Behavioural Freeconomics Best Practice F

Masters of Science in Sustainable Development
Professional Thesis
BEHAVIOURAL FREECONOMICS:
Best Practice for Competing Against Free at
the Bottom of the Pyramid
Written and presented by

Yvette Naufal
August 2015
Under the supervision of

Vanessa Catherine,
Senior Manager Procter & Gamble
“Probably most mathematicians of the ancient world would have been horribly
puzzled by the number zero. For after all, it is a very subtle idea, not at all obvious.
It is in a way the most civilised of all the cardinals, and its use is only forced upon
us by the needs of cultivated modes of thought.”
- Alfred North Whitehead, An Introduction to Mathematics, 1911.
2
Best Practice for Competing Against Free at the Bottom of the Pyramid Y. Naufal
Table of Contents
Table of Contents 3
List Of Abbreviations And Acronyms 5
Abstract 5
Acknowledgements 7
Introduction 8
Overview of Thesis Structure 9
Zero & the Economy of Free in Developed Markets 11

Zero: A Unique Number, Probability, Reward & Price 12
Psychology of zero 12
Psychology of free 13
The Economy of Free 16
Free as a Business Model 17
Criticisms 21
Competing Against Free 24

Types of Free Competition 25
Best Practice Principles for Competing Against Free 26
1. Assess the threat: Decide whether and/or how to respond 26
2. Find the Scarcity: Differentiation 27
3. Divide and Conquer: Segmentation 28
4. If you can’t beat them, join them: Collaboration & Acquisitions 29
5. Offer a better free 30
6. Know thy enemy: Imitate or match free competition 31
7. Match or exceed convenience 31
8. Ensure the price is right 32
9. Maximise network effects 33
10. Rethink profit centres 34
Doing Well by Doing Good 36
The Bottom of the Pyramid 36
Social Business 38
Criticisms of BoP and Social Business 39
Hand Ups vs. Hand Outs 41
Customers and Communities 42
Local Economy & Competition 44
Applying Best Practice from Top to BoP 46
Methodology 46
3
Case Studies: Best Practice Applied 48

Background 48
Kibera slum 48
The Water and Sanitation Challenge 49
Case Study 1: Kibera Town Centre 53
Background 53
Competitive Landscape 55
Competing Against Free: Analysis 58
Case Study 2: Peepoople 65
Background 65
Competitive landscape 66
Competing Against Free: Analysis 67
Analysis And Discussion 73

Key Themes 73
Lowering barriers to trial through price promotion 73
Complementary services and products 75
Younger people with more open minds 76
Recommended Additions to Best Practice 77
Breaking the association with NGOs 77
Infusing local ‘flavour’ 79
Limitations and Opportunities for Further Research 80
Conclusion 81
Works Cited 83
Table of Contents 91
Table Of Figures 94
Table Of Tables 94
4
List Of Abbreviations And Acronyms
3Cs Community Coordinating Committee

AU$ Australian dollar (currency)
BOP Bottom of the Pyramid
FOSS Free and Open Source Software
FTC Federal Trade Commission
HNP Human Needs Project
ITN Insecticide-Treated Net
J-PAL Abdul Latif Jameel Poverty Action Lab
KSH Kenyan shilling (currency)
MDG Millennium Development Goals
NGO Non-Governmental Organisation
KTC Kibera Town Centre
RCT Randomised Control Test
P&G Procter & Gamble
PPP Purchasing Power Parity
UN United Nations
US$ US Dollar (currency)
5
Abstract
Background & Objective

This thesis is positioned at the confluence of two major business trends of the previous
decade. First is the emergence of business models that offer valuable goods or services
for free. Second is the challenge of profitably meeting the needs of the world’s four
billion poorest people, the so called Bottom of the Pyramid (BoP). This paper aims to
contribute to both fields by extending the lessons from one to another, looking at how the
experiences of companies competing against free in the developed world might relate to
social enterprises struggling to overcome expectations of free at the BoP.
Methodology
A list of ten best practice principles is derived through a synthesis of literature on
competing against free in developed markets. This relevance of this list is assessed and
discussed in two case studies of social enterprises operating in the slum of Kibera in
Nairobi, Kenya: The Kibera Town Centre and Peepoople.
Results
Though few commonalities emerged between the two cases’ experiences at the principle
level, three overarching themes behind their successes emerged:
1. Price promotion was an effective tool in lowering barriers to trial, through
discount pricing and promotional bundles;
2. Marketing pairs or groups of complementary products positively impacted the
utility and desirability of offers; and
3. Younger people were a key strategic segment as they had with the least exposure
to free offers.
Two additional success factors, both related to branding, are highlighted as recommended
additions to best practice:
1. Breaking the association with NGOs is critical to being taken seriously as
commercial ventures and ultimately breaking the association with free; and
2. Infusing local “flavour” gives the community a sense of belonging and ownership
and helps to further break down expectations of free.
6
Acknowledgements
I would like to thank the teaching staff of the Master of Sustainable Development at HEC
for sharing their knowledge, experience and insight. To Vanessa Catherine, the supervisor
of this thesis – thank you for your feedback and guidance throughout the research process
and during our time as colleagues. Thank you to Peepoople and particularly to Martina
Nee, for generously sharing your experience. In addition, a special thank you to Ashlen
Francisco, Michael Alo and Nicolette Louw for your support in planning and
proofreading my work.
Lastly, I would like to say an extraordinary thank you to those who I worked with at
Procter & Gamble and Human Needs Project with a special thanks to Frantz Beznik,
Virginie Helias, Frederic Courbois and again to Vanessa Catherine. There are not enough
Acknowledgements pages in the world for me to thank you for the gift of the experience
you gave me. I hope you find this thesis does it justice.
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Introduction
When strategy scholars introduced the idea of the Bottom of the Pyramid (BoP) to the
business world over a decade ago, it was heralded as a way to “eradicate poverty through
profits” 1 . The movement characterised the world’s four billion poorest people as a
prodigious business opportunity, where life improving goods were distributed through
high-volume, low-margin business models, at ostensibly great profit to companies. Years
later, many social enterprises have joined the pursuit of the promised fortune at the
Bottom of the Pyramid, though few are striking gold.
Around the same time as this creation of new markets was taking place at the BoP, an
important disruption of established markets was occurring at the Top. A growing number
of companies in developed markets were defying the idea that you can’t get something
for nothing, offering consumers valuable goods and services for free. This radical change
was driven by business model innovation and reduced marginal costs and it posed a
serious competitive threat in industries like software, media, entertainment and travel.
While the zero price point was a new competitive force in developed markets, it was in
many ways an incumbent rival at the BoP. This is true particularly for social enterprises,
who often have the difficult task of convincing communities that poverty alleviating
services or goods should no longer be free. This thesis intends to address this challenge
by examining how the lessons of competing against free in developed markets can be
relevant to struggles in developing markets. Specifically, this thesis sets out to answer the
research question: How do best practice principles on competing against free in
developed markets apply in the context of the Bottom of the Pyramid?
This research question will be answered by addressing the following aims:

1. Identify current best practice on competing against free in developed markets;
2. Assess and discuss the relevance of developed world best practice to the BoP
through case study analysis; and
3. Suggest additions to best practice for competing against free at the BoP.
1
Prahalad, C.K., 2006. Fortune at the Bottom of the Pyramid: Eradicating Poverty Through Profits. Upper Saddle
River: Wharton School Publishing.
8
These aims have been addressed using a combination of primary and secondary research.
Using a literature review as the foundation to address the first research aim, the key
method used to tackle the final two aims is a case study approach. The two cases that
have been selected for study are social enterprises operating in the slum of Kibera in
Nairobi, Kenya: The Kibera Town Centre and Peepoople. The information for these case
studies has been acquired through a series of semi-structured interviews with
representatives from the two projects studied and has been supplemented by publicly
available sources, as well as internal documents provided by the companies.
Overview of Thesis Structure
In the spirit of knowing thy enemy, the first chapter of this thesis will explore the impact
of zero on the mind, as a unique number, reward, probability and price. Drawing from
literature in the fields of psychology, strategy and behavioural economics, the intention of
this section is to illustrate the allure and power of free and to reflect the scale of the
challenge for those who come up against it. The following section will detail the
emergence of the economy of free, outlining the major business models that manage to
make money from giving goods and services away, as well as the common criticisms they
encounter.
Building on this description of why and how companies give something for nothing, the
second chapter of this thesis will explore the experience of their competitors, who face
the challenge of convincing consumers to pay for something they could otherwise get for
free. Synthesising the literature focused on competition in developed markets, the chapter
will look at what it takes to succeed in industries like software, pornography and media,
addressing the first research aim of this thesis by building a list of best practice principles
that will later serve as the framework to compare competition in developed markets with
the Bottom of the Pyramid.
To provide context to this comparison, the third chapter of this thesis will begin by
defining the key concepts of social business and the BoP. Existing context-specific
research on the impact of free on customers, communities and local economies will then
be outlined to isolate the gap in the literature that this thesis aims to address. The chapter
9
will conclude by describing the methodology used to contribute to this field and the
rationale behind it.
The final two chapters of this thesis will present, analyse and discuss the primary research
undertaken, addressing this paper’s final two research aims. This is achieved through a
case study approach, exploring the relevance of developed world best practice to the
Kibera Town Centre and Peepoople. The two cases will be studied individually and then
together to give a holistic picture of each case, to detect common characteristics of the
two experiences and to identify recommended additions to best practice.
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Zero & the Economy of Free in Developed Markets
Though it may seem like nothing, the number zero is in fact one of the most important
discoveries of human history, and perhaps surprisingly, a fairly recent one. In its earliest
forms, the concept of zero was reflected in a symbol used by Babylonians to express an
empty space in a number. It was absent from the mathematics of Ancient Greece and
rejected by Aristotle, Pythagoras and their followers for centuries on the basis that the
existence of void, or zero, was impossible given that God is infinite. It was not until the
concept of zero made its way to India, where infinity and void appear in the same system
of beliefs that people first began to understand zero as a symbol and as an idea.
It was in around 650AD that renowned Indian mathematician, Brahmagupta first

