Download Envirofit International: Cracking the BoP Market

Envirofit International:
Cracking the BoP Market
Alexander Gerrese, Judd Howard, and Valerie
Slepak
"By submitting this deck of case slides, the members of our team affirm that we all participated in
the analysis of the case and the creation of this document."
Qualitative Analysis
Customer Value Proposition
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Goal: Envirofit will bring high performance cookstoves designed to reduce
Carbon emissions by at least 50 percent
Although this innovation is valuable for those who understand the
detriment of carbon emissions, the target market, which is made up of
India’s BoP, is likely unaware of these issues and unwilling to spend money
on reducing emissions
Women cooking with primitive stoves are likely to want the product,
however, it is their husbands that are making the purchasing decisions in
the household → even though there is a market with demand for the
product, this market segment does not have the means to purchase it
Since the cookstoves were targeted at customers making $2-$7 a day, the
pricing would have to be attractive enough to make consumers with low
spending levels purchase them
The MVP at launch was the local cookstoves made available by the Shell
Foundation → teaming up with Shell in the beginning allowed Envirofit to
use outside funding based on the shared mission of reducing IAP, which
was helpful in taking the idea off the ground
Technology and Operations Management
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Envirofit’s top management team has many years of experience in technical
fields, however, no one had marketing experience, and there was no one
designated as CMO → a marketing strategist is crucial in such a business
because much of their problems stemmed from being unable to reach their
intended customer segment
Along with Oakridge National Laboratories, they developed the patented
alloy used in the production chamber, which allowed them to put forth the
unprecedented 5-year manufacturer warranty → the patented technology
added to the value customers gained from the product
Outsourcing production to China and keeping the process centralized was a
decision beneficial to both Envirofit and its customers → Envirofit was able
to grow and increase production, while customers benefited from lower
costs
Go-to-Market Plan
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To spur their marketing campaign, Envirofit began by trying to educate its
potential customer base about the detriments of IAP
Envirofit acknowledged and dealt with India’s diverse population by
tailoring the promotional videos to the language and culture of the region in
which they were released → although it would be difficult to otherwise
reach customers who speak different languages, such a marketing
campaign is expensive and time-intensive because it requires so many
variations of the promotional videos
Envirofit succeeded in drawing women in by creating promotional videos
that the women were able to relate to and empathize with, however, they
failed to attract men, as men were generally not the homekeepers, and
therefore only cared about the monetary cost of the stoves
Much of the marketing was televised, and much of the target customer
segment likely does not have the means to own a television
The effects of marketing efforts did not linger → sales would increase
during a marketing push, but dwindle after, which could be linked to the
expensive nature of televised marketing campaigns
Profit Formula
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Envirofit was unable to price their products high enough to earn decent
margins because of the low income levels of its target market
Given the centralized production process in China, if Envirofit’s sales were
in higher volumes, they would be able to cut the costs of products and
therefore sell more and increase margins, but the sales volume was too low
with not much growth between 2009 and 2010, and a lag in 2011
Competition
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The highly fragmented nature of the cookstove industry in India to
directly identify competition
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Customers were not always seeking the highest quality stoves, but
rather were more focused on prices, which Enviroprofit did not
necessarily beat their competition in
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First Energy was a main competitor, however, Envirofit’s
production was more efficient, giving them an edge
Quantitative Analysis
*Above assumes given conversion rate of $1=50 INR
Selected Unit Economics
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All figures in rupees (INR) for consistency
The first three years of production show
steady increases in sales, however the
change between 2009 and 2010 is nowhere
near the ~3x growth for revenue (sales)
and ~2.2x growth in units sold between
2008 and 2009
Costs increase each year but only slightly
The avg. price goes up roughly Rs. 100 by
year, which could be a deterrent for their
target market, even though these prices
are still very reasonable and affordable
Margins improved, and are necessary to
sustain the business since their target
market is low income (BoP level)
They will need margins to continue to
increase at least this quickly in order to
reach profitability if their marketing
efforts do not see any success
To increase the margin, they need to
increase sales even faster than they have,
ideally by increasing units sold
Breakeven Analysis & Marketing
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Breakeven figures show that the stoves require high
volumes in sales in order to be profitable for Envirofit
Envirofit falls short of the necessary breakeven
volume for profitability in both 2009 and 2010, but they
are getting closer to reaching it over time
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We assumed that variable costs were the
same as per unit fixed costs as no
distinction was made in the case study
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Their lack of profitability can likely be
attributed to failures in marketing
They did not include explicit marketing figures,
however we would expect them to be high considering
the diversity of the target market and fragmented
nature of the industry
Marketing efforts focused on the women and health
benefits of lowering IAPs
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The marketing campaigns improved sales,
but did not help sustain increased sales
when they stopped
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The men who controlled the income did not
buy into paying such prices for what they
saw as an unequal health benefit vs.
