Business Model

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Reaching the poor through a targeted subsidy pilot

iDE Cambodia has developed a market-based approach to household sanitation that has proven very effective in boosting rural latrine sales. By late 2015, latrine businesses supported by iDE successfully sold more than 180,000 latrines to rural Cambodians at market price.

Facilitating the sale of unsubsidized latrines helped iDE avoid many of the market-distorting effects associated with subsidy programs while selling 22% of their latrines to the poorest Cambodians. Yet iDE remains dedicated to penetrating the poorer segments even further through an innovative approach combining microfinance and smart subsidies, minimizing market distortion.

In November 2015, iDE launched its Targeted Subsidy Pilot in three districts in Kandal province. In collaboration with Amplify Markets and Causal Design, the program tests an innovative delivery mechanism for targeted subsidy through a micro-credit scheme.  Government-identified poor households are targeted through regular sales events and are able to purchase latrines at a discounted price. Instead of creating a standalone subsidy program, which can be inefficient and costly to administer, the pilot offers discounted latrines alongside market priced latrines with the option of financing for all approved purchasers.

The Targeted Subsidy Pilot leverages the existing iDE sales force, supply chain, and previously used micro-financing partner. Through this pilot, iDE hopes to build on best practices and develop a scalable strategy to serve the rural poor with smart subsidies and loans while ensuring long-term engagement of the private sector.

Driving Latrine Affordability With Access to Finance

LESSON LEARNED: Financing has significant impact on latrine uptake, but setting up sanitation financing is a hands-on effort that requires significant investments in field-level coordination and partner management.

The Sanitation Marketing Scale-Up (SMSU) project partnered with IDinsight to research Willingness-to-Pay with Financing. Sanitation financing is a promising approach for increasing latrine uptake cost effectively.

Under certain conditions, financing has the potential to increase latrine uptake fourfold at a $50 market price and decrease operating costs by 70%. However, setting up partnerships with microfinance institutions (MFIs) is a long, iterative process that requires a lot of hands-on management.

Theoretically, developing the sanitation financing model (known in the sector as Sanitation Financing, or SanFin) is a one-time upfront cost, and marginal costs will decrease when the model is scaled and replicated. However, even when working with a partner with whom iDE had previously developed an effective model for selling water filters on credit, the lessons learned from the previous experience were not immediately adopted in the SanFin pilot project. Moreover, despite demonstrating that latrine loans were profitable and showed 100% repayment rates by the end of the pilot, MFI partners still showed reluctance in integrating SanFin at scale after the pilot programs. Three reasons are likely for this reluctance.

First, MFIs are for-profit enterprises, and latrine loans are less profitable than other products because latrines are not income-generating assets. Thus, latrines loans and other social-impact loans have been restricted to a minority percentage of an MFI’s total portfolio and are not considered a core part of the business.

Second, MFIs may be waiting for more proof of SanFin’s positive business impact. The first successful partnership in Cambodia between an MFI and a WASH organization (Hydrologic) began only three years ago. Now, finding interested MFI partners is easier, with MFIs voluntarily seeking to partner with development organizations on social loans. Financing products with positive social impact are becoming a more prominent consideration for MFIs, especially as they look to attract social investment funds, improve their public image, and compete for rural market share. However, it is too early to see MFIs making large institutional changes to accommodate the scale and speed of SanFin that the WASH sector is looking for.

Third, by the end of the SanFin pilot, both MFI partners expressed interest in scaling up SanFin. However, when presented the ambitious targets of SMSU, they expressed significant reservations. In discussions with the management it seems that capital is not an issue, as they have access to affordable capital from organizations like Kiva that have a focus on WASH. Rather, it is their overall lack of capacity—insufficient human resources and limited management information systems— that makes it difficult to reach scale as quickly as SMSU required. Further support would likely be needed to help MFIs achieve scale quickly.

Unclear commitment and limited capacity of MFIs to do SanFin at scale begs the question of whether efforts to engage them are worth the cost-savings of SanFin that the Willingness-to-Pay research demonstrated. It is worth exploring what other models are appropriate for providing financing to rural households that may avoid the need for external institutional partnerships. More learning and experimentation is necessary to better understand how to integrate financing in sanitation market development.

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Empowering Local Government to Support Sanitation

LESSON LEARNED: Proper training, ongoing coaching, and monitoring is important for successful local government engagement

Government engagement, like private sector engagement, needs to be supported with a holistic approach of ongoing training, coaching, monitoring, and relevant tools. Coaching and monitoring, in conjunction with relevant and easy-to-use tools, was instrumental to the success of the Behavior Change Communications (BCC) campaign around latrine usage. Commune Committees for Women and Children (CCWC) conduct educational village meetings on many development issues, however, many CCWC facilitators cited the BCC campaign as the first time they had ever received coaching and tools on speaking about sanitation, or any topic for that matter. The training and subsequent support through ongoing check-ins and feedback helped the CCWCs improve and gain confidence in engaging villagers. The ongoing training and feedback is important for helping the CCWCs learn by doing, and making improvements immediately upon real-time feedback, as opposed to waiting until the end of a project evaluation to identify needed changes. This lesson is important, especially when considering conducting capacity building for the government at scale.