formalised arithmetic operations using zero, marking it with dots underneath numbers,
though it was not until the mid 12th century that zero made its way to Europe. However,
as Aristotle had rejected zero and Christianity was partially based on Aristotelian
philosophy and his “proof of God”, zero was not widely embraced by the Christian world
until the sixteenth century. Zero made its final transformation into the number we know
and depend on today when Newton and Leibniz, the inventors of calculus, made the final
step in the discovery of adding, subtracting and multiplying by zero in the 1600s.
Today, zero is a fundamental building block of our world, an idea that makes calculus,
financial accounting and rapid arithmetic computations possible and, importantly in
today’s connected society, computers. It continues to be the subject of much academic
research, not only in the field of mathematics but also, as this thesis will explore, in the
fields of psychology, behavioural economics and management. Zero, an idea that took
some of history’s greatest minds many centuries to comprehend, continues to be an
exceptional number that excites, confuses, stimulates and influences the human mind like
no other. It is a unique number, price, reward and probability – so much more than its
numeric value would suggest.
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Zero: A Unique Number, Probability, Reward & Price
Psychology of zero
Zero holds a special place in the human mind, influencing and interfering with decision-
making in a unique way. There is much evidence to show that, in various domains, the
transition from small positive numbers to zero is discontinuous. One such example is in
the context of gambling, where Kahneman and Tversky, often hailed the “fathers of
behavioural economics” 2 discovered that there is a substantial, disproportionate
difference between a person’s perception of zero probability and very small
probabilities.3
The power of zero to interfere with numerical reasoning can also be observed in what is
known as the zero-comparison effect, where the presence of zero inhibits an individual’s
ability to make relative comparisons.4 Take the example of a shopper choosing between
two items; Option A) a yoghurt with 10 grams of fat and Option B) a yoghurt with 1 gram
of fat. The shopper does not need prior knowledge of typical or recommended levels of
fat to understand that the Option B has ten times less than Option A. In this context, it is
clear that Option A performs significantly better on this metric. However, if Option B
were to have 0 grams of fat, no such comparison can be made. Any number is an infinite
times larger than zero and individuals must therefore rely on prior knowledge to interpret
the absolute difference rather than the relative difference.5 In this context, advantages and
disadvantages that would otherwise be clear risk becoming less obvious and impactful.
As an incentive, zero has also been found to have a surprisingly large impact on people’s
motivation and performance. Festinger and Carlsmith’s cognitive dissonance theory
shows that offering people zero reward for a task increases the task’s desirability,
compared to when a small reward is offered.6 When a reward is offered, the individual’s
intrinsic motivation can be negatively impacted and motivation can be switched from
2
The Economist, 2011. Human decision-making: Not so smart now. The Economist, 29 October.
3
Kahneman, D. & Tversky, A., 1979. Prospect theory: An analysis of decision under risk. Econometrica, XVLII,
pp.263-91.
4
Palmeira, M.M., 2011. The Zero-Comparison Effect. Journal of Consumer Research, 38(1), pp.16-26.
5
ibid, p. 4.
6
Festinger, L. & Carlsmith, J.M., 1959. Cognitive Consequences of Forced Compliance. Journal of Abnormal and
Social Psychology, 58, pp.203-10.
12
intrinsic to extrinsic. In this case, performance can often be greater in the presence of zero
reward, as has been tested in the contexts of IQ tests and charity fundraising. 7 In both
cases, the conventional prediction that higher compensation leads to higher performance
was confirmed, though researchers found that the act of introducing compensation had
lowered performance overall.8
Psychology of free
Defying the classic analysis of rational consumer behaviour, zero as a price has been
found to increase demand in a disproportionately significant way. Applying the research
on the psychology of zero to the domain of pricing, Shampanier, Mazar and Ariely have
coined the term, zero-price effect.9 In an experiment that varied the price but maintained
the price difference between two varieties of chocolates, it was shown that an option with
zero-price, that is, free, was considered so remarkably attractive that the alternative
option, though yielding a higher net benefit, was foregone. This result is attributed to the
higher positive feeling, or affect, that is generated in the face of a free offer, given that the
free offer is considered an offer that has only benefits and no costs.
This higher affect generated by a free offer is not confined to single products but is in fact
also relevant to multicomponent contexts, that is, where only one component of a product
is free while another component must be paid for. In their experiment examining the
effect of offering free breakfast with a hotel booking, Nicolau and Sellers find evidence
of the zero-price effect 10 , or as they call it, the “free breakfast effect” 11 . Though
participants held a preference for one booking option, they were more likely to opt for
another option when breakfast was also included in the offer. Though a bundled purchase
always requires a price to be paid, a positive feeling is nonetheless generated towards the
free component and consequently, towards the bundle as a whole. This finding is
supported by similar research that shows that consumers prefer to have a free product as
7
Gneezy, U. & Rustichini, A., 2000. Pay Enough or Don't Pay at All. The Quarterly Journal of Economics, 115(3),
pp.791-810.
8
ibid., p. 801.
9
Shampanier, K., Mazar, N. & Ariely, D., 2007. Zero as a Special Price: The True Value of Free Products. Markeitng
Science, pp.742-57.
10
Nicolau, J. & Sellers, R., 2011. The Free Breakfast Effect: An Experimental Approach to the Zero Price Model in
Tourism. Journal of Travel Research, 51(3), pp.243-249.
11
ibid., p. 247.
13
part of a bundle rather than a 50% discount on the bundle, even when the final price is the
same.12
Evidence of the zero-price effect has also been found in an intriguing natural experiment.
When online retailing giant, Amazon introduced free shipping in selected European
countries, the shipping price in France was mistakenly set at one French franc
(approximately US$0.10), a negligible positive price, instead of free. While other
European countries saw dramatic increases in the numbers of orders with the introduction
of free shipping, there was very little change in demand in France with this mistaken shift
to almost but not quite free shipping.13
As it typically implies only benefits and not costs, the decision to take a free offer is
particularly simple. This simplicity is often cited as being a large part of its appeal14 and it
has been shown that the simpler the decision, the stronger the impact of the zero-price
effect.15 This is coherent with research on decision costs, which finds that decision costs
can increase price sensitivity and cause people to forego potentially profitable offers,
particularly among the poor.16
Building on the existing literature that shows that decision-making is cognitively costly17,
it is important to consider the concept of an agent’s endogenous price threshold, which is
the price at which a person can spend money without deliberation. This threshold
increases with an individual’s wealth; a person of moderate wealth, for example, might
spend a few dollars carelessly but need to carefully consider an expense of a few hundred
dollars. For poorer people, this threshold is typically very low, 18 meaning that any
positive price may require deliberation. This increases the likelihood that potentially
valuable offers will be foregone if the price becomes higher enough to require
12
Spiegel, U., Benzion, U. & Shavit, T., 2011. Free Product as a Complement or Substitute - Does it Matter? Modern
Economy, 2(2), p.124.
13
Shampanier, Mazar, & Ariely, op cit., p. 9.
14
Shampanier, Mazar, & Ariely, op cit.
15
Driouchi, A., Chetioui, Y. & Baddou, M., 2011. How zero price affects demand?: Experimental evidence from the
Moroccan telecommunication market. Ifrane: MPRA Al Akhawayn University.
16
Spears, D., 2014. Decision costs and price sensitivity: Field experimental evidence from India. Journal of Economic
Behavior & Organization, 97, pp.169-84.
17
McGuire, J.T. & Botvinick, M.M., 2010. Prefrontal cortex, cognitive control, and the registration of decision costs.
PNAS, 107(17), pp.7922-26.
18
Spears, op cit., p. 170.
14
deliberation but the apparent value is not enough to make deliberation seem worthwhile.
In these cases, the agent will forego the offer without thinking. The value of free offers is
therefore particularly salient in the context of poorer people, as decision costs for these
transactions are typically very low or non-existent, allowing offers to bypass the
restriction’s of the agent’s endogenous price threshold.
Another proposed cause of the zero-price effect is that free goods may have nudge
qualities. A key concept in the field of behavioural economics, a nudge is the act of
crafting “choice architecture” to influence people to make certain decisions without
losing their freedom of choice.19 Though the idea of nudge strategies was created with the
intent of guiding consumers towards decisions in their best interests, in the marketplace,
nudge strategies can be employed to influence individuals to consume in a way that may
be against their short and long-term interests. One such example of this is the case of free
newspapers designed to gain or maintain political influence, which can ultimately have
the impact of reducing social wellbeing if they are found to replace other more critical
and fact-based sources of information.20
The non-linearity in demand caused by free offers is also sometimes referred to as the
penny gap. 21 This term was first coined by Venture Capitalist, Josh Koppelman to
describe the difficulty in charging customers for digital content, even at prices as low as
$0.01. Digital markets are increasingly characterised by content and services that are free
to the consumer and this approach can be seen growing in physical markets as well. This
presents a new set of challenges to both the businesses offering something for nothing
and to those who must compete against them. The following section will explore this
dynamic, providing an overview of today’s economy of free, the business models behind
it and a summary of the current best practice for competing against free.
19
Thaler, R.H. & Sunstein, C.R. 2008. Nudge: Improving Decisions about Health, Wealth & Happiness. New Haven:
Yale University Press.
20
Gal, M.S. & Rubinfeld, D.L., 2015. The Hidden Costs of Free Goods: Implications for Antitrust Enforcement.
Working Paper. New York: New York University School of Law.
21
Anderson, C., 2009. Free: The Future of a Radical Price. New York: Hyperion.
15
The Economy of Free
In 1901, The Gillette Company invented the first safety razor and in the years that
followed, pioneered the “razors and blades strategy”, one of the first known business
strategies designed to make profit by giving a product for free. 22 The company gave razor
handles as freebies with a whole range of products including coffee, tea, spices and
marshmallows. Razor handles were donated in bulk to the US army during World War I
and were given as gifts upon the opening of a bank account as part of “shave and save”
campaigns.23 By giving away the razor handles, which were useless without the blades,
Gillette created significant demand for their high-margin disposable blades, a product
designed to be bought in great quantities and thrown away with ease.24
Gillette is now owned by American consumer goods multinational, Procter & Gamble
and is among the company’s portfolio of brands surpassing US$1 billion in sales globally.
The now famous “razors and blades” strategy has become a staple in the marketing
practices of many industries. Offers such as free mobile phones with the purchase of a 12-
24 month service contract are now abundant in the marketplace and these free offers are
far from radical. In reality, these ‘free’ offers are perhaps more accurately described as
cross-subsidies as the profit derived from the increase in sales tends to compensate for the
part marketed as free.
Though no longer considered radical, these early forms of free strategies have paved the
way for the current economy of free, a phenomenon characterised by the increased
provision of goods and services at zero cost to the consumer. Significant advancements in
methods of production, distribution and dissemination of information have systematically
driven down marginal costs in recent years. Basic economics shows that in a perfectly
competitive market, prices should fall to marginal cost and indeed, as marginal costs
decrease towards zero, so too grows the proliferation of free goods and services in the
marketplace. This is particularly true in digital markets but is increasingly apparent in
22
Anderson, op cit.
23
ibid.
24
Picker, R., 2010. Gillette's Strange History with the Razor and Blade Strategy. Harvard Business Review, 23
September.
16
physical markets, where cost reductions and business model innovation are contributing
to a growing economy of free.
The previous section described the influences at play behind the demand of free goods.
This section will explore the supply side of that equation, outlining how and why
companies offer free goods and how to compete against free. Starting with an overview
of the predominant business models driving the free economy and exploring some of the
criticisms of such approaches, this section will conclude with a compiled list of best
practice principles for competing against rivals who are pursuing a free strategy.
Free as a Business Model
The following list of common free-based business models is intended to give a broad
overview of the most prevalent approaches in the market today. It is by no means an
exhaustive list, nor are the categories presented mutually exclusive. Companies may
favour one of these business models, a combination of these business models or an
entirely different business model not listed below. The most common approaches have
been summarised below in four key categories:
1. Freemium,
2. Three party markets,
3. Cross-selling and
4. Non-monetary.
A brief description is also given of some models falling outside of these categories.
Freemium
A portmanteau of the words ‘free’ and ‘premium’, a freemium business model is one that
offers users a basic version of a product for free, with the option to purchase premium
versions or services. Using their free offering to grow a very large user base, companies
successfully following a freemium approach are generally able to generate profit with a
very low conversion rate, commonly converting only 1-2% of the total user base to
paying customers.25 Freemium has become the dominant business model among today’s
25
Anderson, op cit.
17
online start-ups and smartphone app developers as the subscription fees that many charge
have been found to be a more sustainable source of revenue than the traditional
advertising-based free models popularised in the early 2000s.26
Notable examples of freemium companies include:

