Pay per use revenue models are used in several consumer markets. This business model can be an effective method of accessing markets with large scale consumers - Water market is one of them. The water distribution industry has implemented an innovative approach of providing affordable potable water to the low income communities in rural and semi urban slums on pay per use basis. However the biggest challenge is reaching additional users incrementally which may not always be cost-effective.’ Increasingly stringent water quality standards and environmental regulations drive increased spending, technological innovation, and positive pricing’ impacts the sustainability of this approach. Hence determining the feasibility and economic viability of such business model in the low end segment is of vital importance.
Economic viability, pay per use, Eureka Forbes, unsafe drinking water, awareness, financing.
Impure water supply affects the lives of people in ways beyond health. As per research by ‘Abdul Lateef Jameel Poverty Action Lab’ in February 2013, the ease in access to clean water leads to reduced stress, contributing to happiness. Fetching water from disparate sources is time and labour intensive, which could detract from education or productive activities, a burden which falls disproportionately on women and children. The illness caused by impure water leads to tension within and among households. Thus inconvenient access to water may contribute to stress or unhappiness (Florencia Devoto et al 2013).
According to the estimates of WHO/UNICEF Joint Monitoring Program (JMP) for water supply and sanitation, 2013, around 786 million people use unsafe drinking water sources, which have risen to 1.1 billion presently. It is estimated that around 37.7 million Indians are affected by waterborne diseases annually, 1.5 million children are estimated to die of diarrhoea alone and 73 million working days are lost due to waterborne disease each year. This results in an economic burden of around $600 million a year. According to census 2011, more than 70% of rural households use tube well or wells as the source of water. But, much of this water is contaminated with high content of fluorine, arsenic and other contaminants which can lead to life threatening diseases like cancer. Absence of affordable water purification systems in the market to address the needs of the rural poor in India provides an opportunity to expand and upscale through pay per use model. In urban India, slum dwellers are acutely affected by water shortages. As reported in Searchlight south Asia about 60% of the Mumbai city lives in slum of which less than 20% of slum-dwellers have access to potable water. A pay per use system is followed in most of these areas where people pay Rs 14 per litre, which is exorbitantly high due to illegal vendors. Thus, the urban slum serves as a potential market to implement a cost effective, affordable and profitable pay per use model.
Eureka Forbes has built water purification plants in 100 rural and 4 urban communities in collaboration with either an NGO or the local government (Ernst and Young 2011). Its objective is to make significant contribution to the society by providing clean and safe drinking water to each Indian household. However the company has encountered reluctance among the masses to pay for water which is a basic utility. It wants to overcome this societal barrier and build a model which is beneficial to the society at large and profitable at the same time. In our view, access to clean and pure water will contribute to health, happiness and satisfaction of people. Water is an essential utility and commercializing it is a challenge. Though the government is supportive of water purification plants and has formulated several schemes in the twelfth five year plan encouraging public private partnership and rural women participation, the acceptance of pay per use water model by the society is questionable.
In India the concept of a paid drinking model faces constraints, particularly, in rural belts, where drinking water is not seen as a commercial commodity that needs to be purchased, but rather as a free commodity. In other words there is unwillingness on the part of the consumers to pay for drinking water. The reasons, apart from prevailing perception, are multifold which will be expounded in further depth. It is on this difficult premise that we need to explore the economic viability of creating a sustainable model of drinking water, to rural and peri urban belts, acknowledging the gross limitations of capital expenditure needed to setup infrastructure while also taking into account the capability and willingness of consumers to pay and use the same.
Setting up a water purification plant is capital intensive. The cost, per plant, includes fixed capital expenditures of around 6 crores, and average annual running and maintenance cost of around 2 lakhs. The average cost per liters of water varies between 0.13 to 0.2 rupee subject to vagaries of electricity and other allied expenses, specific to the region. The returns on this investment depend on the income dynamics of the targeted consumers, who are the rural and peri urban masses. The median annual income of a rural household is around 22000 rupees. This roughly translates to 1800 rupees per month while the median income of an urban poor is around 50000 rupees (Dinesh Kumar and Kumar Shah).
The above mentioned factors of costs involved versus expected returns determine the economic viability of the project. The purchasing power is heavily dependent on the per capita income levels of the people. The urban poor’s median income is twice as much as that of a rural person’s and hence this calls for a differentiated pricing structure between the rural and urban segments for sustenance in the corresponding regions.