Local government officials often show enthusiasm for sanitation efforts. However, they have limited resources and know-how. Further engagement and resourcing of government at all levels and across various ministries is necessary to empower local government to actively support sanitation.

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Developing Latrines for Challenging Environments

LESSON LEARNED: Solutions to challenging environments require more than a modification or adaptation of existing design; otherwise heavy subsidy is required for uptake.

The effort to design a latrine suitable for challenging environments, such as areas with high ground water tables or frequent flooding, produced two prototypes using an infiltration method. However, introducing the infiltration-based prototypes to market was not recommended. Research showed that infiltration is not realistically feasible, desirable, or viable in the Cambodian context. Potential directions for future development were identified, including on-site waste treatment or sealed systems coupled with waste management.

One of the learnings from this experience was that a mere adaptation of existing pit-latrine designs is not sufficient for the challenging environments addressed.

Investments into R&D for a new system—treatment or “sealed + waste treatment”—is necessary to develop a product that is hygienic in light of known user behavior.

Modification to current designs is not sufficient for a market-based solution. Either significant subsidy is needed to encourage adoption of the proposed filtration design or a new archetype of latrine solution is needed. 

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Engaging Masons in Latrine Installation

LESSON LEARNED: Engaging masons through training on the new latrine design helped connect supply chain actors and ensured correct installation.

To reduce the time and cost of installation, the Easy Latrine was designed to be installed without hiring a mason. The development of the pre-cast concrete chamber box eliminated the need to hire skilled labor to construct a brick chamber box. However, households generally constructed the shelter along with the underground component, so they still preferred to hire a mason for installation. Because the project had removed the mason from the latrine purchasing experience, households who hired a mason to help with installation faced challenges. Masons either installed the latrine underground incorrectly, which meant customer dissatisfaction and a negative reputation for the product; or would ask households to exchange the chamber box for traditional bricks.

To ensure customer satisfaction and quality installation, the project trained masons on the main components of a latrine; how to install a latrine; and common shelter models. Masons were also introduced to local Latrine Business Owners to facilitate supply chain actor coordination.

Training sessions demonstrated value in educating masons on proper latrine installation; connecting masons with latrine businesses; and helping government become familiar with supply chain actors.

The mason trainings also developed relationships with masons that will be useful when the project’s latrine shelter is ready to go to market. To sustainably scale up mason engagement, the project explored engaging local government in the workshops. In several workshops, the project invited district officials to attend, which allowed them to better familiarize themselves with latrine supply chain actors and high quality installation procedures.

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Connecting Latrine Supply Chain Actors

LESSONS LEARNED: Bringing supply chain actors together surfaces challenges and new ideas.

As part of the project’s Going Deep component, supply chain forums were held every six months to facilitate greater collaboration along the supply chain and encourage local government to support market development efforts. Participants usually included Latrine Business Owners (LBOs), sales agents, retail shops, Community Led Total Sanitation (CLTS) NGOs, masons, and local government officials. Larger raw materials suppliers were also invited, but little or no interest was shown.

The forums brought to light that the latrine supply chain is still quite disjointed. While LBOs, retailers, and masons are usually familiar with each other, they do not interact with each other on a daily basis.

Although retailers are aware LBOs sell underground components of a latrine, it did not occur to them that connecting with LBOs could lead to a business opportunity of selling shelter materials. LBOs generally had existing formal relationships with masons, but few hired masons to offer installation services. However, by the end of the project, teams of masons offering installation services were emerging in Prey Veng province. LBOs, retailers, and masons all expressed interest in offering shelter products and services, which would likely bring closer collaboration. 

Another issue discussed in the forums was how to leverage economies of scale across the LBOs. LBOs in Kandal generally purchase materials from a main supplier in Phnom Penh, but LBOs in Svay Rieng are better positioned to leverage economies of scale. However, there is a fear of competition among LBOs, making it difficult to coordinate closely. 

In the supply chain forums, CLTS NGOs shared that they have a specific triggering schedule. LBOs understood that CLTS events create more business opportunity. LBOs observed many NGOS doing CLTS and wanted to get a schedule, but did not know how to approach the NGOs. LBOs requested that CLTS NGOs share the schedule, but the NGOs reported that they do not have the capacity to keep LBOs informed about triggering schedules. Going Deep experimented with facilitating a relationship between CLTS implementers, local government, and the private sector, which showed promise, but demonstrated that dedicated effort and resources are needed to ensure close coordination.

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Leveraging existing supply chain actors

LESSON LEARNED: Leveraging existing supply chain actors is important for optimizing customer experience.

In the Pilot Project (2008-11), the invention of the chamber box removed the need for a household to hire a mason, since the mason’s specialized skills were no longer needed to construct a chamber box of brick and mortar. This was thought to benefit the end-user by allowing them to install the underground and slab portion of the latrine themselves for less cost, and that masons would ultimately benefit through increased demand for brick shelters. However, it was found that many households still prefer to hire the mason for the installation of the whole latrine since installation of the underground and slab is often done at the same time as installation of a brick shelter, which does still require a mason.

