This excellent article in the Stanford Social Innovation Review talks about how the private business model can be applied in multiple different ways to address the problem of adequate food security in poor communities around the world. While the role of businesses has mostly been relegated to ensuring the availability of food, the authors posit that there is potential for hybrid business models to also improve access to food, especially for the so-called “bottom billion.” In order to do this effectively, though, there’s a need to first understand the differences and variations in needs amongst different communities with diverse incomes. As authors, Ulrich Villis and Mehdi L. Hajoui write,
For consumers in the bottom billion, however, companies can generally not expect to immediately realize the full margins they generate from their typical business activities. The prices that the very poor can afford are often equal to or below full product costs, so the forgone profit must be â€œsubsidizedâ€ to achieve a viable business model.
They identify three hybrid models which draw on business principles as well as additional subsidies (since traditional profit-making mechanisms don’t work in this context) to make up for forgone profits. The additional funds can come from governments, social sector organizations, other
consumers and the companies themselves. These are:
The External Subsidy. In the simplest case, governments, foundations, or other social-sector organizations can provide external subsidies, in such forms as cash transfers or vouchers to people in need through existing or new social-welfare programs. Alternatively, these organizations can buy the products directly and distribute them for free to those most in need, while the companies can sell the products to consumers who can afford it.
The Cross-Consumer Subsidy. Under this model, the subsidy is provided by consumers with higher incomes, such as global customers or the middle- and upper-income consumers in a developing country. Wealthier consumers subsidize poorer ones by paying either an implicit or an explicit premium. Companies can achieve this form of price discrimination through a variety of measures, such as by selling separate brands or package sizes marketed to different income levels or by selling lower-priced goods through retail channels where poorer people shop. Alternatively, if made explicit, companies can charge a â€œsocial premiumâ€ to wealthier customers, so that they knowingly cover the subsidy for lower-income consumers.
The Social Business Model. With this approach, the company itself accepts a lower profit and thus covers the required subsidy. Social businesses, as for example proposed by Grameen Bank founder Muhammad Yunus, are nondividend companies created solely to solve societal or environmental problems, rather than to maximize profits.
Although these hybrid models are still evolving, they provide an approach by means of which the poor can meet their basic survival needs in a sustainable, market-based solutions. Rather than using traditional philanthropic activities or donation models, these approaches can plausibly achieve greater social impact as well as greater business impact, including the creation of new markets.