Further the economic viability depends on the success of implementation of pay per use model. This model has been extensively used in industries like telecom and consumer media. This method will offer the advantage of using progressive price slabs per usage which would particularly be useful to encourage usage when the uptake is found poor. Similar to a telecom industry model, operational cost reduction will be pronounced as the RO’s can be operated only upon demand.
We have classified the following approaches based on short term and long term. A long-term vision aligns with the public interest. It must be based on ethical principles and holistic welfare of the society. Also, they must be executed pragmatically, assuring that short-term actions support the long-term goals (Gillian Lees and Roger Malone, 2011). Hence, it is appropriate to approach the problem from both short term and long term perspective.
In the short term, the company may focus on economic viability that is establishing the model by earning revenues with zero or minimum profits and target to achieve breakeven in the shortest time. An established model backed up by proper marketing, pricing and awareness among the masses will help in building up sustainable and profitable model for the long run.
In developing countries like India, demand for water related products generally come from high and middle income groups. Even at the Base of the Pyramid, the demand for clean drinking water has grown the fastest in peri-urban areas (Hammond et al. 2007). Though, rural areas and slums are in the greatest need for safe drinking water, penetration in these areas is the most challenging (IFC 2009). Marketing of the product should be focused on day to day usage and value of safe drinking water. Simultaneously it should create some aspirational value for the consumer in order to justify the price being charged. (PATH 2009a).
Keeping drinking water as affordable as possible and bringing it within the reach of everyone including the low income groups and at the same time being commercially viable, will be a challenging task. It needs to be considered that there is already presence of such models in some parts of the country and competition is fierce but the demand is low. The pricing structure should account for equipment break-even, cost of consumables, supply chain and wage costs as well as cost of marketing and promotion. Positioning the product correctly is also an important factor to consider as it refers to the perception of the consumer about the product in comparison to competitors or other similar but not same products (Ries and Trout 1981). Treated and safe water should not only be considered as a necessity but also as a preventive measure of disease. The needs of the consumers must also be taken into account while positioning the product (Meera Bapat and Indu Agarwal 2003).
Different ways of financing can lead to increase in customer base. Micro financing helps in growing developmental roots. Micro financing organizations are like offshoots of Non-Government organizations run on commercial basis (M S Sriram and Rajesh Upadhyayula 2002). Combining financing of MFOs along with working of NGO may have different results.
Finances from private banks, governments or any other sources such as private equity or venture capitalist can also be considered.
In the long run, a sustainable model can be built around the concept of social entrepreneurship involving internal and external stakeholders. This can be achieved by spreading awareness about safe drinking water giving prime focus on social acceptability and socio-economic welfare of the country. This will in turn require a study of various unique and customizable purification-cum-distribution models, extent of support from various organizations and specific needs or requirements area wise.
There is a misconception among most consumers that clear water means clean and safe drinking water. Even rain water is perceived to be healthy and of higher quality (PATH 2009b). Programs for providing safe drinking water also face unique challenges such as the belief that diarrhoea is not a disease (Clasen 2009). Considering these facts, there is a dire need to spread proper awareness about the meaning of safe drinking water and disadvantages of drinking unsafe water. Safe water campaigns should also be complementary to disease prevention and treatment such as of diarrhoea (POUZN 2007).
The buying behaviour of the consumer for drinking water is an important criterion. The company should consider ‘What the reference criteria are for buying and using safe drinking water?’ Similar studies have been carried out in countries like Nigeria (Dale Whittington et al 2002) and Brazil (James F. Casey et al 2005), (Dale Whittington et al 1990).However it was also seen that few people were unhappy that they had to pay for drinking water which is supposed to be free and hence fetched water from old contaminated sources despite presence of safe water (Hadiya Faheem and Debapratim Purkayastha 2010).
Research has shown that social influence and habits play a major role in water related behaviour (Moser et al 2005). Increase in social marketing programs; have been positively impacted by community mobilization and motivating interviews (Quick 2003), (Thevos et al 2000).
Field experience and research suggests that introduction of purification technology without a motivational, participatory and educational activity in communities is unlikely to be sustainable or successful (Figueroa and Kincaid 2010).
Public private partnership where set up cost will be borne by Government and operating cost by company can be a viable solution. Subsidies provided for such projects are also beneficial in short term. Ownership of system and onus of maintaining the water source and the plant with the communities and the concerned Panchayat are more likely to impact the usability and effectiveness of the program.
Short Term Approach – Establish the Brand and Achieve Breakeven
There are a few challenges in acceptance of pay per use model. Awareness about the importance of usage of pure water needs to be conveyed in more rigorous way. Social marketing, customer segmentation and awareness through primary education will help in laying the roots of the pay per use model in the slum and peri urban areas.
