How focusing on profit can help the poor(Read article summary)
Water technology company Xylem makes a profit on its foot-operated irrigation pumps for poor farmers. But those profits allow it to stay around to service its products and develop new ones.
Courtesy of Thatcher Cook for Mercy Corps
When leading water technology company Xylem started manufacturing simple pumps for smallholder farmers, it wasn't for charity: The company expected to profit.
The new Essence of Life line caters to the everyday water needs of farmers with small plots of land, among some of the world’s poorest customers. Like any of its customers, Xylem expects these farmers to pay for the right product at the right price.
“Many of us in the water business – Xylem and its peers – are engaging in a lot of the same strategies: premium products in premium markets,” said Keith Teichmann, vice president and director of innovative networks and marketing at Xylem in an interview with Global Envision.
It’s not that Xylem didn’t focus on humanitarian activities in the past – the company’s corporate citizenship and social investment program, Xylem Watermark, has delivered clean water and sanitation solutions to more than 2.3 million people in communities in need around the world. And when water-related disasters strike, the company funds urgent relief projects through a partnership with Mercy Corps.
But during a brainstorming session, Teichmann says, the water technology giant recognized a huge missed business opportunity.
“Senior level strategic people ... looked at each other and said, ‘What if we did something really different, something really wacky? What if we upend that traditional model and go for the base of the [economic] pyramid? Take our 100-plus years of technology and repurpose it into something that works in solving issues there.’ ”
So Xylem developed the Essence of Life program to focus on the water needs of the 1.5 billion smallholder farmers who live on less than $2.50 per day, said Teichmann.
By doing so, Xylem became one of the few original equipment manufacturers making water management products directly for the individual smallholder farmer.
Essence of Life’s signature product is the Saahji stepping pump. Using the simple, foot-operated pump – similar to the mechanics of the average stair climber in a gym – farmers get the water they need to improve crop yields and diversity. The increased output can more than triple farmers’ revenue.
Xylem conducted interviews with hundreds of smallholder farmers to validate the Saajhi’s ability to deliver on their needs and expectations.
Why does Xylem insist on selling the pump, when it could just give it away?
Teichmann answered by sharing what he learned during an interview in Nairobi with a World Bank consultant.
“He said, ‘I see a lot of people come, and I’ve seen a lot of people go,’” recalled Teichmann. “‘They don’t come here with the idea of setting up a business model and, as a consequence, they fail very quickly. And in their failing, they do as much a disservice as people who never came.’”
Without a sustainable business plan, efforts to help the poor can burn out. Although the profit margin on Essence of Life products is smaller than other products, Teichmann said it’s vital.
“Do we make the same amount of money that we make on very high end products? No,” he said. “We couldn’t if we wanted to. And I would say that ethically we wouldn’t want to.
“What we do is make enough money to continue the investment and get some return back so we can bring on people and make more products, expanding the portfolio [we can offer to farmers],” he continued. “The business model sustains itself, which is very important.”
In projecting profit, Teichmann said businesses must evaluate what will sustain the product strategy while keeping in mind that the target market is at a very low socioeconomic level.
Thinking creatively about product design, manufacturing, and distribution has helped Xylem find that balance.
“Xylem knows how to manufacture products, especially water-technology products,” Teichmann said. “When we did the Saajhi design, we minimized the number of components and concentrated on the serviceability of the products, removing those that would wear or potentially fail in the field.”
Xylem cuts production costs by partnering with nonprofit organizations and government agencies to distribute the pumps – groups that know these rural communities well.
“We utilize their intimate understanding of conducting transactions and relationships in rural communities,” Teichmann said. “They become a part of our logistical channels to not only bring the product in, but to service the product as well.”
That service component is crucial, Teichmann said. If farmers can’t get repairs or replacement parts, even the most innovative and necessary product becomes useless.
“The countryside, in some cases, is littered with the corpses of failed products,” Teichmann said. “We see competitive products rusting in fields because there was no proactive service proposition, and they broke. We decided at the very beginning that this would not be us.”
Quality and service are just as critical to smallholder farmers as they are to other customers, said Teichmann. Smallholder farmers are a market that’s often ignored in this regard. Though it takes time and imagination to see sustainable business possibilities, Teichmann said he believes the effort is worth it.
“It is truly a compelling market,” he said. “I don’t know one other market we participate in – collectively as a water industry – that has a singular [base] of 1.5 billion people."