• Skype: Offers free Skype-to-Skype calling service and charges users to make calls
to landline and mobile numbers;
• LinkedIn: Basic functionality offered for free with enhanced job-seeking and
networking features in the subscription-based Premium offer;
• New York Times: Allows readers to access up to 10 articles per month with the
option to pay a subscription fee for unlimited access; and
• Gameloft: Provides free basic version of games and apps with optional in-app
purchases available for upgrades and competitive advantages.
Three party markets

A business model that operates in a three party market is one where a free exchange is
created between two parties and a third party is charged to participate in the exchange.
This can be coordinated in a number of ways, with the classic method being through
advertising. Advertising may be in the form of banners or commercials integrated around
content, or, as more recently introduced, integrated into the content itself, as in the
examples of product placement or paid inclusion in search results.
As advertising-based models are falling out of vogue, many digital businesses are looking
to the rise of big data as a significant source of revenue in future.27 There are a number of
ways that companies can monetise the data they receive through exchanges with non-
paying customers. Smartphone apps, for example, aggregate all kinds of data from users,
including their locations, personal information, habits and communications. This discrete
invasion of users’ privacy is increasingly coming under public and government scrutiny28
and it will be important to track how legislation keeps up with this rapid technological
progress in the years to come.
26
Kumar, V., 2014. Making "Freemium" Work. Harvard Business Review, May. pp.27-29.
27
ibid.
28
The White House, 2014. Big Data: Seizing Opportunities, Preserving Values. Washington, DC: The White House.
18
Examples of businesses operating in three party markets include:

• Facebook: Access to the world’s largest social network29 is provided free to users,
while the company generates revenue mostly through advertising and by revenue
sharing with freemium games and apps built into the platform;
• Travel agents: Advice and bookings are provided free of charge to travellers,
while commission is charged to hotels, airlines and tour providers; and
• Pornography: Viewers of free pornography are often asked to solve ‘captcha’
images before watching videos, which are sold to spammers wanting to create
new email accounts en masse.30
Cross-selling
A cross-selling approach is the act of giving a free product designed to entice the receiver
to pay for something else. This is an ideal model to increase revenue for complementary
products in lucrative markets. Instances of cross-selling can be seen in strategies as
classic as free peanuts at a bar designed to make patrons thirsty for typically high-margin
beverages.
Other examples of cross-selling in action include:

• The Arctic Monkeys: This UK-based band rose to popularity by burning copies of
their CDs to give to fans for free at concerts. This allowed them to grow a large
fan base, which subsequently paid for tickets to see them live in concert.
• McDonalds: One of the first companies to provide free Wi-Fi, McDonalds saw a
15% increase in sales when it introduced this offer in 2004.31
• Galderma: This speciality pharmaceuticals manufacturer successfully grew the
markets share of their prescription acne gel, Epiduo, by rebating the full cost for
the first year and cross-selling other skin care products to these customers via
email marketing.32
29
Ross, M., 2014. Facebook turns 10: the world's largest social network in numbers. ABC News, 4 February.
30
Egele, M., Bilge, L., Kirda E. & Kruegel, C., 2010. CAPTCHA smuggling: hijacking web browsing session to create
CAPTCHA farms. Proceedings of the 2010 ACM Symposium on Applied Computing, pp.1865-1870.
31
Tuttle, B., 2012. Big Chain Restaurant Trends: Hot Menu Items, Hot Marketing Strategies. TIME Magazine, 11 June.
32
Bryce, D.J., Dyer, J.H. & Hatch, N.W., 2011. Competing Against Free. Harvard Business Review, June.
19
Non-monetary
Though not facilitated by a business model in the strictest sense of the term, free goods
and services offered for non-monetary gain nonetheless make up an important part of the
economy of free. Under this category include goods created or given for altruistic or
philanthropic motives, or for a number of other reasons such as building reputation,
gaining experience and engaging in a community.
Notable examples include:

• Wikipedia: The free online encyclopaedia is run by a non-profit organisation and
relies on unpaid, crowd-sourced contributions to build and maintain the database.
The site’s mission statement is “to empower and engage people around the world
to collect and develop educational content under a free licence or in the public
domain, and to disseminate it effectively and globally”.33 In 2012, its major paid
competitor, Encyclopaedia Britannica announced it would no longer publish a
print edition and Wikipedia continues to be a major competitive threat to
Britannica’s paid online offering.
• Free and Open Source Software (FOSS): Applications such as Linux, MySQL and
Apache were born out of the voluntary collaboration of independent software
developers. These contributions may be motivated by a desire to engage in a
cooperative creative activity, creating a better product for self-use or reputational
development. It may also, however, be driven by a desire to create a competitive
threat to an existing commercial monopoly.
33
Wikimedia Foundation, 2015. Mission Statement. [Online] Available at:
http://wikimediafoundation.org/wiki/Mission_statement [Accessed 2 March 2015].
20
Other
The economy of free is rapidly evolving and the linked business model innovation is
widespread. Additional models that do not fit into the above categories include but are not
limited to:
• Growing to sell: Access to a service or product may be provided free for the
purpose of product development. An interesting example of this is social-network
powered navigation system, Waze, which uses user data to identify real-time road
congestions. Though the company recently monetised its service with advertising,
its primary profit came from the recent sale of the company to Google, who were
looking to improve their own navigation systems.34
• Predatory / exclusionary strategies: In some instances, competition in certain
industries can be so vicious that a loss leading free strategy may be engaged by a
company with the intention of deterring potential entrants or creating an untenable
competitive environment for rival companies.
Criticisms
Though the power of free as a business strategy has received much praise in recent years,
the concept has also received its fair share of criticism. The integrity of free strategies has
come under question, with many people sharing the view that “There’s no such thing as a
free lunch”. This phrase reflects the belief that everything provided free must eventually
be paid for in one way or another and this is indeed often the case with such strategies.
The proliferation of free has met some philosophical objections. Christian Michel, a
French libertarian who runs a philosophical discussion group at London's Institut Français
and has written about the ethics of freedom, says, “The myth of a free lunch, whether it
takes the form of 'free health care' or 'free education', is the ultimate dream of the
consumer society, to take and consume everything without having to give anything
back.”35 Michel argues that the obligation to pay is the restraint that economics puts on
34
Gal, M.S. & Rubinfeld, D.L., 2015. The Hidden Costs of Free Goods: Implications for Antitrust Enforcement.
Working Paper. New York: New York University School of Law.
35
Jeffries, S., 2008. The Big Giveaway. The Guardian, 6 May.
21
human greed and warns that the elimination of this obligation presents a moral quandary
for society.
In some instances, the optional purchases on fermium platforms have been made
deceptively discrete, leading some consumers to mistakenly pay for a good they
understood was free. In 2014, tech giant, Apple was ordered by the US Federal Trade
Commission (FTC) to provide full consumer refunds of at least US$32 million following
a complaint that the company billed consumers for charges incurred by children making
in-app purchases without their parents’ consent while playing free mobile games intended
for kids.36 The FTC also ruled that Apple was to modify its billing practices to raise the
barriers for payment authorisation, as well as its marketing of apps to clearly mark which
ones feature in-app purchases.
Though otherwise typically free of a monetary cost, many free offers in fact require the
consumer or the general public to pay in other ‘currencies’. For individuals, this may be
with their time if the offer implies waiting, or with their privacy if their data is being sold.
Free also creates externalities on a broader social level. A free newspaper, for example,
may be paid for with the degradation of media diversity. The more people become
accustomed to free offers in one market, the more they come to expect them in related
markets.37 This can have a damaging effect on the competitiveness of entire industries,
creating barriers to profitable operation and reducing incentives for dynamic innovation.
The normalisation and expectation of free goods by the consumer is not the only threat to
commercial competition. Antitrust scholars have been quick to point out that free as a
business model can be exploited as a form of predatory pricing, allowing companies to
deter rivals from entry or expansion, only to later recoup the investment by raising prices
once competition is eliminated. As discussed in the previous section, when the zero-price
effect is utilised as part of an anti-competitive exclusionary strategy, these attempts to
monopolise tend to be particularly effective, ultimately reducing consumer welfare as
well as diversity and competitiveness within various markets. 38
36
US Federal Trade Commission, 2014. Apple Inc. Will Provide Full Consumer Refunds of At Least $32.5 Million to
Settle FTC Complaint It Charged for Kids’ In-App Purchases Without Parental Consent.
37
Gal & Rubinfeld, op cit.
38
ibid.
22
The innovative, dynamic and occasionally hostile economy of free provides numerous
challenges for all who choose to compete within and against it. This chapter has outlined
the competitive landscape within the economy of free, charting its growth and detailing
some of the most prevalent strategies employed by companies attempting to exploit the
power of free. The following chapter will explore the other side of the border, delving
into what it takes to succeed against a free competitor, highlighting the best practice
principles and exploring some insightful success stories.
23
Competing Against Free
Although there is an abundance of academic literature on free business models and their
success criteria, surprisingly little has been written on the subject of how to compete
against them. This may be in part due to the common belief that it is simply not possible
to compete with free. Indeed, a 2011 study found no evidence of any non-digital
companies that had prevailed against free rivals and found that only one third of the
studied incumbent companies facing a free entrant (in digital and physical markets) were
able to successfully compete. 39
Despite this disheartening scorecard, the truth remains that although it is extremely
challenging to compete against free, it is nonetheless possible. To identify the key
strategies of those who triumph against free rivals, this chapter has compiled a list of best
practice principles for competing against free in developed markets, as described by those
who have experienced or observed such success. It includes insights from cases in a
number of different industries, including media, software, pornography and leisure.
Due to the lack of existing academic literature, the compilation of this list draws on a
wide range of sources, including peer-reviewed journals, as well as magazines, blogs and
news articles. The competitive dynamics of the cases studied are varied: some insights
come from companies with near-identical offerings, while others are competing against
similar alternatives or close substitutes. It is important to note that this list is not intended
to be a step-by-step guide to success. Indeed, some principles are mutually exclusive,
some are excellent complements and others are appropriate in only a limited number of
cases. The list aims to synthesise all available data on what leads to success, with the
intention of testing these principles in a practical context, to ascertain which elements of
the advice dispersed by various companies in the developed markets has relevance in
Bottom of the Pyramid markets.
39
Bryce, D.J., Dyer, J.H. & Hatch, N.W., 2011. Competing Against Free. Harvard Business Review, June.
24
Types of Free Competition
To maximise the potential for learning and to take into account the fluid dynamics of many
markets, this study has considered the concept of competition from a rather broad viewpoint.
Various types of competition are explored and the three key forms are delineated below for
reference.
Direct competition
This is the clearest form of free competition, where one company or group markets a product
or service that another offers for free. Though the good offered may vary in a limited number
of factors such as brand, quality, quantity or aesthetics, this form of competition requires the
two rival offers to be targeting the same customer base and operating in the same specific
industry.40
Indirect competition (Substitutes)