Hygiene promotion camps have both social and economic benefits. Economic advantages through such kind of awareness programs will give higher payback with lower investments. (Brian Appleton and Christine Sijbesma, 2005)
Our model will run successfully if it is accepted as sustainable model and it is possible if people involved can make some money from it and thus operate viably.
Segmenting the customer in a suitable way is one of the most difficult things. This segmentation of the customers can be done according to geographical origin, regional – urban or rural, psychographic criteria and behavioural attributes. This segmentation will enable in creating long term and short term strategies. Product positioning, pricing, value proposition can be decided effectively based on customer segmentation. Way forward for prioritizing and guiding the research can be easily decided due to segmentation. (Mike McGuirk, 2007).
Today, everyone knows importance of pure water and bad effects of contaminated or unhealthy water. Campaigns conducted for awareness of safe water and hazards of bacteria contained water impacted a common man. Impact of such model through schoolmasterly messages will have different as message conveyed to students gets printed in their mind for longer duration. (Paul Osborn 2008).
In ‘Positioning, The battle for your mind’ (Ries and Trout 1981), the impact of positioning on the mind of the prospect is discussed. Positioning is an organised way for finding the windows in the mind. It impacts the perception of the consumer about the product, other similar products and competitors.
In ‘Our needs, our priorities; women and men from the `slums’ in Mumbai and Pune talk about their needs for water and sanitation’ (Meera Bapat and Indu Aggarwal 2003), the problems that slum dwellers, primarily women in Mumbai and Pune cope with everyday regarding water and sanitation is discussed. The inadequate water in households causes ill-health. Also carrying heavy water containers over long distances and long queues in public standpipes is a cause of concern for the women who typically collect water for the household. It is very humiliating and stressful for the people to rely on public taps or other peoples’ taps.
In order to implement any project and make it sustainable in the long run, the one very important component required is ‘money’ – the money which the business has itself or which it takes from banks and other organizations in the form of loans. To set up a number of water purification plants across different rural and peri–urban areas would require a lot of finance coming into the business and with a majority of the end customers being slum dwellers and those belonging to the lower strata of the economy; the company needs to have the right sources of financing.
Microfinance sector or the microfinance organizations (MFO) is one of the key contributors of financing in India. Sriram and Rajesh (2002) looked into the growth and transformation of MFOs in India. There are 3 forms of organizations that seem to be popular in the microfinance sector – The Non-Banking Finance companies, the Banks – both Local Area banks and Urban Co-Operative Banks and the Co-operatives. In the Indian case, the MFO spins off from the NGO rather than the NGO transforming itself. However, there is no ideal or easy path for MFOs to mainstream in India.
Microfinance is something that is done by the alternative sector – not the government or the commercial sector and predominantly and exclusively caters to the poor people. Microfinance grows out of developmental roots and collaborates with NGOs to lend money to the businesses and other organizations which can be a boost for Eureka Forbes to set up the plants in an economic way.
Also, The Government has come up with various schemes like Jan Dhan Yojna, Provision of Urban Amenities to Rural Areas (PURA), JnNURM, etc. for rural development in India. These schemes can be another source of funding for the organization in setting up the water purification plants and providing safe and clean water at economic rates. Few domestic financial institutions (DFIs) are currently involved in financing small-scale Water and Sanitation providers. In some countries, such as Kenya, India and Vietnam, the markets for micro and meso-finance for such companies are growing with the development of lending products.
The companies currently have access to a limited range of repayable financing to cover the up-front financing needs that they cannot cover themselves. The entities providing such services can include MFIs, commercial banks, non-banking financial institutions, NGOs, credit cooperatives or solidarity lending groups. According to a study conducted by Mehta (2008) for the Gates Foundation, only a few large MFIs in Asia had achieved significant scale in these areas. There is a tendency to focus exclusively on microcredit, even though SSF can include many other financial instruments, such as savings, insurance, leasing, working capital loans, etc. Microcredit is somewhat easier to grasp and has been much better documented. The combination of savings and loans (credit) holds great promise for facilitating access to such companies. (Small scale finance for Water and Sanitation, EUWI 2012)
In Cambodia (Path 2009a), a study was conducted which found out that people have a perception that clear water means clean and safe drinking water. In fact the rain water is also considered to be potable. The research also highlights the awareness among consumers on water treatment products. According to the consumers durable water treatment products are more convenient like the mineral pots in particular because of its affordability and effectiveness However there are certain drawbacks such as fear of buying a product that will not last long and easily break. The study also provided some insight into the market for consumer view of fast-moving consumer goods (FMCG), such as water treatment tablets and powders. These products are considered to be fast and convenient available in smaller quantities making them more affordable for lower income groups. However there is no general awareness of this method among the consumers. There is a limited reach in rural areas. The main challenge is demand generation; branding, promotion, and price are essential strategies in rural and lower-income markets.
