Understanding opportunity cost for latrine suppliers
iDE Global WASH
Determining the right price: affordable for consumers and profit-motivating for manufacturers.
At first, iDE recommended a minimal profit margin (around $5/latrine) to increase affordability for rural households. We believed that enterprises would be motivated to sell latrines on a low-margin, high-volume model given the large market of potential customers. However, experience showed that enterprise motivation depends not only on profit margin, but also on the opportunity cost of other lines of business.
Latrine business owners (LBOs) and sales agents, like most rural Cambodian households and small businesses, have multiple streams of income. LBOs, despite iDE’s title for them as “Latrine Business Owners,” tend to be concrete producers who happen to make and deliver concrete components of a latrine. But often their main income is from other concrete products and they often have contracts that are more lucrative than latrines. Thus, a low margin will preclude their engagement in producing and promoting latrines.
We originally selected LBOs based on their overall business capacity. However, iDE found that the most engaged LBOs were not necessarily the largest. Sometimes, the highest selling LBOs were the smallest. What mattered was the proportion of business coming from latrine sales. An LBO with few other lines of businesses, or whose other lines of businesses were less profitable than latrines, was more likely to be focused on selling latrines as the opportunity cost was lower.
To keep businesses engaged, iDE advised LBOs to raise prices, which also contributed to a higher commission to sales agents. Some LBOs were concerned consumers would not be willing to pay more. However, more LBOs began selling latrines for $40 in the southern provinces than the original $35 price. Overall demand was steady at that time, and iDE did not hear any customer complaints from LBOs or sales agents. Gradually, the price has increased to an average of $61 in 2018, although this differs between provinces and ranges from $55 in Prey Veng and Svay Rieng to $71 in Banteay Meanchey. The price has increased as material costs have risen, sales agent retention has demanded higher commissions, product preferences in certain provinces have necessitated extra costs (in some provinces a 1-meter diameter concrete ring is preferred for the latrine pit, compared to iDE’s standard .8-meter ring), and LBOs have requested higher prices to continue to stay in the market. In addition, the Easy Latrine is now sold with installation included, which has added approximately $10 to the price. Today, on average, LBOs can expect to profit around $0.14 per dollar for an Easy Latrine, yielding between $7 and $9 profit per set delivered.
iDE also began training LBOs to produce latrine shelters and an alternating latrine pit upgrade product to diversify their sanitation product offering. iDE’s latrine shelter models range in price from approximately $200-$400 USD, and the alternating pit upgrade product sells for just under $50 USD. This expanded product diversity allows for increased sales opportunities, higher commissions, and more profit to further motivate sales agents and LBOs. By selling latrine shelter models, iDE is working to address the issue of customers delaying the installation and use of the latrine while they wait to construct a shelter.
As the sanitation market reaches saturation and poor households make up a larger percentage of the remaining first latrine market, balancing affordability and LBO profits will be critical to sustainably reaching full latrine coverage.