A rival offer is considered a substitute when it is a different good or service that at least
partially meets the same consumer need or demand. Substitutes pose a competitive threat in
all markets, as they place a ceiling on the prices an industry can charge.41 This threat is
particularly salient when an available substitute is free, as the zero price reference acts as a
forceful downward pressure on pricing.
Established expectations
As discussed earlier in this chapter, one of the externalities created by free goods is that the
more people become accustomed to free offers in one market, the more they come to expect
them in related markets.42 This can manifest in a low or non-existent willingness to pay for
goods or services where similar offers have been provided for free.
40
Porter, M.E., 1979. How Competitive Forces Shape Strategy. Harvard Business Review, pp.21-38.
41
ibid.
42
25
Best Practice Principles for Competing Against Free
1. Assess the threat: Decide whether and/or how to respond
Not all competition between free and non-free rivals will necessitate major business model or
strategic change. Indeed, there are a number of cases where both offerings can coexist in the
market, at least in the short to medium term. A comprehensive assessment of the threat posed
by the rival is therefore instrumental to subsequent strategic planning. For new entrants
facing free incumbents, this would fall naturally into the market research and competitive
landscape stages of business plan development. For incumbents facing the threat of a free
entrant, the significance of the threat is based on three factors: the entrant’s ability to cover its
costs quickly enough, the rate at which the number of users of the free offering is growing,
and the speed with which paying customers are defecting.43
The decision-making matrix below has been developed from a study spanning five years and
studying 34 incumbent companies from 26 product markets. It illustrates the last two of the
determining factors described above, and includes the strategic recommendations of each
scenario.
HIGH
5% a year or
more IMMEDIATE THREAT BUSINESS MODEL
Launch free product THREAT
immediately Change business model
Rate at which paying