In ‘Best Practices in Social Marketing Safe Water Solution for Household Water Treatment’ (PUOZN 2007) it is found that marketing and communication plays an important role in creating awareness of treating household water and need for sustained and consistent product use.
The report of ‘Building a viable commercial market for household water treatment products at the base of the pyramid, (PUOZN 2010) states that high prices, weak supply chains, and lack of awareness are the most obvious barriers to adoption of pay per use water model, many NGO-based programs focus on price subsidies, direct sales programs, and mass media campaigns. As they begin to scale up, however, these programs often struggle with sustainability issues. Identifying the appropriate target group(s) and channels of communication in peri-urban and rural areas are critical to this effort. Before developing a water treatment campaign one must collaborate it with other campaigns focused on diarrheal prevention and treatment. For instance, in Madagascar, parents did not give a thought to the connection between the child’s thin stature and diarrheal bouts. Hence awareness of water treatment in conjunction with disease prevention is necessary.
Combating water borne diseases at household level report (WHO 2007) estimates that 94% of diarrheal cases are preventable through modifications to the environment, including interventions to increase the availability of clean water, and to improve sanitation and hygiene. In addition, a 2005 systematic review concluded that diarrheal episodes are reduced by 25% through improving water supply, 32% by improving sanitation, 45% through hand washing, and by 39% via household water treatment and safe storage. In ‘Scaling Up Household Water Treatment among Low-Income Populations’ (Clasen 2009) states that in various countries diarrhoea is considered to be a natural and even desirable condition especially in young children and so not considered to be worthy of preventive measures. People who consider water unsafe or want to protect their families from the risk of suffering from diarrhoea adopt water treatment methods. Health benefits are not seen as the need to adopt disease prevention measures and in places where diarrhea is not even considered as a disease further limits the strategy of making people adopt clean water through awareness of possible health risks.
Research conducted in comparable markets’, as in Zambia led to insights in the social acceptability in rural and peri urban masses. The three prime parameters affecting social acceptability were found to be that of social influence, attitude structure and perception of a community influences. These determine the diffusion of a new technology, as in this case an RO, and hence it’s effective penetration (Rogers 1962, 1995).
The factors affecting the consumer behaviour are the perceived newness or product proportion of innovators in a community, communication channels and the prevailing social system of a community. These determine the adoption rate and hence the diffusion of RO based water filtration usage in communities. The perceived threat level of water impurity is also, one of the key drivers in adoption of RO based technologies (Rosenstock 1996).
Proper risk allocation allows the public sector to better tailor PPP approaches to specific situations like pay per use model. According to study by Deloitte Corporate Finance in 2009 it was found that the public sector needs a full life-cycle approach or framework that pays adequate attention to all phases of a PPP - from policy and planning, to the transaction phase, and then to managing the facility.
Many of the infrastructure and water related projects can be propelled with the involvement of government due to political and financial reasons, and involvement of government gives feeling of ownership (Ghina Yamout, Dima Jamali 2006). As per study by Browne and Mohan, society remains out of the financials of the project as Government takes the commercial risk.
The mobilization of private sector participation for the provision of water services will likely result in operating efficiencies and the release of government funds for other purposes. This is particularly true if the private sector adopts proper tariff structure, while working on addressing endemic deficiencies relating to water leaks, customer management and billing and collection problems. (Ghina Yamout, Dima Jamali 2006)
The approaches discussed above have led to revelation of various opportunities and means of establishing a sustainable business model as well as some interesting ways of increasing the viability of a pay per use model in the domain of drinking water.
When we looked at the awareness level among people about safe and pure drinking water it was observed that people perceive rain water as potable (Path 2009a) and clear water as clean. Awareness about the importance of usage of safe water and adequate branding and promotions of pure water is required. Proper segmentation of the consumers and thereafter adequate promotion through social marketing and other means may be effective.
While discussing about positioning and pricing of water(Ries and Trout 1981), it was found that though getting water from far off sources and carrying them over long distances is a cause of concern, customers are still reluctant to pay for water as it is considered as a free utility.
