Now we'll hear from Dr. Heiko Gebauer, leader of the Business Innovation for Sustainable Infrastructure Services Group at Eawag. He'll be joined by Caroline Saul, a researcher in Eawag's Department of Environmental Social Sciences. And together they'll present their work on market-based approaches for delivering sustainable water services in low income countries. >> During these days, you might heard quite a lot about the word business model and business model innovation, so it became quite popular. And if you hear business model, you might already have some association in mind what it actually means. And basically, business model more or less describes the logic of organization, how to create and capture value. And the next couple of minutes, we try to answer few questions. First of all, what are business model innovations? And how can we actually contribute to household water treatment systems? And finally, how can different elements in the business model be altered. So business models typically refer to non-profit organizations but also to profit-oriented companies. And naturally in the [INAUDIBLE] water treatment systems you somewhat quite often talk about non-profits. But non-profit doesn't necessarily mean that you don't charge your people. So you also try to recover some of the costs. And organizations like OSHO, the [INAUDIBLE] are trying to give the water filter away for free, but then try to charge the [INAUDIBLE] material to their customers. And customers make anonymous contribution to the water filters as well. Profit-oriented companies like Unilever, of course, they try to make money with their water filters. And the idea is to sell them above the manufacturing costs so we have sufficient revenues and profits to finance the company. And in between non-profit organizations and profit-oriented companies an interesting new type of business model is actually emerging. And these business models are so called social businesses. And in a way because they try to combine economic but also social goals. An example would be Hydrologic from Cambodia. And the social goal is to make household water filters affordable, but also desirable for rural families in Cambodia. But on the other hand, also to recover their costs and to finance the distribution channels and the manufacturing of the filters. And if you work with business models, the most common way is to do it with the business model canvases. And for profit-oriented companies these canvases normally have nine elements. Where you start from the right to the left from your customer segments to customer relationship, distribution, marketing and also the value proposition. And then you take your key activities, key resources, and key partners as well. And these elements are based on different dimension of every business that's about revenues and costs. And if you want to work with that, you basically have to answer three questions. First of all, what value do I deliver to my customers? And what value do I offer my customers? And how do I capture value? How do I finance my business? And for non-profit organizations this canvas might look a little bit different. Here you decide or distinguish into donor model canvases, beneficiary model canvases. And for donor models, it's very much about the value propositions for your donors. And for the beneficiaries, it's about the impact metrics, so what kind of social impact you try to achieve. And you try to combine these different business model canvases in order to your whole approach, your whole implementation of business model financially sustainable. And as part of any of these business models, for social businesses, non-profit organizations, or profit-oriented ones, it's important to understand who is your actual customer and what's your market environment. And this market environment is typically called the BOP market. And BOP stands for the base of the pyramid. The base of the pyramid describes people living close to the poverty line with a handful of dollars per day. And the question is, how we can understand the benefits but also the needs and the preferences these people actually have. And we don't want to go into any details here. There's a lot of literature actually describing base of the pyramid strategies, subsistence marketplaces, but also how we out of poverty or even how you make business solutions to poverty. Here's just examples of books and links you can follow up with in order to better understand how you can really make your products and services affordable for the BOP market, but also desirable. So, let's come to the next question. How can business model innovation actually contribute to household water treatment systems? And if you look into how household water treatment systems should go into the market, how we can penetrate a market, you typically start with a pilot phase. Where hopefully you can prove that the distribution and sales of your household water treatment system becomes financially sustainable. And then when the pilot becomes successful, you try to scale up to reach in higher market penetration to sell more filters. That finally where you can scale up in terms of social impact, but also in terms of your financial contributions and the finances you need to get from a pilot to a scale. Unilever started with a CSR business model. So, in their CSR projects for years they experimented with finding new ways in creating a mini water treatment plant that can finally become a basic household water filter. They made a lot of design changes and a lot of cost reductions in order to make this kind of household water filter the compact 40 liters filters desirable, but also affordable. By introducing it to the market and by also looking into the first commercial successes, Unilever actually saw that it becomes quite an interesting business format. So they re-integrated it into the lower business units. So by