customers are defecting
DELAYED THREAT
MINOR THREAT
Coexist or delay launch
Monitor situation
Less than 5% a of free product
year
LOW
LOW HIGH
Less than 40% a year More than 40% a year
Free offering’s growth rate
Figure 1: Competing against free decision-making matrix.44
43
Bryce, Dyer & Hatch, op cit.
44
ibid.
26
The threat is considered immediate when current customers are defecting at a rate of 5% a
year or more and the free offering’s growth rate is below 40% a year. The advised action for
immediate threats is to launch a competitive free offering as soon as possible. When the free
entrant’s growth rate exceeds 40%, however, this new free offering must be paired with
radical, rapid business model innovation in order to survive.45 In contrast, when both the
defection and growth rates are low, or when growth is high but defection is low, companies
must be careful not to act too soon and risk unnecessarily harming their otherwise profitable
business.
Of the cases studied to form the above matrix, two thirds of incumbents are judged to have
made the wrong choice, either responding too slowly, introducing a free offering too quickly
or doing nothing at all.46 These numbers clearly demonstrate the significance and difficulty of
accurately assessing such a threat and, importantly, determining the correct course of action
to follow.
2. Find the Scarcity: Differentiation
To succeed against the economy of free, or as it is sometimes referred to, the economy of
plenty, a company must understand where scarcity exists and how it can be leveraged. This is
a matter of looking carefully at which customer needs and demands are being met by free
offerings and to identify those that are not. Customers may be in fact ‘paying’ for a free
service with their time, energy or privacy or may have their needs only partly met. 47 Beyond
the good itself, there may be elements of the user experience that the customer would be
willing to pay for, or it may even be possible that customers would find value in the simple
act of paying itself.
By understanding the potential value of an offering in the broadest possible sense, companies
are able to lessen the burden of marketing it. When a customer has the option to receive the
same or similar product at zero cost, the success of marketing it at a positive price is to
understand what else the customer is buying, be it convenience, privacy, outstanding
45
46
ibid.
47
27
customer service, prestige or other. The goal is to find the unique asset in the company’s
offering and to structure all business around promoting and leveraging this enduring asset.48
3. Divide and Conquer: Segmentation
A staple of almost all marketing strategies, market segmentation is critical to success when
competing against free. Given the inherent attraction of free goods and the difficulty of
competing against them, it is clear that even the most successful of competitors will only ever
convert or gain a percentage of the market. Therefore, it is essential for non-free competitors
to thoughtfully and accurately segment this market, crafting their marketing strategy to
appeal to those who are most likely to be willing to purchase. Segmentation methods will
vary from company to company and industry to industry but the central question of all
segmentation endeavours should be how to identify the sweet spot where a key selling
proposition is highly valuable and there is a reasonably sized segment who are likely to
recognise this value.
For many companies competing against free, the targeted segment may correspond to a
marketing strategy that places the offering as a premium alternative. Indeed, some companies
have found success in marketing goods that are usually free by modifying the offering only
slightly to appeal to an entirely different segment. One such example of this is members-only
skateboard parks in the United States, a country that has seen a decade-long boom in the
construction of free public skate parks.49 Despite this abundance of free alternatives, the
number of members-only skateboard parks in the US continues to grow, driven by demand
from a more middle-aged market, who are willing and able to pay hefty monthly subscription
fees for the exclusivity and premium experience that such a club can offer.50
For other companies, the success of selling a good with a comparable alternative for a free
may not rely on a premium segment, but rather a niche segment. Such is the case for
Kink.com, America’s largest fetish adult entertainment website who successfully sells
pornographic content by creating content based on niche interests that free adult
entertainment websites may not include. Additionally, Kink.com combines this niche
48
Clark, D., 2013. How to Fight Back Against Disruption and Compete with Free. Forbes, 22 February.
49
Dougherty, C., 2013. I Say, That's One Gnarly Grind You Just Executed. The Wall Street Journal, 1 March.
50
ibid.
28
approach with premium offerings, such as custom-made content and interactivity options. In
an industry that has seen its worldwide revenue halved since 2005, Kink.com has been able to
stay on top of the declining market through clever segmentation and differentiation.51
4. If you can’t beat them, join them: Collaboration & Acquisitions
As the old adage goes, “If you can’t beat them, join them,” and that is precisely the approach
taken by a number of the companies studied. For some, this means engaging in co-opetition;
that is, simultaneous competition and cooperation, 52 whereby rivals work together to grow
and nurture the market with anticipated mutual benefit. For others, this relationship is more
permanent, with companies joining forces through mergers and acquisitions.
The latter scenario was the case for personal finance software company, Intuit, who
responded to the threat from free rival entrant Mint.com by purchasing the company in 2009.
Mint, a free money management software that makes its profit by selling access to its user
base, grew quickly in popularity and had a reported user base of 1.5 million people at the
time of acquisition.53 Following the acquisition, Intuit made a clear segmentation of the
market, maintaining Mint as a free offering separate from its popular Quicken software,
allowing both products to co-exist and avoiding cannibalisation.
As touched on in the previous principle, the pornography industry provides many insightful
case studies through which to study competing against free. While the industry was once
touted as being “recession-proof”54, these days, free pornographic content is plentiful and
easily accessible and the question of how to monetize content is simultaneously becoming
more urgent and challenging. Websites providing free pornographic content, so-called
“tubes”, often pirate and publish content from other non-free sources. This means that
consumers effectively have access to an identical product for free, making the challenge of
differentiating and monetizing content even more difficult for the content creators.
51
Benes, R., 2014. Porn site Kink.com collars a new type of S&M. The Blog Magazine, 24 June.
52
Brandenburger, A. & Nalebuff, B., 1998. Co-opetition. New York : Currency Doubleday.
53
Wortham, J., 2009. Intuit Buys Mint, a Web-Based Finance Competitor. The New York Times, 14 September.
54
Edelman, B., 2009. Markets: Red Light States: Who Buys Online Adult Entertainment? Journal of Economic Perspectives,
23(1), pp.209-20.
29
One way that content creators mitigate this financial risk is to collaborate with rival
companies to maintain and grow their paying user base. 55 This is known as sharing traffic:
rival companies operate as an affiliate network, advertising each other’s content on their sites.
If a user finds these ads more compelling than the main content and clicks through, the
original site is then paid for this referral. This co-opetition allows sites to diversify their
revenue streams and profit from website viewers they were unable to personally convert, as
well as to attract new clientele, effectively creating value for themselves and the industry as a
whole.
5. Offer a better free
As described in the first principle, Assess the threat: Decide whether and/or how to respond,
sometimes the only course of action for a company facing a free rival is to fight fire with fire
and launch a free offering of their own. For companies pursuing this route, there are a
number of strategies available, as outlined in the previous chapter of this thesis. These
include cross-selling, third party markets and freemium offerings, all of which require the
company to provide a free offering with no guarantee of a return.
However, for companies who wish to leverage the power of free without creating a strictly
free offering, one strategy to do so is to bundle an offering with a free component. Research
shows that consumers are influenced by the zero-price effect even when the free offering
requires the purchase of another good.56 This may be in the form of a free gift with purchase
or a Buy 2 Get 1 free offer. In all cases, companies mitigate the risk of a loss by generating
revenue for every purchase, though their profit margins are typically decreased.
The practices of bundling and free add-ons have been shown to be most profitable when two
opposing but complementary segments co-exist: one segment who places a high value on the
add-on but a low value on the primary offer, and another that places a high value on the
primary offer but no value for the add-on. In this case, companies are able to raise the
primary price, effectively ensuring that the add-on offer is only taken up by the targeted
segment, creating a situation where those placing a high value on the primary offer are
55
Fayner, S., 2010. Down the Tubes. MIT Technology Review, 25 August.
56
Nicolau & Sellers, op cit.
30
subsidising the add-on for those who do not.57 One such example is ‘children stay for free’
offers in hotels. In this case, business travellers, who place no value on the option to have
children stay free, subsidise the offer for leisure travellers, for whom the offer has great
appeal.
6. Know thy enemy: Imitate or match free competition
One of the most important elements of competing against free is to know thy enemy. In
addition to acquiring the traditional information on their competitive landscape, companies
can also gain strategic insight by examining the customer experience of the rival’s offer. In
some ways, this principle is the opposite of finding the scarcity, as it entails exploring what
the competition is doing, to imitate or match it as opposed to exploring what they are not
doing with the aim of differentiating.
One such example of a company imitating their free competition with lucrative results is on-
demand streaming media provider, Netflix. One of the largest competitive threats to Netflix is
illegal piracy. The company faces the challenge of converting customers to their paid
subscription model and they have, thus far, done this fairly successfully, with piracy rates
typically dropping following the introduction of Netflix in a given country.58 This success has
been largely attributed to the company’s programming approach, which involves identifying
which TV series and films are most popular on piracy sites and purchasing their
programming accordingly.59 This approach ensures that Netflix’s offering is appealing and
relevant to people who would be otherwise pirating media content, thereby improving the
likelihood of converting such users.
7. Match or exceed convenience
When the price of a good is evaluated to include the cost of time and effort to the user or
customer, many so-called ‘free’ goods appear to be indeed quite costly. Such cases provide
an excellent opportunity for companies to differentiate themselves from their free rivals, not
57
Fruchter, G.E., Gerstner, E. & Dobson, P.W., 2011. Fee or Free? How much to add on for an add-on. Mark Lett, 22,
pp.65-78.
58
Woollacott, E., 2013. Netflix Checks Piracy Stats to Help it Decide What to Buy. Forbes, 9 September.
59
ibid.
31
by competing on price but by making their offering as close to ‘free’ as possible on the
parameters of time and effort.
This is typically the approach taken by proprietary software companies, who are increasingly
forced to compete against a myriad of free alternatives, both in the form of commercial
ventures and Free and Open Source Software (FOSS). While FOSS provides flexibility for
programmers, it has a reputation for being cumbersome to most users.60 This is the view
espoused by Hewlett-Packard’s Senior Vice-President, Marten Mickos, who says, “Open
source is free if your time is worth nothing”.61 In this context, the value of a user-friendly
interface and customer service becomes apparent, and while proprietary software may not be
appealing to those who will spend time to save money, it has much more cachet with those
who will spend money to save time.
In addition to ensuring the convenience of the good itself, overcoming the penny gap
sometimes requires making the act of paying particularly easy and simple. In the case of
online sales, for example, this may mean taking measures such as providing a variety of
payment methods, allowing payment without signing in, asking for essential user information
only and providing clear calls to action on web pages.62 Facilitating payment in as few steps
as possible can also boost sales, as can providing the convenience of holding payment and
address details on file to facilitate ‘one-click’ purchases.63
8. Ensure the price is right
Determining the price of an offering, one of the most important elements of its value
proposition, is never a simple endeavour. This challenge is especially salient for companies
competing against free as research suggests that consumers form reference prices and price
expectations based on previous experiences with price information.64 This is particularly true
60
Asay, M., 2009. Building a business selling open-source software. [Online] Available at:
http://www.cnet.com/au/news/building-a-business-selling-open-source-software/ [Accessed 2 April 2015].
61
ibid.
62
Papageorgiou, K., 2013. 9 Ways to Make the Payment Process Easy for Online Customers. Entrepreneur Magazine, 4
September. Available at: http://www.entrepreneur.com/article/228169.
63
Ariely, D., 2011. How online companies get you to share more and spend more. WIRED Magazine, 6 June.
64
Winer, R.S., 1986. A reference price model of brand choice for frequently purchased products. Journal of Consumer
Research, 13(2), pp.250-56.
32
for experiences with free goods, where it has been shown that, once accustomed to free
goods, customers come to expect this zero-price point in related goods and markets. 65
This expectation and engrained experience of free has a direct impact on pricing for Netflix.
As Netflix launches in each new country, they take the local rates of piracy as an indication
of how competitive their pricing will need to be. “Piracy is a governor in terms of our price in
high piracy markets outside the US,” says Netflix CFO, David Wells. “We wouldn’t want to
come out with a high price because there’s a lot of piracy, so we have to compete with
that.”66 The clearest example of this strategy in action is in Australia, where overseas media
content is traditionally charged at a premium but Netflix offers a monthly subscription price
25% lower than in the US. At AU$8.99 a month, it is the cheapest movies-and-TV streaming
package in the market, providing an appealing offer to a country with one of the highest rates
of content piracy in the world.67
Customers are likely to define their valuation of a non-free offering against the utility they
expect to derive from a free alternative.68 For companies choosing to charge a positive price,
it is therefore imperative to ensure this price matches the added value that a customer should
attribute to your offering. This is made even more difficult by the fact that potential
customers will often take the price of an offering as an indication of its value.69 Meticulous
Willingness to Pay research is required to ensure the price strikes the right balance; if too
low, the value of the offering may fail to be conveyed and if too high, the appeal of free may
win out.
9. Maximise network effects
For companies who have the benefit of being the first mover in a given market, one way to
mitigate the risk of free entrants is to leverage the power of network effects. 70 Network
65
66
Price, R., 2015. NETFLIX: High piracy rates like Australia's make us drop our prices. Business Insider Australia, 20
April.
67
ibid.
68
Papies, D., Eggers, F. & Wlomert, N., 2010. Music for free? How free ad-funded downloads affect consumer choice.
Journal of the Academy of Marketing Science, 39, pp.777-94.
69
ibid.
70
Mendelson, H. & Lee, D., 2008. Divide and Conquer: Competing with Free Technology Under Network Effects.
Production and Operations Management, 17(1), pp.12-28.
33
effects is the term used to describe a situation where a product or service becomes more
valuable as more people own or use it. 71 Demand in many technological markets is
characterised by network effects. This is the case, for example, with the Microsoft Office
Suite. Sharing a Microsoft Word document with others is made simple by the fact that so
many use Microsoft Office. In contrast, sharing a document created in Apple’s Pages
software requires additional steps to make it compatible with Word, a process that not all
users may have learned and which subsequently reduces Pages’ convenience and increases
Word’s relative value.
The ideal scenario for leveraging network effects in competing against free is to be in the
incumbent position. 72 With the first mover advantage, companies are able to make
compatibility a key competitive factor, growing their user or customer base in such a way
that switching would be largely undesirable or cumbersome in the event that a free rival
enters the market. However, merely raising the cost of switching is not enough to sustain this
competitive advantage. The offering itself must also be superior to the free rival, providing
clear benefits for both early and late adopters.73
This has been the case for Apple with their iTunes and iPod products. Music and videos
purchased in the iTunes store are only compatible with iTunes software, meaning they can
only be played on Apple devices or on computers with iTunes software installed. By
combining this closed network with a superior user experience, Apple has created a highly
profitable network of users and customers, maintaining a significant market share in spite of
the competitive threat posed by piracy and free streaming services.
10. Rethink profit centres
Competing both in and against the economy of free requires a shift in the traditional
processes and policies around revenue generation and cost accounting. Specifically, there are
two key structural obstacles that impede companies from adopting free strategies: firstly, the
belief that each individual product or service must generate a reasonable amount of revenue
71
Shapiro, C. & Varian, H.R. 1999. Information Rules. Harvard Business School Press.
72
Mendelson & Lee, op cit.
73
ibid.
34
and profit on its own and secondly, the profit centre structure and corresponding accounting
system that reinforce and reflect this approach.74
A number of successful free business models rely on a fundamental shift in this way of
thinking and there are valuable lessons in this approach for non-free business models as well.
By moving profit responsibility higher up in the organisation, from a product level to a
revenue-overseeing management group, companies open up new possibilities for innovation.
This also requires a break from tradition in the way costs and revenue are considered as the
two are then separated into entirely different functions; a revenue group focused on finding
creative ways to make money despite a potentially zero-price point, and a product
development group, whose mandate it is to maximise the value of the offering whilst keeping
the cost as low as possible.
One such example of a company following this approach is Google, where it is estimated that
only the CEO and three to four Senior Vice Presidents have responsibility for the Profit and
Loss Statement.75 In cases where the revenue group and product development group disagree
on how a given strategy would affect profit, it is the responsibility of this senior management
group to arbitrate and ultimately, make the final decision if no agreement can be reached. The
agility facilitated by this management structure allows free companies to take risks in ways
that companies seeking to make profit on every service line cannot. It may be a break from
tradition but considering profit on a broader company level can make room for innovation.
Though this innovation may come at the risk of an immediate loss, the big picture in this
approach is to risk losing the battle for the sake of winning the war.
This chapter has investigated the emerging economy of free in developed markets, discussing
the relevant literature on consumer psychology, business models and the dynamics of the
competitive landscape. The following chapter will explore these concepts as they pertain to
the world’s poorest people, the so-called Bottom of the Pyramid (BoP). Starting with an
exploration of the BoP and the business strategies designed to serve it, the following chapter
will conclude by describing how the principles identified above will be tested in this radically
different context.
74
75
ibid.
35
.Competing Against Free at the Bottom of the Pyramid
Doing Well by Doing Good
The Bottom of the Pyramid
The largest section of the World Economic Pyramid, the Bottom of the Pyramid (BoP) is
comprised of the World’s four billion poorest people. As pictured in Figure 2.1, these are the
people living on an annual per capita income of less than US$1,500 (PPP), the lower limit of
what is defined as necessary to live a decent life. Most people at the BoP live in rural areas or
urban slums and they typically live with very limited access to clean water, sanitation and
other basic services.76
Annual per Capita Income* Tiers Population in Millions
More than $20,000 1 75-100
$1,500-$20,000 2&3 1,500-1,750
Less than $1,500 4 4,000
*Based on PPP in US$
Figure 2: The World Economic Pyramid.77
Sometimes referred to as the Base of the Pyramid, these consumers collectively represent
US$5 trillion (PPP)78, though this group is evidently not a monolith. To understand more
about the people that make up the BoP, one basic way is to segment by income level. This
approach reveals three key segments79:
1. Low income (US$3 - US$5 per day): This 1.4 billion person segment is characterised
by people with around two years of secondary education and the skills needed to
enter the job market. Many have semi-regular incomes and tend to live near or
among people who live in the next tier of the World Economic Pyramid.
76
Prahalad, C.K. & Hart, S.L., 2002. The Fortune at the Bottom of the Pyramid. Strategy & Business, p. 2.
77
ibid., p.2.
78
Prahalad, C.K., 2009. Introduction to The Fortune at the Bottom of the Pyramid, Revised and Updated 5th Anniversary
Edition. Financial Times, 26 September.
79
Kasturi Rangan, V., Chu, M. & Petkoski, D., June. The Globe: Segmenting the Base of the Pyramid. Harvard Business
Review, 2011., p. 3.
36
2. Subsistence (US$1 - US$3 per day): Of these 1.6 billion people, most are poorly
educated and low skilled. They typically have volatile income and many lack
improved sanitation, health care and education.
3. Extreme poverty (Less than US$1 per day): The “bottom billion” 80 lack basic
necessities: clean water, sufficient food and adequate shelter. They are generally
excluded from the formal economy due to poor health, malnutrition, financial
vulnerability and a lack of education or skills.
The term BoP was first introduced to the world in 1999 in an article published by strategy
scholars, CK Prahalad and Stuart Hart.81 This article attempted to raise awareness of the
World Economic Pyramid and the untapped market potential. However, it was not until 2002
that the BoP movement really took off. Between 1999 and 2002, there was a shift in the
business community’s openness to BoP strategy, aided by development scholars such as
Amartya Sen82 and Hernando de Soto83, who spoke out against the traditional models of
development, calling for business to be a part of the solution to poverty alleviation. At the
same time, the Millennium Development Goals were established, putting increased pressure
on the private sector to contribute to sustainable development.
With this mounting public pressure and few viable business cases for action, it is perhaps of
little surprise then that the business community welcomed the concept of BoP strategy when
Prahalad published a second article in Harvard Business Review in 2002.84 In this article and
in Prahalad’s subsequent book 85 , it is argued that businesses, governments and aid
organisations must stop considering the poor as victims and instead see them as resilient and
creative entrepreneurs as well as value-demanding consumers. These low-income markets are
presented as a prodigious opportunity for the world’s multinational companies with the
80
Collier, Paul., 2007. The Bottom Billion: Why the Poorest Countries Are Failing and What Can Be Done About It.
Oxford: Oxford University Press.
81
Prahalad, C.K. & Hart, S.L., 1999. Strategies for the Bottom of the Pyramid: Creating Sustainable Development. Ann
Arbor , 1001.
82
Sen, A., 1999. Development as Freedom. Oxford: Oxford University Press
83
de Soto, H., 2000. The Mystery of Capital: Why Capitalism Triumphs in the West and Fails Everywhere Else. London:
Bantam Press.
84
Prahalad, C.K. & Hammond, A., 2002. Serving the world's poor, profitably. Harvard Business Review, September. pp.48-
57.
85
Prahalad, C.K., 2006. Fortune at the Bottom of the Pyramid: Eradicating Poverty Through Profits. Upper Saddle River:
Wharton School Publishing.
37
prospective rewards including “growth, profits, and incalculable contributions to