Another factor which plays an important role in long term sustainability of this business model is finance. Community financing revolves around economic constraints, lack of governance and political instability. Pooling money from people of rural areas is a difficult task which in turn results in low community financing (Alexander S. Preker et al 2002). Data analysis of micro-level households indicates that community financing helps in improving access to different scheme which will facilitate setting up water purification plants in rural and semi-urban area (Alexander S. Preker et al 2002).
Apart from the financial problem, pay per use model also poses a threat from the psychological front. Marketing and communication plays a vital role in spreading awareness about consumption of safe water and need for sustained and consistent product use which in turn impacts the acceptability of pay per use model. These activities help in building long term impression in one’s mind.
While discussing about the behaviour changes of the consumer, it was noted that the perceived newness of the product, prevailing social system and perception of the community as a whole are among the major factors affecting consumer behaviour (Rosenstock 1996).
Another factor which surfaced during the discussion was proper risk allocation and division of responsibility and ownership which could be better met using a public private partnership model (Ghina Yamout, Dima Jamali 2006). Partnerships between the Government, NGOs, the private sector, funding agencies and the locals may provide some insights into the challenges and opportunities faced in executing these kind of models (Bipasha Baruah 2007).
While studying viability of pay per use model for water purification plant, three possibilities were observed.
Awareness about safe and pure water is low. People tend to consider clear water to be safe drinking water. We need to generate demand through promotions and create a brand for purified water. This will help us to maximize demand in the short run. Hygiene promotion camps can give higher payback with lower investments (Brian Appleton and Christine Sijbesma, 2005).Spreading awareness among students has positive long term implications. Customer segmentation by psychographic and behavioural attributes can help build a sustainable pay per use model (Mike McGuirk, 2007). Combination of social awareness of pure water along with a well-planned marketing strategy to position and segment pay per use model will take the business to a new height.
Implementation of any big project requires funding. Funds for water purification plant needs to be financed by the community or the company. In later case reaching a breakeven will take long time and project won’t be viable from business point of view. Microfinance organizations can be looked as a prominent solution. Jan Dhan Yojna, Provision of Urban Amenities to Rural Areas (PURA) schemes which are implemented by Indian government can help in setting up water purification plant.
Before setting up a plant one must look at its long term sustainability. This can be effectively achieved by involving the government for financing (Ghina Yamout, Dima Jamali 2006). Through this way, ownership of plant will belong to the community and that in turn will help in running the plant effectively. Private sector participation can help in customer management and efficient plant working.
Considerable amount of penetration in consumers mind can be done through systematic approach of creating awareness. This social aspect is effective way of establishing a strong position of our model in slum and semi-urban areas. After short term establishment, different ways of financing and PPP can make pay per use model operationally sustainable and economically viable.
The above paper is aimed at providing different views to determine the strategy for development of a pay per use model of drinking water in rural and semi urban slums. We analysed that by creating awareness one can penetrate the market, but customers’ current buying behaviour also needs attention, which will give us insights into the conversion ratio.
Analysis of competitors approach can also be one measure to understand the market better. Technological developments and innovations done in the field of water purification can also be explored. Local and national Government policies as well as local influencers may play a vital role in the success or failure of such pay per use model.
In order to develop different strategies and models as per the requirements, assessment of water supply in different geographies and the source of drinking water for the people in semi-urban and rural slums may also be looked upon.
Further to this, various distribution and delivery methodologies may be studied; for example point of sale at the plant vs. home distribution or development of a small market area near the water plant which provides other benefits apart from selling water to the consumers.
The scope of the study can be broadened further and can form a basis for scaling and upgrading from just normal water to electrolyte water. Electrolyte plays an important role in maintaining homeostasis within the body. Now-a-days deficiency of essential minerals like sodium, potassium and calcium is common among people who are subjected to a hectic lifestyle and lack of healthy diet. Over long periods of physical activity, the body loses electrolytes, which needs to be replaced but is not replenished by our normal drinking water. This electrolyte packed water may result into a huge market in the near future.
The project was made by the group of students; Ankit Periwal, Anurag Gupta, Sharel Fernandes, Sumona Chakraborty, Suraj Yambal, Vignesh Gowrishankar S. P. Jain Institute of Management and Research, Mumbai, India, under the guidance of Dr. Arup Mazumdar , Faculty in Charge, Business Consulting Projects Group, SPJIMR and Ms. Vibha Bhilawadikar , Vice-President, Kiesqaure Consulting, who mentored the group in this project.
Authored by: Dr. Arup Mazumdar Faculty in Charge
Business Consulting Projects Group
SPJIMR
Ms. Vibha Bhiwadikar
Vice President Kiesquare Consulting vbhiwadikar@yahoo.co.in
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