seeing, actually, the commercial success Unilever decided to change the business model to a commercial business model. And a key element of this business model was going for the different kind of sales channels like door-to-door but also traditional retail channels to reach a high number of customers. And if you talk about a high number of customers, and now about 57 million people benefit from this kind of filter. But they also went for portfolio extension. So instead of just going for one filter or maybe couple of them, they really increased the product portfolio. And this product portfolio no longer address only the low income segment, but also more into the middle income, but even high income segments. All these features have an aspirational design so they look nice. People really want to desire it. And they're nevertheless, also affordable. And when it comes to affordability, Unilever implemented an interesting business model innovation. In this business model, innovation is actually quite close to what are initially introduced with the printer and the ink. So, Unilever makes money selling the filter, but also with selling consumables, or what we call germ kill kits. So after an amount of time you have to replace your germ kit in your filter, and Unilever makes money with selling these kits. And [INAUDIBLE] the distribution channels and to have a link to the existing customers. And by phase 2, as I said, Unilever's business model became financially successful and could scale up as well. Now let's look into the last example, and this is from a social business. Social business Hydrologic in Cambodia. Hydrologic started initially with the idea, we want to make a very cost effective household water filter. And by making it very cost effective, they went for a simple design in order to make it very affordable for the people. And the idea was to sell this kind of design to NGOs that more or less can give this filter to the beneficiaries. Either by charging for it as well or maybe even giving it away for free. What they tried to do was, of course, that is NGOs, if they don't sell it, they have to subsidize the product. So the NGOs also have to invest in it. And the whole set up was finally, unfortunately in the way that the manufacturing cost of the household water filter, the Hydrologic head, was above the sales price. And above the sales price means Hydrologic had need donations to finance its business, but also the NGOs needed donations to subsidize the water filter prices. And now is the question, how we change this kind of thing? Can you for example make it more attractive by adding financial services, like micro credits to it that people might not been able to invest in it, but maybe micro credit might solve a problem. But interestingly, Hydrologic changed even more than just a financial service. What they did is really going for an aspirational design. So, instead of making the product cost effective, more affordable, they changed the whole mindset. Saying, no we want to have something that is aspirational and which is easy to use for our customers. And by making it aspirational, it became attractive also for commercial channels. So today you can buy these filters not from the NGO but from traditional retail channels in Cambodia. And by selling more to people, Hydrologic experience, that interestingly the manufacturing cost went down. Because by producing more, it means you have higher economies of scale and to reduce your manufacturing costs. So, Hydrologic was actually the position that the sales prices was higher than the manufacturing costs finally. And by making money with the filter, the old business model became financially sustainable. And in about two years, about 100,000 filters could be sold. >> So, Hakio's spoken to you so far about what are business models, what are business model innovations, and how can they contribute to household water treatment systems. Now I'm going to discuss some of the trends we're seeing in business model innovations for water treatment systems. We published the paper in 2014 which classifies implementation models for water service provision and identifies some ways organizations are innovating. Which includes diversifying their offerings, securing payments, increasing cost recovery, and extending their distribution channels. Diversification can mean adding additional water treatment products targeted at different customer segments. Selling additional products, like shampoo and hygiene products. And securing financing via unconventional avenues such as carbon credits or green or social impact bonds. Securing water payments can be achieved by a partnering with mobile payment services such as and allowing people to access treated water using prepaid cards during times when water retailers would usually be closed. Cost recovery and increasing cost transparency can be achieved through local production of equipment and training local staff for repairs. Additionally, by increasing the density of the distribution of units, repairs and replacements can be attended to quickly, which reduces losses which would be incurred if there was downtime. Developing professionalized distribution approach can involve multi-channel distribution, which means you could sell door to door but also in supermarkets. This would involve individual distribution targets, margins, and sales volumes for each channel. Additionally, distribution centers can be become service centers which also handle the marketing of new products. In summary, we've explored what are business models, business model innovation, and what aspects of them can be altered in order for household water treatment systems to reach scale by exploring the journey of three different organizations who have been producing successful household water treatment systems. I hope you enjoy the rest of the course in the week, and good luck on your exam.