humankind”.86
The central business idea behind the BoP is to sell to the poor and help improve their lives
through the production and distribution of culturally sensitive, environmentally sustainable
and economically profitable goods and services. In contrast to static or slowing Top of the
Pyramid markets, the BoP is positioned as a business strategy for genuine top-line growth.
Though margins may be much smaller than most multinational companies are accustomed to,
it is argued that the potential profitability is nonetheless immense due to the sheer size of the
market.87
Social Business
The mindset of finding profitable opportunities in solving social problems is also one of the
central tenants of social business, a concept defined by 2006 Nobel Peace Prize laureate,
Professor Muhammad Yunus. Unlike a profit-maximising business, a social business is
cause-driven, operating with the dual goals of addressing a social problem and generating
profit. According to the definition developed by Professor Yunus, investors and owners may
gradually recoup money invested but profits beyond this point must be reinvested into the
business itself or used to start other social businesses with the aim of increasing social
impact.88 In this vein, the success of a social business is measured by the impact of the
business on people or the environment, not by profits generated.89
Sometimes also called “not-for-loss”90 business models, many social businesses continue to
be managed in the manner prescribed by Professor Yunus, though the concept has since
grown to include both non-profit and for-profit models.91 Though an enterprise may operate
86
Prahalad & Hammond, 2002, op cit.
87
Prahalad, 2006, op cit.
88
Yunus, M., 2009. Creating a World Without Poverty: Social Business and the Future of Capitalism. New York:
PublicAffairs.
89
Yunus, M., 2007. Social Business. [Online] Available at: http://www.muhammadyunus.org/index.php/social-
business/social-business [Accessed 12 April 2015].
90
Garrette, B. & Karnani, A., 2010. Challenges in Marketing Socially Useful Goods to the Poor. California Management
Review, 52(4).
91
Centre for Social Enterprise, 2015. What is Social Enterprise? [Online] Available at:
http://www.centreforsocialenterprise.com/what.html [Accessed 20 March 2015].
38
with a profitmaking value proposition, it must keep social impact as its primary goal and at
the heart of its purpose in order to be considered a social business.92
Today, social businesses exist in many parts of the world and the concept has particularly
strong ties to the BoP. Many BoP projects operate on social business principles, aiming to
improve the lives of the low-income populations they serve whilst generating revenue to be
either reinvested or distributed as dividends. Such BoP social businesses will be the focus of
the analysis to follow in this thesis and the terms may henceforth be used interchangeably.
BoP social businesses are often put in the position of being in a form of competition with
NGOs, as they aim to sell products or services that have traditionally been or are presently
being distributed for free by NGOs. This tension will be explored further in the following
chapter of this paper.
Criticisms of BoP and Social Business
In the years since the concepts of social business and BoP rose to popularity, both have
received their fair share of criticism. Aneel Karnani, Prahalad’s colleague at the University of
Michigan, cautions against the risk of romanticising the poor. 93 Portraying people in poverty
as discerning customers and creative entrepreneurs hobbles realistic solutions to poverty
alleviation, he argues, reasoning that market approaches to reducing poverty tend to focus too
heavily on economic ends with social, cultural and political benefits left as mere by-
products.94 This is in line with the view that social business can be used as a form a corporate
camouflage, a rouse employed by companies to unjustly leverage the reputational benefits
associated with being a social business.
Other criticisms of such projects have analysed the aforementioned economic ends,
concluding that the so-called ‘fortune’ at the BoP is in fact far more illusive than promised,
with most BoP ventures failing to gain the penetration rate required to recoup their invest or
turn a profit.95 Indeed, over a decade since Prahalad’s book was published, cases of BoP
projects with financially relevant returns are few and far between, as an increasing number of
92
Martin, R.L. & Osberg, S., 2007. Social Entrepreneurship: The Case for Definition. Stanford Social Innovation Review,
Spring.
93
Karnani, A., 2009. Romanticizing the Poor. Stanford Social Innovation Review, Winter.
94
ibid.
95
Simanis, E., 2012. Reality Check at the Bottom of the Pyramid. Harvard Business Review, June.
39
multinational BoP projects turn away from their initial financial goals, shifting their purpose
towards philanthropic or reputational benefits.96
One of the major reasons proposed for why many BoP businesses have failed to attain their
initial financial goals is an imbalance in priorities. 97 It is suggested that the primacy of social
impact goals has, in many cases, overshadowed projects’ financial goals. Operating at the
BoP poses many complex challenges: non-existent distribution channels, design challenges,
inadequate financing and precise business model innovation. Managing this balancing act
requires a tight focus on business economics as well as exceptional strategic capabilities.98
Without these, projects are exposed to the risk of mismanagement, creating an unsustainable
structure in the long term.
To add to the trials on the supply side, companies in search of the promised fortune at the
BoP also need to contend with challenges on the demand side. With such volatile and
inconsistent incomes, consumers at the BoP are naturally price-sensitive.99 Basic necessities
account for a large fraction of their income, leaving little left over for other expenditures.100
Many companies and aid organisations seek to compensate for this lack of purchasing power,
offering highly subsidised or free goods. The following section of this thesis will give a brief
outline the proliferation of free goods in poor communities and explore the existing research
on its impact on individuals and businesses.
96
Simanis, op cit.
97
ibid.
98
ibid.
99
Prahalad, C.K., 2009. Introduction to The Fortune at the Bottom of the Pyramid, Revised and Updated 5th Anniversary
Edition. Financial Times, 26 September.
100
Garrette & Karnani, op cit., p. 9.
40
Hand Ups vs. Hand Outs
The central premise of BoP business strategy is that poverty can be fought with
profitability.101 Though it has become a driving force behind much development thinking and
practice, the idea that projects should aim for financial sustainability has been the subject of
extensive, contentious debate. There is indeed little consensus among strategy scholars about
the best way to attract and retain BoP consumers, with a clear divide between those who
believe BoP projects should take a philanthropic approach and those who advocate a for-
profit model for the benefit of companies and communities. This section will explore the
experience of the key stakeholders in this debate, outlining the relevant literature on the
impacts of free distribution on individuals, communities and businesses.
The traditional BoP approach, as described by Prahalad102, follows a distinctly for-profit

approach. In addition to the obvious financial benefits for companies, proponents of this for-
profit position claim that providing free products or services to BoP consumers creates the
risk of engendering a sense of entitlement or dependence among recipients, producing a
situation where the people such strategies seek to empower are in fact more likely to become
disempowered. 103 The positive price charged is further justified by the fact that BoP
consumers are often already paying a premium, or “poverty penalty”104, frequently for lower
quality goods.
On the other side of the debate, those who advocate philanthropic approaches in the form of
corporate social responsibility highlight the low purchasing power of people at the BoP,
arguing that charging money hinders development because those who are too poor to buy
life-improving goods do not have access to them.105 It is also argued that free distribution is
of great value to companies, with the global and intangible benefits including insurance and
risk management benefits106, goodwill effects107 and market benefits108.
101
Bill Gates, quoted in blurb, Prahalad 2006, op cit.
102
Prahalad 2006, op cit.
103
Christensen, L.J., Siemsen, E. & Balasubramanian, S., 2015. Consumer behavior change at the Base of the Pyramid:
Bridging the gap between for-profit and social responsibility strategies. Strategic Management Journal, 36, pp.307-18.
104
Prahalad 2006, op cit.
105
PSI 2003
106
Godfrey Merrill Hansen
107
Porter Kramer 2006
108
Lev Petrovits
41
On both sides of the debate, the research shows that the decision of whether or not to charge
has an impact far beyond a project’s bottom line. It is a critical piece of the puzzle in reaching
both financial and social goals and the subsequent impact on customers, communities and the
local economy requires careful consideration.
Customers and Communities
Free offers have a particularly strong allure for individuals at the BoP and there are a number
of reasons for this. In addition to the psychological drivers outlined in Chapter 2, there are
other forces at play that increase the appeal of free at the BoP. Firstly, people living in
poverty tend to be overly risk-averse.109 This is because they face a substantial amount of risk
in their everyday lives from health shocks, agricultural shocks or any other number of
unexpected crises. Even simple day-to-day activities such as shopping are inherently more
risky; when money is so scarce, even small loses resulting from bad purchases represent a
significant fraction of an individual’s income or wealth. Free offers mitigate this risk by
eliminating the financial cost associated with the good.
In addition to eliminating monetary cost, free offers typically also reduce decision costs.
Making decisions is mentally taxing, especially when they involve the unknown. Research
shows that poor people face such deliberation costs more often and this decision fatigue
makes them more likely to opt out of making difficult decisions110 In contrast, given the ease
of deciding to take a free offer, the decision costs for these transactions are typically very low
or non-existent, making such offers particularly appealing. However, this bias towards easy
decisions and free offers does not necessarily work in the favour of the poor, as it may
influence them to act against their best interests or forego potentially valuable opportunities.
Offers provided for free may also convey a social norm, suggesting that everyone should be
and will be taking up the offer.111 This is a powerful tool in public health interventions, where
free distribution has recently been shown to be the most effective way of increasing access
and use of preventative health products such as bed nets, deworming medicine and hand
109
Banerjee, A. & Duflo, E., 2011. Poor Economics. New York: Public Affairs.
110
Spears, D., 2010. Economic decision-making in poverty depletes cognitive control. Princeton University.
111
World Bank, 2015. World Development Report 2015: Mind, Society and Behaviour. Washington, DC: World Bank.
42
washing soap.112 The study, a meta-analysis of a series of Randomised Control Tests (RCT)
run by J-PAL Poverty Action Lab, finds that charging even small fees for such products
dramatically reduces adoption.113 The drop off in demand from free to positive pricing is
drastic and does not appear to be influenced by the market value of the product or subsidy
rate. 114
This research also challenges the belief that paying for a product makes people more likely to
use it. This is a common belief among policy makers and strategists and is typically based on
two theories: endowment effect, the tendency to value a good one owns more than the same
good owned by someone else115 and screening-out effects, the theory that charging a positive
price will select out those who do not value the good and ensure it is only taken by those
likely to use it.116 Although both effects are well documented in a wide variety of contexts117,
no statistically relevant evidence was found of either effect in the J-PAL RCTs.
In contrast to these findings, a 2014 study by Christensen, Siemsen and Balasubramanian

