mayuge, a small and dusty town in the eastern part of Uganda that is traversed by dirt roads lined with plastic waste.
Mayuge is the base of Pearl Entrepreneurs Academy (PEA), a community-based organization founded and led by Elvis Kadhama. Elvis is a 25 years-old, environmentally conscious and Mayuge-born college-graduate with a vision derived from his own personal experience. He wants to help young people save and generate income to escape the poverty trap. PEA launched with agriculture training and organic farming supplies to help the young and underprivileged in becoming self-reliant.
Elvis got to know the ENVenture incubation program through an ENVenture field agent. ENVenture is a social clean tech startup providing community-based organizations across Uganda with revolving loans, entrepreneurial education and the support needed for them to launch and grow last-mile clean energy businesses. Effectuating economies of scale through ENVenture, the community-based organizations can use the loan to selectively source clean energy products needed in their community. Such products include water filters, solar lanterns and systems, improved cookstoves or briquettes from recycled household waste. Community-based organizations are matched with experienced national and international business development volunteers that coach, advise and support them hands-on throughout the process.
The resulting track record and impact figures motivated me to join Pearl Entrepreneurs Academy (PEA) as business development volunteer in January for a duration of three months.
We started off with a primary and secondary market research phase to develop an understanding of the challenges, to identity which products are both needed and affordable and to validate an effective business model.
Please enjoy the following introductory video before we dig deeper on some of the major challenges, business model related solutions and big picture ideas.
THE CHALLENGES
1. A FOSSIL FUEL DRIVEN POVERTY TRAP
As stated in the video, low-income households in Mayuge district spend 10% of its monthly income on kerosene for lighting as well as 40% on firewood and charcoal for cooking. The vast majority of the 80 households interviewed do not have the money to buy additional charcoal to boil water for drinking, ending up with 20% of their monthly income spent on medical treatments caused by contaminated drinking water. Overall, this amounts to 70% of the total monthly income already. A household owning i.e. one solar lantern, one improved cookstove and one water filter could save 73% of the monthly cooking, lighting and medical related expenses in comparison to a household owning none such products. This means spending only 19% of the monthly income on life- and health-improving clean energy solutions instead of priory 70% on fossil fuel-based solutions. (Source: Primary research)
EXCURSUS ON THE POVERTY TRAP’S IMPLICATIONS ON HEALTH AND THE ENVIRONMENT: Whereas the downside of typhoid is clear, kerosene, charcoal and firewood reportedly cause respiratory problems, fire outbreaks, and eye problems. Kerosene furthermore does not provide sufficient light for businesses to flourish or for school children to do their homework (Source: Primary research). The consumption of charcoal and firewood for cooking by 96% of the Ugandan population is one of the major contributing factors to deforestation. Uganda’s population grows by 3.5% annually and 46% of the population live below the poverty line. The resulting pressure to sustain their livelihoods results in the depletion of forests to gain farmland, a problem intensified by diminishing agriculture yields due to ongoing climate change. At the current rate of deforestation around 2% annually, no forest would remain in Uganda by the year 2050. Burning kerosene (paraffin) emits carbon dioxide on a level similar to crude oil, further contributing to climate change.
2. THE LACK OF BASIC EDUCATION
Customer education about the products is rather challenging due to a lack of basic education. Our interview partners are repeatedly not aware of the existence of bacteria in pond-, borehole- or spring water that can cause typhoid, diarrhea and other diseases. Medical treatments reportedly occur without patients being provided with a diagnosis or information on how subsequent infections can be avoided. (Source: Primary research)
3. THE LACK OF FINANCIAL EDUCATION
Furthermore, I experience a lack of financial literacy, making it hard to even communicate the basic concept of investing money in order to generate long-term savings. Let me show you an example with the improved ceramics cookstove we over, consuming only half the firewood or charcoal in comparison to an open fire or local cookstove. The resulting net savings potential of such a product ranges from 290 USD to 440 USD across its three-years lifetime — or 8 USD to 12 USD per month. Low-income households earning 40 USD to 50 USD monthly repeatedly state a willingness to pay between 2 USD and 8 USD even after being educated about the savings potential and despite a one-year product warrantee. (Source: Primary research)
4. THE LACK OF BARGAINING POWER
Naturally, the low willingness to pay correlates with the lack of income to procure any products. Unfortunately, I experience the buying power being further limited as we’re mainly addressing women. Women seem to be most perceptive to improving the state and health of their family. With cooking being a woman’s responsibility, they profit the most from i.e. an improved cookstove speeding up the cooking process and causing less suffocation and burning eyes. However, women repeatedly tell us that they cannot get such products because their husbands “don’t care about them” and would not allow for the purchase. (Source: Primary research)
5. A lack of financing options for customers
With risk capital being limited for community-based organizations like PEA, providing customers with installment plans to finance the products is no viable option. Revenue streams are needed to invest in inventory to maximize inventory turnover and impact measured in sales. Furthermore, installments contain a high credit default risk and additional overhead costs for PEA as the debt serving discipline among the low-income population seems to be low if not strengthened by personal ties.