Moreover, bypassing the masons in the supply chain also led to some misconceptions about the chamber box quality. As the masons were unfamiliar with the new product innovation, either they would install it incorrectly, or tell the households to return it in exchange for the traditional bricks. That is, because the masons were still involved in the user experience, it was important to engage them so that even if they are not installing the product, they still serve as advocates. The case study of the masons shows that it may not necessarily be in the customer’s best interest to bypass seemingly “unnecessary” supply chain actors. A closer analysis of their value added might reveal an opportunity to engage and leverage their presence.

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Understanding Opportunity Cost for Latrine Suppliers

LESSON LEARNED: Low prices may not be the best for consumers as they can undermine enterprise motivation to sell.

Initially, the project recommended a minimal profit margin (~$5/latrine) to increase affordability for rural households. It was believed that enterprises would be motivated to sell latrines on a low-margin, high-volume model given the large market of potential customers. However, experience showed that enterprise motivation depends not only on profit margin, but may also depend on the opportunity cost of other lines of business. 

Latrine Business Owners (LBOs) and sales agents, like most rural Cambodian households and small businesses, have multiple streams of income. LBOs, despite the title of “Latrine Business Owners,” are ultimately concrete producers who happen to make and deliver concrete components of a latrine. They also make other concrete products and often have institutional contracts that are more lucrative than latrines. Thus, too low of a margin will not be sufficient to maintain their engagement in producing and promoting latrines.

The project found that a low profit margin—$5/latrine for the business and $2 for the sales agent—was not sufficient for maintaining sustained engagement. The LBO and sales agent might continue to sell during a period of high sales. However, any period of low sales could deter them from reengaging due to the low profit.

LBOs were originally selected based on their overall business capacity. However, the most engaged LBOs were not necessarily the largest. Sometimes, the highest selling LBOs were the smallest. It appeared that what mattered more was the proportion of business coming from latrine sales. An LBO with few other lines of businesses, or whose other lines of businesses were less profitable than latrines was more likely to be focused on selling latrines as the opportunity cost was lower.

In response, the project advised LBOs to raise prices, which also contributed to a higher commission to sales agents. Some LBOs were concerned consumers would not be willing to pay more. However, more LBOs are now selling latrines for $40 in the southern provinces than the original $30-$35 price. Overall demand has not gone down, and project staff have not heard any customer complaints from LBOs or sales agents.

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Managing Innovation While Focusing on Scale

LESSON LEARNED: Align incentives and have clear, harmonized objectives to manage innovation and scale simultaneously.

The Going Deep sub-component was an innovation-focused project within the larger Sanitation Marketing Scale-Up (SMSU) project that focused on at-scale implementation of core project activities. The different natures of innovation and scaling between the sub-component and the main project created tension at times, with the former operating within an environment of flexibility and uncertainty and the latter focused on optimizing efficiency.

This tension, when coupled with rapid growth, led to growing pains. The project experienced tension in having to share resources, especially staff time, across Going Deep and Scale-Up, which had the same goals but different focuses. The challenge arose because the same staff members were assigned to specific tasks in both SMSU and Going Deep, the former whose focus was to optimize efficiency of proven models and the latter to iterate on innovations.

While the focus of scale-up is to recruit and train as many successful businesses as possible, those successful businesses could only optimize their potential to sell if Going Deep identified effective market penetration strategies. Going Deep strategies would only be relevant if there are competent, well-trained businesses to take the ideas to scale. To ensure that project activities reflected the harmonized nature of SMSU, the project aligned incentives such that staff were evaluated on how well they coordinated with and supported the other aspects of SMSU outside their immediate responsibilities.

Incentives can be used to leverage the productive tension between innovation and scale and optimize the benefits of each. Managing innovation within a project focused on scale will be the key to continued growth and impact.

The Art of Adaptive Program Management

LESSON LEARNED: The project approach should be adapted over time to find the most effective way to reach objectives based on project experience.

Market development for sanitation (Sanitation Marketing) in Cambodia usually takes the form of market facilitation—development partners build capacity of private enterprises to stimulate demand and provide supply to satisfy demand without becoming directly involved in market transactions. However, despite being independent, sustainable businesses in their own right, concrete businesses showed inconsistent capacity and enthusiasm for conducting their own active sales management. 

Project experience shows that pure market facilitation is not necessarily the best model for reaching the public health goal of rapid and widespread latrine uptake.

Given the public health goal of rapidly improving latrine uptake rates, the project adjusted accordingly and explored alternative approaches of market engagement, such as a Direct Sales Model (DSM). DSM experiments in Kandal and Koh Kong showed that a dedicated sales force managed by the project stimulated high levels of demand. As such, the project shifted the focal point of intervention from Latrine Business Owner to sales agents, building up a full-time sales force to reduce turnover, with dedicated management by project staff. As market conditions continuously evolve, project intervention methods should reflect ongoing learnings about market capacity and maturity, and adjust interventions accordingly.

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