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Two-Sided Markets

Check out the original post @ http://aifservicecorps.blogspot.com/2010/03/two-sided-markets.html.

SAATH:

SAATH is a non-governmental organization that utilizes market-based strategies to create inclusive societies by empowering India’s urban and rural poor.

Visa:

Visa is a global payments technology company that connects consumers, businesses, banks and governments in more than 200 countries and territories.

What does that mean? Okay, if you take nothing else away from this please understand this. Visa is not a credit card company. They have absolutely no say over what your credit card limit is, what your interest rates are, or what kind of non-Visa rewards your bank gives you (However use Visa, you’ll be better off all around =)). Therefore, please, please stop asking me or any other former or current Visa employee to fix these issues for you, you will only find our answer frustrating. Instead, go find your friends at CITIBANK, BAC, or ICICI and ask them to deal with your credit card woes.

Visa is first and foremost a technology company. They use technology to support payment transactions between those who want to buy with those who want to sell. Visa gracefully capitalizes on the notion of a two-sided market, allowing it to make more than $6 Billion in revenue in 2008.

By now you are thinking, what does this have to do with SAATH…

Two Sided Markets:

As soon as I walked into the door at Visa, my mentor (Chris Sweetland) handed me a book called “Paying with Plastic.” Although the notion of two-sided markets is all around us, it wasn’t till this book that I internalized the power of the two-sided market - two or more customer groups that receive value only if all sides are actively engaged. It’s the notion of the greater good. If we collaborate we will all be better off. The issuer brings the cardholders, the acquirers bring the merchants, and Visa brings the network to be able to connect any combination of issuing and acquiring institutions.

Let me break this down less technically with the help of “Paying with Plastic” for those of you who are still like: what the heck.

This is a classic example used to explain two-sided markets, I’m just going to put my own spin on it.

Let’s rewind to 2002. You’re waiting in line to enter the “hottest” nightclub in Philly – Transit (Penn, please laugh). When you approach the door, you realize it’s free entry for ladies “AWESOME”, and $20 bucks for the gents. The club is the “network.” Men are one side of the market, and women are the other side of the market. To bring men and women together, the nightclub (network) decided to charge the men, but not the women. Why?

A nightclub is a great destination to meet the opposite sex (assuming that is what you are into). If that is the case, women for some reason are harder to come by in nightclubs, therefore to attract women, and meet the opposite sex’s demands, nightclubs offer their services (a forum for meeting others) free to one side of the market. Genius (and extremely convenient for me =))!

And there you have it: Bring the women and many men will come, and pay to come.

Two-sided SAATH:

SAATH applies the same logic, except to the Bottom of the Pyramid (BOP). SAATH’s Urban Resource Center (URC) serves as a network hub, physically, instead of electronically. It connects service providers in Ahmedabad, to those who need or want it, specifically those in underprivileged communities. The URC offers more than 130 services from acquiring a ration card, to finding a driving instructor. It charges a membership fee to get users to sign up and then allows them to access all of the URCs different services (again for a fee). It helps service providers like the government, other NGOs, and private companies to access this relatively untapped market who is willing to pay for goods and services, but who currently don’t have exposure, access, trust or the knowledge to use them.

The Gap:

Currently, SAATH runs the URC on an NGO model as opposed to a social enterprise. This is where my skills (expertise?) come into play. How can the URC be revamped into a social business which still meets the needs of the bottom of the pyramid, but become self-sustainable (with a surplus) in the process?

The Solution:

Visa charges both sides of the market, why can’t SAATH? Instead of just charging the customers to be linked to services, SAATH should charge private institutions, NGOs and the government to leverage its network platform. Its ability to connect the customer to the supplier is just as or even more valuable to the service provider as it is to the customer. Therefore this linkage, and capitalizing on it, is what will help the URC be sustainable and more importantly scalable. If a service provider had to build its own center or outlet in each underprivileged community, just as if every bank had to build its own payment network, the service provider would make less progress, and so would the bank. The banks realized this in the early 70’s and formed NBI and IBANCO, the predecessors of what is now VISA Inc. SAATH realized this and formed the URCs, and now needs to capitalize on its value proposition.