No private financial institutions exist that the rural low-income population can access. With no securities to offer to banks, the only private companies providing loans are microfinance businesses charging annual interest rates of up to 240%. Needless to say, the low-income population does not possess any type of insurance or pension plans. (Source: Primary research)
THE SOLUTION
Those challenges brought us to the last-mile distribution and financing model that we validated and set up for PEA. Due to the lack of private financial institutions accessible for the low-income population, around 80% of households in Mayuge district seem to be organized in Village Saving and Loan Associations (VSLA’s). Such groups from the same parish, consisting of around 30 persons, mostly women, meet on a weekly basis to collect savings that are paid out at the end of a savings period. Throughout the savings period, the capital is used to offer small, interest-bearing loans to its members. Such VSLA groups are launched and administered by community-based trainers, joining the weekly sessions to audit the accounts and to settle disputes.
We decided to focus on VSLA’s as a last-mile financing and distribution vehicle. PEA works together with community-based trainers who earned the trust and respect of their respective VSLA groups and its members on a commission basis. VSLA meetings can be utilized to educate a group of potential customers at once.
In a first meeting, interview questions are asked to gather spending data and to raise awareness of the challenges the members face. Products offered by PEA and addressing those challenges are presented and each product’s net lifetime savings potential is communicated with illustrated in-field calculations based on the VSLA members reported spending for charcoal, firewood, kerosene and medical treatments. It is suggested that VSLA loans are provided to group members interested in any product in order to finance the purchase. This allows PEA to capture the full sales price right away. The VSLA group is incentivized with the interest that can be earned on the loan. But most importantly, the customer starts benefiting from the product right away and can use the generated weekly savings to pay back the loan in weekly installments. For example, the most affordable solar lantern can be purchased for 9 USD. Priory to buying the solar lantern, the household spent 1 USD per week on kerosene for lighting. As a result, the loan can be paid back over 9 weeks plus interest, not causing any financial burden for the customer. In subsequent VSLA meetings close to the savings payout and loan distribution dates, the community-based trainer reminds its members of the products, collects commitment fees, communicates orders and conducts or at least facilitates distribution.
Right now, we’re focusing on the VSLA model described above. Word-of-mouth seems to be the most important marketing channel with barely any alternative formal marketing channels existing. Customer satisfaction is ensured through high-quality products with warrantee coverage, user education and proactive calls enquiring customer satisfaction and offering support. Vouchers and commissions are offered to customers who successfully recommend the products beyond their VSLA group. Investing the small amount of capital PEA has at its disposal into the VSLA scheme seems to be more effective than investing it into driving customers to the shop.
I’d describe PEA’s challenge of bringing clean energy products to the rural low-income population as a case of creating a new market. We’ll therefore be working on winning community and opinion leaders like politicians, religious, school teachers and village heads as powerful early adopters, facilitating crossing the chasm into the subsequent adopter categories among the low-income population. Partnerships with NGO’s working in remote areas and with VSLA groups are being built.
THE BIG PICTURE IDEA
I’m sure that there are more innovative and profitable business models out there that can contribute to reaching the UN Sustainable Development goals with an even better, and more capital-efficient impact model. Why do we limit ourselves to a business model that offers life improving, income-saving, carbon offsetting and deforestation-preventing clean energy products to the bottom-of the pyramid population with no additional financial burden?
Why don’t we create a business that re-captures more of the savings generated, using existing pay-as-you-go mobile money technology working on basic cellphones? Those could be used to finance a full package of not only solar lanterns, improved cookstoves and water filters, but free kindergarten, primary school and high school education for 2,5 to 3,8 of the low-income household’s children? I’m now being provocative: The fertility rate in Uganda was 5.6 births per women in 2016. Why don’t we create a business that offers free education for 2 to 3 children, include family planning services and make a case for fewer, well educated children being a better retirement insurance and sign of wealth than many poorly educated children. Wouldn’t such a business model, ensuring savings are being used for the future generation’s education and the environment they’ll live in, be even more impactful and sustainable? What do you think?
Thank you for reading.
