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Distribution & marketing to help catalyse sales for clean energy products in India
Sustainability Outlook spoke to Innovator and CEO, Ajaita Shah, Frontier Markets about her unique approach to catalysing solar: using customer-centric distribution & marketing company to help close sales in rural markets for clean energy products.
Clean energy products often appear to be struggling in rural India. What is the big challenge facing these companies?
During my time in the microfinance sector, we tested a lot of clean energy solutions. From a micro-financing perspective, the biggest challenge we faced was that there was no liability or accountability on the ground.
As a micro-financier, we weren’t really product distributors, nor did we have the technical know-how [about specific products]. It was high risk for us to endorse products that we didn’t really understand let alone then have to deal with the after-sales service, because, at the end of the day, rural customers were customers that we were going to continue to work with in the villages irrespective of the product.
You chose to build a service company, rather than a product company in this space. Why did you choose to focus on distribution services?
For me, as I started looking at solar more deeply, I realized that after sales service is the key gap in scaling solar successfully. There is no brand recognition that comes with solar right now. People aren’t kind of going “Oh, X product is the number one product that very customer can take without hesitating”. In part, this is because none of these manufacturing companies actually have service in the last mile rural village. I think that’s really what hampered solar’s ability to be sustainable.
It’s not that clean energy products are necessarily ‘bad products’, but 95% of customers do not necessarily understand how to use the product. When customers are frustrated, they stop using the product, or, for whatever reason if the product breaks, most customers will abandon the product than attempt to repair it. In these cases, the impact of solar dies, but no one knows about it because these manufacturers have been doing retail sales using rural distribution or bulk distribution, without actually going back [to check up on their village customers].
Distribution is a tough business. What sorts of challenges do you face and how are you overcoming these?
When I set up Frontier Markets, I wanted to build it on three premises: one, we’re customer first and we are a customer centric distribution model, second, that we’re brand agnostic and we’re going to be bringing in products that are relevant to our households because we know our households better than anyone else does, and third, we emphasize strong after sales service.
Coming from a microfinance background, and working for some pretty incredible MFIs, I understood what the value of branding was, and why if you were going to build out a distribution service, you need to have brand recognition with your customers. That’s really what builds loyalty and trust, and that is also what kills competition.
We created a distribution model where was have service centers that are hub-and-spoke with branches that covers an area of roughly 30km in all directions. This is very similar to micro-finance. We use a service center platform to then do further marketing and sales of solar solutions.
In addition, we have created retail points which are branded by us – these entrepreneurs actually have a physical shop that is branded by Frontier Markets. We train them around clean energy products and the retail points stock our products.
One business element is that once a sale is made, the customer information is collected at the shop and passed on to Frontier Markets so that we can actually do direct customer service for any of the products that we sell. This is has allowed us to do both entrepreneurs supply chain building, as well as still know who that end customer is – it has helped us to create a product basket that really focuses on our customers’ demands and interests, versus coming up with our own conclusions on what our customers think.
There are so many distribution and sales channels in India. Which ones did you choose, and how have you managed to keep costs under control?
We have diversified our channel access in different ways – we work with MFIs (2 partnerships with MFIs in Rajasthan), we work with NGOs, we work with government channels such as agriculture and forestry departments – this is all just giving us access to their customer base, and then we need to reach out to them in bulk. We have also started activating solar entrepreneurs that are at the village level.
The innovating in access via these channels has been that we have been doing this from a top down approach, versus a bottom up approach, we have been connecting with folks in different departments that can give us access at bulk at each district’s network of people, and at the scale, it is up to us to figure out how to get them to purchase a solar solution or to become an agent for an entrepreneur that wants to sell a solar solution.
Can you give us some figures to illustrate how the market has responded so far? What is your growth plan?
To date, we have sold about 10,000 solar solutions. We are working with all different types of manufacturers and we have a wide range of solar products from small solar lanterns to home lighting systems to inverters. Our franchises are actual retail points and then we have created another 250 entrepreneurs. Our entrepreneurs usually sell lanterns and smaller systems, whereas the retail points sell a large range of clean energy products. In total, there are 375 total people in our village network that are selling solar solutions.