economic cost, though they do understand
the product benefits
Their marketing efforts fail because they are not
focusing enough on appealing to the men, whether it is
because they are focusing on the women or if they are
not doing enough to show the benefits of the stove
Days of Income to Afford Stove
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To demonstrate the relative cost to families for an
Envirofit Stove, we did the best/worst case in terms of
number of days’ income that it would take to afford the
avg. stove price each year
The higher fuel efficiency of the Envirofit stoves would
require less income to go towards fuel, and therefore
leave families with more disposable income
For families at the upper end (Rs. 350) of the target
market, the average Envirofit stove is extremely
affordable given the data on the proportion of income
going towards fuel and disposable income
The lower end (Rs. 100) would have a slightly harder
time affording the stoves, as it would take and
increasing number of days’ incomes, however they are
still very much affordable at this income level
The high end stove is affordable for either end of the
target market, but it comes in at a higher price than
their competitors, so it is unclear whether or not it
would be realistic to expect purchases without a more
successful marketing campaign
Regardless on the model purchased, the Envirofit
stove saves families thousands of rupees in disposable
income each year that they would be spending on fuel
for their current, inefficient and unhealthy kitchen
stoves
Envirofit is the better option in terms of economics and
in terms of health benefits, so the only thing that
seems to be holding them back is marketing struggles
Issues
Recommendations
Prolonged high marketing costs pose a threat to profitability
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Envirofit accrues disproportionately significant costs with its market
research, town presentations, and informative marketing campaigns
tailored to each local language and customs. There is an inherent need to
educate this customer base so these costs won’t soon disappear
It seems that the great interest shown in research only converts to sales
during promotions, resulting in an unsustainable business model
Low margins pressure Envirofit to scale more quickly despite slow growth
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Envirofit’s stoves require high volumes of sales in order to be profitable
and the company has fallen short of these volumes in both 2009 and 2010.
While its sales trajectory trends upward, with average product prices
rising as well Envirofit may lose potential customers and continue to grow
slower than intended
Since a large portion of the company is the R&D that generated its initial
products, Envirofit requires most profits to be fed back into that division.
This leaves little extra cash to refine operations/hire more employees that
could help increase sales
Advantages
Localized informative marketing campaigns have proven successful
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Surveys show that men and women have become more knowledgeable
about IAPs and the benefits of cooking with energy-efficient stoves
Women’s enthusiasm for purchasing a stove conveys that Envirofit offers
a strong CVP for the targeted customer
Men seem to understand the benefits of the stove but don’t know why they
should spend so much money on a “luxury item” - this means the main
barrier seems to be the cost and image of the product
Little direct competition sets Envirofit up to dominate the market
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Since its main competitor First Energy pivoted strategy after losing its
parent company’s funding, Envirofit is the clear market dominator from a
technological perspective and increasingly from a marketing perspective.
This, coupled with its unique 5 year warranty, should be enough to offset
the currently beatable product pricing
Once operations scale up and local manufacturing is feasible, economies
of scale will improve margins, lower costs and further allow Envirofit to
penetrate the BoP market and obtain market dominance
Envirofit should redirect marketing and sales efforts to the money-saving qualities of energy-efficient stoves
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If households make $2-7 a day, then on average per year they make 4.5*365 = $1642.50. They spend 10-20% of their income on fuel, which is on average $246.38 per year. If
Envirofit’s stoves are 60% more fuel efficient, then people can use 60% less fuel for the same result, meaning they will only have to spend $98.55 on fuel per year. This
saves them a yearly $147.83, meaning that even the $40 “high-end” cookstove pays for itself immediately and should be a no-brainer for customers.
Envirofit should thus focus their marketing funds and efforts on convincing the purchaser of the household that this investment will save them a significant amount of
money that they can spend on food, clothing, or even more luxurious items they couldn’t previously afford