LL_Understanding Opportunity

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.