Now we’re going into solar water heaters and street lights. That bridge has formed based on our understanding of what the customer demand has been. We are in 8 districts of Rajasthan, we’re in 5 districts of Andhra Pradesh, and we have about 135 solar branded franchises that are officially our retail points, with solar service centers linked to them. We are also looking to expand to multiple other states this year.
One of things we have learned interestingly enough is that your solar lantern is a market entry product. I call it a fast moving consumer good – it’s low cost, it’s low risk in terms of servicing, and you’re not making that much margin of it. The only way for you to be successfully activating your market is by selling the lantern in bulk. We have been very aggressive about selling lanterns because what is does is that it introduces solar as a concept to each village. For lanterns, 10,000 was our annual average 2 years ago, and now we’re averaging at about 2,500 lanterns per month. We’ve gone up fairly significantly because we understand the model a little bit better.
Frontier Markets will operate in low-income communities. How do customers pay for your products? How can a villager afford to pay Frontier Markets to set up retail points or choose to be an entrepreneur?
We have been experimenting with a range of ideas to refine our financing component. For me, it’s been more about supply chain financing rather than consumer financing.
In general, MFIs now are slowly coming on board to give at least do top-up loans for clean energy products, but they have a limited range for loans. Most MFIs aren’t really funding beyond the small lantern / or mobile charger – larger products such as a home lighting system goes out of their loan range, and there is a inflation or a risk factor with larger solar solutions. Our MFI partners, for example, will graduate to a home lighting system because they know that we are there – that’s not true for most MFIs.
Consumer financing for us has happening in two ways – one is with the MFIs, second with rural banks, and the third way was to see if our entrepreneurs would provide credit to consumers themselves. Because they are so locally situated, and because we are very selective about who becomes a franchise, they guys can become a center point to collect money faster. The consumer is connected more to their entrepreneur or a particular local franchise – more so, to the franchise because it’s brick-and-mortar, it’s there to stay, and their family members are probably related to their local social network. For them, it’s really easy to hold someone accountable to any product they have given credit for. From a cost and a risk perspective, it is a lot better that trying to give loans to customers directly.
In terms of supply chain financing, we have been working on a rotational credit model for our franchises. After the first billing, when we understand their pattern for sales, we then offer them some credit terms. So initially, we offer 50% upfront, which becomes 20% and 0% [deposit] upfront, to get a month’s worth of credit to rotate the product that they’ve taken on to stock. The model that we work on though, is that we are all about marketing, and our goal is that once it is in stock, we help franchises push the product out into the market with the customer base. We try to make sure that our franchisees don’t stock beyond a month at a time.
NGOs typically do activities to help an entire community increase their income level, and hence enable a demand for energy products, but private start-ups can’t always afford to do these types of add-on developmental activities. How do you engage with local communities?
We’ve got a diversified basked of channels, and under the entrepreneurship models, we are engaging with women’s groups, farmers, MFI groups, and NGOs to do overall capacity building. The key thing for me is that the individual person – whether they are a franchise or whether they are an entrepreneur – needs to have a certain basic support system. It’s not as simple as just training, and then giving them a product basket, and then giving them financing. It’s actually helping them close their sales in the market.
It’s about giving them a brand identity. It’s about linking them to the community. It’s making sure that we’re doing feedback sessions with their customer base so that we can supply newer products that we know there is a demand for in the market. It’s giving them the opportunity to tell us what they want to sell in terms of the solar basket, and building relationships within the community so that they can link to local government heads. We don’t create ten entrepreneurs in one village for that reason, because we really want that one entrepreneur to earn some serious income from this business, otherwise it’s not worth it for them.
I think it’s really important to remember that. I hear my counterparts talk about how they created a 1000 solar retail points, but if you look at the area actually covered, it can be very small. My number on question is how much money are these people really earning? And is this enough for them or not? And how can you make sure that they have made the right investment to guarantee that at least in the future, there is something these entrepreneurs can do? What happens when they have saturated their market? So I think these are really important factors.
What we’ve been looking at is the ratio between the area covered, the number of people in the village, to the types of products covered and compare this to the capacity to purchase , capacity to sell and capacity to earn an income. It’s an algorithm. It’s very important to understand what you’re doing to this entrepreneur when you bring them into this eco-system.
Image credits: Frontier Markets
Industry Term: energy