The Takeaway:

If you want to reach the bottom of the pyramid, tap the URC. If you want to purchase things GO World, GO Visa.

Fun Fact:

Until Early 2008, Visa was a not-for-profit organization, which then successfully converted into a corporation with a p/e multiple of 38.9. The URC currently runs in a not-for-profit status… think of the possibilities.

March Music Madness

Okay guys, don't worry, I'm alive and well. I have just been super busy.

Sorry for leaving you for so long, but to get back in the spirit of things, I wanted to give you the gift of a new hindi song (Aditi and Moneeza, if you are reading this, please have the corporate strategy team on their feet).

Enjoy!

The Top Down (Approach).

I remember reading the vault guide and always wondering when in real life I would ever use the “top down” vs. “bottom up” approach.

And today, as I sat in Ahmedabad, Gujarat inside my friend's WagonR, it happened.

The answer to the “bottom” is the top down approach. In my mind, there are two very hot topics in the development space:

1. Climate Change

2. Bottom of the Pyramid

How do you reach the bottom of the pyramid, and do it in an environmentally sustainable way? The key: you start from the top down!

The answer potentially doesn’t lie in India, or if it does, it doesn’t lie in the slum community. In fact, in order to get those at the bottom of the pyramid to use more environmentally friendly products, or take loans to buy solar lamps instead of battery powered lamps, we need to start at the top. We need to start with influencers.

Who are influencers?

1. Heroes – ex. Doctors (Okay not just any doctors, but doctors that live in small villages, they are huge influencers in small communities)
2. Builders (builders higher contractors, laborers, and day workers, who all use tools, equipment, and supplies that are consumed by the top of the pyramid)
3. Those with buying power (everyone idealizes those with buying power, people want to have the liberty to make the choices that others have, and they would probably make the same choices if they had the money to have that chance)
4. Westerners (I am just going by what I see and hear here, this is not because I have an ego or something… even bollywood idealizes Americans)

Although we may educate the slum community on the benefits to the environment when using “green cement” or “solar powered” lanterns, if we aren’t using them ourselves, and if they aren’t being idealized on television or in movies (television and movies that get to the bottom of the pyramid), then why would someone want to take a loan to buy these things, or why would they want to pay more for them?

Let’s look at the typical buying pattern for any consumer when looking at solar lanterns as an example:

1. Is the quality better? (perhaps, but not on cloudy days)
2. It is cheaper? (initially no, but in the long run yes)
3. Do most people use it ? (no, people generally have electricity lines running directly to their house)
4. Is it better for the environment ? (yes, but remember initially it is more expensive)

A consumers will typically buy something if it is “popular” or they need it. And when they need it, they go for what is most reliable, and definitely what is cheaper. Secondly, most consumers like instant gratification. So why would someone want to get something expensive, when it only pays off in the long run?

In any case, besides the “top of the pyramid” being the influencers, they are also the highest consumers of excess crap. I mean even I’m guilty of it. I probably didn’t need to buy Nutella yesterday, but I did, because well, I like it. Okay so this doesn’t really have to do with Nutella, but more with not buying new things until we really need new things. Or not buying stuff, we really don’t need. What I mean to say is as influencers, policy makers, etc. , we should essentially start with ourselves.

So what is the conclusion? I am encouraging all of you to go and buy solar lamps, wind turbines, etc. to light your houses, instead of using the grid. Since I know that is not holistically practical, what I would like to do instead is to tackle the influencers one at a time. Maybe the doctor in the local village, or the builders who build things, or bollywood. In any case, please don’t take my examples as the end all, instead please understand what I’m trying to say.

This blog post is dedicated to Hasit and Elizabeth, the sidekicks who embarked on this journey and influenced my thinking.