paints a vastly different picture.118 In this experiment, which tested for-profit and non-profit
strategies for water purifying sachets in rural Malawi, it was found that a deeply discounted
for-profit approach is most effective in driving product adoption, repeat purchase and
continued usage.119 Moreover, clear evidence of screening-out effects among participants are
identified: 28% of consumers who took the product for free ultimately did not use it,
compared to 2-6% among those who paid a positive price.120 The report, while validating the
role of positive prices in reaching social goals, does, however, come with one important
caveat: while positive prices ensure that people who obtain the product do use it, higher
prices also lower overall usage.
112
Abdul Latif Jameel Poverty Action Lab, 2011. The Price is Wrong. J-PAL Bulletin. Cambridge, MA: Abdul Latif Jameel
Poverty Action Lab., Cohen, J. & Dupas, P., 2010. Free Distribution or Cost Sharing? Evidence from a Randomized Malaria
Prevention Experiment. Quarterly Journal of Economics, 125(1), pp.1-45.
113
ibid.
114
ibid., p. 4.
115
Kahneman, D., Knetsch, J.L. & Thaler, R.H., 1990. Experimental Tests of the Endowment Effect and the Coase Theorem.
Journal of Political Economy, 98(6), pp.1325-48.
116
Oster, S., 1995. Strategic Management for Nonprofit Organizations: Theory and Cases. Oxford, UK: Oxford University
Press.
117
Holla, A. & Kremer, M., 2009. Pricing and access: Lessons from randomized evaluations in education and health.
Working Paper 158. Center for Global Development.
118
Christensen, Siemsen & Balasubramanian, op cit.
119
ibid., p. 313.
120
ibid., p. 313.
43
Interestingly, while the J-PAL research advocates free distribution to drive product adoption,
it does find that receiving a product for free can increase willingness to pay for it later.121
Neighbours of people who receive free products are also more likely to purchase later as a
result of directly or indirectly experiencing the product’s benefits. This is consistent with
Christensen et al’s findings that BoP consumers may need a period of delay before paying for
products, to watch and emulate the behaviour of others and to allow time to raise funds.122
While the empirical evidence on whether free distribution drives product adoption and long-
term usage is inconclusive, there are other benefits to charging fees that have yet to be tested
and other effects on individuals and communities that may still be uncovered. User fees may,
for example, incentivise service providers, encouraging them keep products in stock,
replenish inventory and to show up for work.123 It may also help to reduce cases of reselling
or to solve to asymmetric information problems for donors by weeding out NGOs that are not
providing useful or relevant services.
Local Economy & Competition
Though there is a growing body of research exploring the effect of free distribution on BoP
consumers, far less has been written on its impact on local economies and the competitive
environments of targeted communities. The J-PAL research described above, for example,
focuses on the demand side of the equation. The evidence suggests that an individual may
have a higher willingness to repurchase after initially receiving a good for free but what it
does not take into account is whether the number of people encouraged to repurchase
compensates for the initial loss in sales.
In an effort to fill the gap that the J-PAL research presents, a recent study has examined the
impact of free distribution of insecticide-treated mosquito nets (ITNs) on the sale of
subsidised ITNs in Tanzania.124 In an effort to combat the country’s endemic malaria, the
Tanzania National Voucher Scheme, a public-private partnership, distributes discount
121
Holla & Kremer, op cit.
122
Christensen, Siemsen & Balasubramanian, op cit.
123
Abdul Latif Jameel Poverty Action Lab, op cit., p. 6.
124
Gingrich, C.D., Hanson, K., Rweyendela, V. & Piper, T.A., 2014. Does Free Distribution of Mosquito Nets Affect
Subsidized Net Sales? Evidence from a Nationwide Campaign in Tanzania. Journal of International Development, 26,
pp.749-62.
44
vouchers for ITNs to pregnant women and children. However, between 2009 and 2011, two
government campaigns distributed ITNs free of charge, nationwide. The free distribution of
ITNs had a lasting impact on private sales: almost immediately, monthly net sales fell 34%
below the quantity predicted for that time. After six months, sales were 57% below the
predicted quantity, representing a total theoretical loss of 347,000 nets over six months. 125
This study is one of the only academic studies that explore the spill over effects of free
distribution on sellers of similar goods. Its findings are particularly important in light of
research showing that once people become accustomed to free goods in one market, they
come to expect them in related markets. 126 Though this effect has yet to be tested in the BoP
context, it is reasonable to expect that it would remain relevant given the further increased
appeal of free for people living in poverty. The implication of this is that decreased sales
resulting from free distribution may not be contained to a single product or market. It is
possible that this effect may also leak into other markets by association with the product type
or the seller. For example, in communities where people have become accustomed to free
hand soap provided by NGOs, they may come to expect that all other NGOs should not
charge for their offers or that other personal hygiene products should be free.
It is important to remember that the non-free competitors in such cases are not always other
NGOs or corporations. Indeed, it is often local businesses whose sales are undercut and
undermined by free distribution. Toms shoes, one of the most well known examples of a
company providing free goods at the BoP is a prime example of this. The US-based company
operates on a ‘one-for-one’ business model, which implies that for every pair of Toms
purchased in developed markets, one pair will be donated to someone in poverty. In 2006,
Andreas Widmer and his social equity fund, Seven Fund, awarded Toms a prize for
innovative enterprise solution to poverty. However, just a few years later, Widmer had
second thoughts on this accolade, as he had come to see that the model in fact had the
unintended consequences of undermining local producers and sellers. “Why would you buy
something you can get for free?,” Widmer says. “[It] wreaks havoc on a lot of businesses,
especially small- to medium-sized ones. […] To give anything is always a bad idea when you
are trying to fight poverty”.127
125
ibid., p. 758.
126
127
Wharton Knowledge, 2015. The One-for-one Business Model: Avoiding Unintended Consequences. Pennsylvania, USA.
45
Applying Best Practice from Top to BoP
Methodology
It is clear from the literature that many, though not all strategy scholars and policy makers
believe that zero price is the best price when it comes to reaching social impact goals at the
BoP. However, central to the premise of social business is the concept of financial
sustainability and while free may or may not be the right way to attain social objectives, it is
certainly not the best way to achieve financial sustainability. With this in mind, this thesis
will seek to address the gap in the literature by exploring how BoP projects can compete
against the alluring power of free, examining how the lessons learned in developed markets
can be applied for success in the BoP context.
A case study approach has been selected for this study due to its relevance and utility to the
context and subject matter. A case study is a special kind of qualitative work that investigates
a contextualized, contemporary phenomenon within a specified boundary.128 Other case study
characteristics include providing a detailed description of contextual material about the case
setting, gathering extensive material from multiple sources to provide an in-depth picture of
the case, and using the researcher as an instrument of data collection.129 A case study is a
particularly relevant approach when the environment does not facilitate statistical analysis, as
is the case with this subject matter.
The author of this thesis worked for an 18-month period on the business model development
of the project analysed in the first case study, the Kibera Town Centre. The concept of
reflexivity is therefore an essential component of this methodology to ensure the study’s
integrity and eliminate bias that may arise from the author’s proximity to the subject of
analysis. Reflexivity is the researcher’s ability “track one’s influence on a setting, to bracket
one’s biases, and to monitor one’s emotional responses”.130 To foster this reflexivity and to
mitigate bias, the author has engaged in a process of peer debriefing for all findings and has
drawn on multiple sources of data to avoid citing information originating purely from
personal experience.
128
Yin, R., 2013. Case Study Research: Design and Methods (Fifth Edition). New York: Sage Publications.
129
Creswell, J.W., 1998. Qualitative inquiry and research design: Choosing among five traditions. London: Sage
Publications.
130
Hatch, A.J., 2002. Doing Qualitative Research in Education Settings. New York: State University of New York Press.,
p.10.
46
The Kibera Town Centre has been selected as a case for study due to the author’s
engagement with the project and subsequent ease of access to multiple in-depth sources of
data for analysis. The second case study, Peepoople, has been selected as complementary
case, whose background, challenges and success provide an insightful counterpoint to the
first case. Both projects are examples of BoP social business projects currently operating in
the slum of Kibera in Nairobi, Kenya. The following chapter will provide a brief overview of
this context, as well as an introduction to the issues the projects are seeking to address.
The information for these case studies has been acquired through a series of semi-structured
interviews with representatives from the two projects studied: Vanessa Catherine, Project
Leader of the Kibera Town Centre and Martina Nee, Communications and Donor Relations
Manager at Peepoople. The data gathered during these interviews has been supplemented by
publicly available sources as well as internal documents provided by the organisations. The
framework through which these cases will be analysed will be the ten best practice principles
for competing against free in developed markets, as identified in the literature and listed
below:
1. Assess the threat: Decide whether and/or how to respond

