Our current thoughts on subsidies

Business Model Diagram

We: Jane, Rohit and I have been working on a Value For Money (VfM) analysis for one of our potential trial funders. This has been a real intellectual challenge and has led to insights we didn’t know existed.

The thought processes we’ve been through have really helped clarify the level and type of subsidy in the ColaLife Business Model and what that subsidy is precisely for. We’d be really interested in comments from any economists or logistics experts reading this. or anyone else come to that.

There are two points at which subsidy may be needed in the ColaLife trial business model. Let’s give them names so we don’t get confused with what follows:

  1. The World Price Subsidy
  2. The Marketing Subsidy
The World Price Subsidy
Before the trial starts we will work in target communities to assess the willingness and ability of mothers and care-givers to pay for an Anti-Diarrhoea Kit (ADK). With that price established we will work backwards down (up?) the distribution chain taking into the margins the retailers and wholesalers will need to make to motivate them to ‘carry’ the ADK as a commodity alongside things like Coca-Cola, detergent and cooking oil. We will then have to take into account the cost of assembling the ADKs and getting the ADKs to the wholesalers and this will give us the maximum cost at which the ADKs can be introduced into the system – ‘price point A’. Our best guess at this figure is USD 1.30. If we introduce the ADKs at a cost of USD 1.30, we will be able to cover the cost of distribution to the wholesaler, the wholesaler’s margin and the retailer’s margin and the ADK will still be affordable to mothers and care-givers in the target communities.
However, our best guess at the world cost of the assembled ADK at ‘price point A’ is around USD 2.00. And this cost is dictated by the world price of the components. The difference of USD 0.70 will be the World Price Subsidy required per AidPod. This subsidy is necessary because those living on 1-2 dollars a day cannot afford the world price of many things. Of course, the need for subsidy will reduce with time as the target communities develop and their incomes increase and as we do everything we can to drive down the World Price of components through things like local manufacture. For the trial this subsidy will be met from the trial budget but we have ideas on how this subsidy might be raised on a sustainable basis. More on that later.
The Marketing Subsidy
The ADK will be a new commodity in the communities we will be targeting and we will need to prime the market to create demand for it which will pull the ADKs into these remote communities – the same pull that brings Coca-Cola to these same communities. To do this we will be issuing vouchers to mothers and care-givers which they will be able to exchange for an ADK. The retailer will be able to redeem the voucher for cash using their mobile phone. Unlike the World Price Subsidy, the Marketing Subsidy is a device to create and stimulate a market for a new commodity that is priced at a level that the target clients can afford and would be willing to pay. So this subsidy is a cost of market establishment and would be phased out once this has been achieved.
Well that’s the way we are thinking at the current time. Make sense?
[This post was re-worded on 28/9/11 for clarification following feedback for users]