2. Find the scarcity: Differentiation
3. Divide and conquer: Segmentation
4. If you can’t beat them, join them: Collaboration & Acquisitions
5. Offer a better free
6. Know thy enemy: Imitate the free competition
7. Match or exceed convenience
8. Ensure the price is right
9. Maximise network effects
10. Rethink profit centres
Each principle will be individually examined, discussed and classified as being of high,
moderate or low/no importance to each project’s strategy for competing against free. To
ensure consistency across the two case studies, these rankings will be determined by the
author of this thesis based on the information collected. The two case studies will then be
analysed alongside one another to explore their common characteristics and to recommend
relevant additions to best practice as revealed in the case studies.
47
Case Studies: Best Practice Applied
Background
Kibera slum
The setting of these case studies is the slum of Kibera in Nairobi, Kenya. In the Nubian
language, kibera means forest131 but the Kibera of today is a far cry from its namesake.
Living conditions in this overcrowded urban slum are extremely poor, characterised by a
lack of basic infrastructure and vital services like clean water, sanitation, waste
management, roads and electricity.132 Contaminated water runs through broken pipes,
spreading waterborne diseases like typhoid, cholera and diarrhoea, creating a serious
health risk to residents and a tragically high under five mortality rate of 18.7%, tripling
that of the Nairobi average.133
Frequently cited as being the largest slum in Africa, Kibera is home to an estimated
235,000 – 270,000 people, though NGOs, journalists and government bodies often claim
that this figure is as high as one or two million.134 The source of this misinformation is
unclear though its inaccuracy is undeniable. For such a figure to be correct, Kibera would
have to support a population density thirty times higher than the skyscraper filled
Manhattan.135 This is clearly not the case and yet such fundamental falsehoods continue
to be propagated by groups including the White House136, The Economist137, the BBC138
and countless other stakeholders involved with the slum139.
At least part of the spread of this inflated figure can be explained by the proliferation of
NGOs in Kibera. As with the number of people, the exact number of NGOs operating in
131
Robbins, M., 2012. The missing millions of Kibera. The Guardian, 1 August.
132
Schouten, A.C. & Mathenge, R.W., 2010. Communal sanitation alternatives for slums: A case study of Kibera,
Kenya. Physics and Chemistry of the Earth, Parts A/B/C, 35(13-14), pp.815-22., p.818.
133
WHO Centre for Health Development, 2008. Our cities, our health, our future: Toward action on social
determinants of health in urban settings. Kobe: World Health Organisation., p. 8.
134
Robbins, op cit.
135
ibid.
136
Tomasini, A., 2010. Audio Slideshow: Dr. Biden Sees the Neighborhoods of Kenya. [Online] Available at:
https://www.whitehouse.gov/blog/2010/06/08/audio-slideshow-dr-biden-sees-kibera-kenya [Accessed 30 April 2015].
137
The Economist, 2012. Boomtown Slum. The Economist, 22 December.
138
Mason, P., 2009. Kibera survived ethnic violence; now the water's running out. BBC Newa, 29 October.
139
Robbins, op cit.
48
Kibera is difficult to identify, though research suggests that there are 700 different NGOs
and community groups140, leading to a rather distorted ratio of NGOs to inhabitants.
Though the vast majority of these are surely created with the genuine intention of
improving the lives of Kibera’s inhabitants, there is also a number of so-called “briefcase
NGOs”141 diverting any funds received to the pockets of those running the NGO. This
corrupt activity, combined with the sometimes unclear impact of genuine NGOs has
engendered a sentiment of distrust and resentment among residents towards most NGOs
in Kibera.142
The Water and Sanitation Challenge
Kenya faces significant challenges in realising its 2030 Vision “to ensure improved water
and sanitation are available and accessible to all”143. Although the 2010 Constitution
made access to water and sanitation the right of citizens144, the proportion of people with
access to an improved water source remains low, even showing signs of decline.145 The
growth of informal settlements poses serious challenges to the provision of water and in
Kibera, as in many slums, water is scarce, costly and frequently contaminated.
As there are very few residential water connections in Kibera, the vast majority of
residents purchase their water from local tap water vendors and water kiosks.146 Water is
typically purchased in 20 litre units, as residents bring their own jerry cans to fill and
carry home. This presents not only a significant cost in terms of time but a heavy
financial burden as well. The price of water in Kibera is said to be 25 times higher than
140
Government of Kenya, 2004. Investigation of Actors Operating in Kibera, Volume 1: Analytical Report. Nairobi:
Government of Kenya and UN-Habitat The Kenya Slum Upgrading Programme.
141
Lee, E., 2014. Does foreign aid make NGOs corrupt? The Guardian, 2 May.
142
Bodewes, C., 2005. Parish Transformation in Urban Slums: Voices of Kibera, Kenya. Nairobi: Paulines
Publications., p. 84.
143
Government of the Republic of Kenya, 2007. Kenya Vision 2030. Nairobi: Government of the Republic of Kenya., p.
18.
144
Government of the Republic of Kenya, 2010. The Constitution of Kenya. Nairobi, Kenya: National Law Council for
Law Reporting.
145
World Bank, 2012. Improved water source, urban (% of urban population with access). [Online] Available at:
http://data.worldbank.org/indicator/SH.H2O.SAFE.UR.ZS [Accessed 28 April 2015].
146
United Nations Development Programme, 2011. Small-scale water providers in Kenya: Pioneers or Predators? New
York: United Nations Development Programme., p. 9.
49
the price charged by the national utility company147, making water an expense on par with
rent.148
Figure 3: Map of water points, sanitation and waste collection in Kibera149
It is estimated that 60% of the population of Nairobi live in slums, where the ratio of
toilets to people is about one in 300.150 Without toilets, individuals and communities are
at risk from contamination of fresh water and ground water due to the infectious and often
deadly pathogens found in human faeces. Inadequate sanitation compels residents of the
slum to use unhygienic latrines, open spaces or to participate in the practice of “flying
toilets”, where one defecates into a plastic bag and throws it outside into the street. This
unhygienic disposal of human waste exposes people to high-risk sanitation related
diseases. Worldwide, one child dies every 15 seconds dies due to contaminated water
from human excreta.151 In Nairobi slums, the prevalence of diarrhoea among children is
32%, compared to 13% in Nairobi as a whole.152
147
Migiro, K. & Mis, M., 2014. Feature - Kenyan women pay the price for slum water "mafias". Reuters, 26 November.
148
United Nations Development Programme, op cit., p. 9.
149
Map Kibera, 2015. Water and Sanitation. [Online] Available at: http://mapkibera.org/theme/watsan/ [Accessed 10
May 2015].
150
Cross, P., 2013. Sanitation and Hygiene in Africa: Where do We Stand?: Analysis from the AfricaSan Conference,
Kigali, Rwanda. London: International Water Association., p. 123.
151
UNICEF, n.d. Millenium Development Goals. [Online] Available at: http://www.unicef.org/mdg/environment.html
[Accessed 1 May 2015].
152
Peepoople, n.d. Kenya. [Online] Available at: http://www.peepoople.com/where-we-are/#kenya [Accessed 1 May
2015].
50
The unmet need for safe water and sanitation is the basis for many other problems. In
addition to the spread of disease, the inaccessibility of adequate sanitation forces some
children to walk long distances, exposing them to safety risks and often impeding them
from attending schools. Even when disease does not kill, poor health makes people more
susceptible to a whole host of illnesses including acute respiratory infection and chronic
under nutrition. 153 It undermines children’s learning potential and adults’ economic
productivity, perpetuating the cycle of poor health and poverty.
Although the current state of affairs is bleak, the upside is that the outlook is positive. The
Millennium Development Goal to ensure environmental sustainability includes the target
to halve, by 2015, the proportion of the population without sustainable access to safe
drinking water and basic sanitation.154 A four-step ‘sanitation ladder’ is used to delineate
the four levels of improved sanitation, as illustrated in the figure below.
Improved:
Facilities that ensure hygienic
separation of human excreta
from human contact; include
flush or pour-flush toilets to
piped sewer system, septic
Unimproved: tanks of pit latrine, VIP latrines,
Facilities that do not Shared: pit latrines with slab and
ensure hygienic Sanitation facilities of composting toilet
separation of human an otherwise
excreta from human acceptable type shared
contact: including pit between two or more
latrines without slab or households; include
Open defecation:
platform, hanging public toilets
Defecation in fields,
forests, bushes, bodies latrines and bucket
of water or other open latrines
spaces or disposal of
faeces with solid waste
Figure 4: Millennium Development Goals Sanitation Ladder155
153
UN Water, 2015. Face Sheet 2: Sanitation is a good economic investment. [Online] UN Available at:
http://www.un.org/en/events/toiletday/pdf/Planners-Guide-Fact-Sheet-2_English.pdf [Accessed 3 May 2015].
154
UN, 2015. MDG Goal 7: Ensure Environmental Sustainability. [Online] Available at:
http://www.un.org/millenniumgoals/environ.shtml [Accessed 15 April 2015].
155
ibid.
51
Furthermore, research has shown sanitation to be an excellent investment for both social
and economic development. Hygiene and sanitation are among the most cost-effective
public health interventions 156 , yielding an average of US$5.50 for every US$1
invested.157 Although supply of sanitation is urban slums is low, there is evidence to
suggest that the demand is growing, with many willing and able to pay. 158 For
entrepreneurs and enterprises willing to take on the challenge of improving sanitation,
there is exciting potential for social and financial gain.
There are a growing number of social enterprises in the community aiming to use
business to create social, economic, environmental and cultural value.159 The following
two case studies will analyse the efforts of two such social enterprises: The Kibera Town
Centre and Peepoople. Both cases are facing the task of directly or indirectly competing
against free in Kibera as they seek to address the complex social and environmental
challenges of embedding an improved sanitation and water cycle.
156
UN Water, 2015, op cit.
157
Hutton, G. & Haller, L., 2004. Evaluation of the Costs and Benefits of Water and Sanitation Improvements at the
Global Level. Geneva: World Healt Organisation.
158
UN Water, 2015, op cit.
159
Voice of Kibera, 2013. Social enterprise, the next big catch for slum dwellers. [Online] Available at:
http://blog.voiceofkibera.org/?p=631 [Accessed 12 April 2015].
52
Case Study 1: Kibera Town Centre
Background
The Kibera Town Centre (KTC) is the product of a partnership between American NGO,
Human Needs Project (HNP) and multinational consumer goods company, Procter &
Gamble (P&G). The partnership was formed in 2012 as the culmination of two visions:
the HNP Town Centre, at the time in the early phases of construction and P&G
Community Centres, a key sustainability initiative within the Fabric Care division, for
which the team was in search of an opportunity to pilot.
At the time of the partnership formation, HNP was in the early stages of construction of
what was then known as the HNP Town Centre. The Centre was designed to provide
access to water, showers, toilets, adult education, microfinance, a shop and an Internet
café. With the inclusion of P&G came the inclusion of a communal laundry room
concept, designed to enhance the washing experience of Kibera residents and to save
them significant amounts of time, money and energy.
Basic Empowerment Transformation

Water Cyber café Micro credit and Savings Co-op
Showers Cafeteria Adult education
Toilets Shop Meeting room
Laundry Room Info kiosk
Table 1: Categorisation of services at Kibera Town Centre160
The Centre’s services are categorised into three groups: basic, empowerment and
transformation, as illustrated in Figure 3. The reasoning behind the diversity of services
offered at the KTC is embodied in the Centre’s theory of change: “Strategically combined
services, provided in a centralized setting, will save Kiberans time, money and effort.
Residents will be able to obtain the skills, information and credit they need to create
opportunity for themselves.”161
160
Naufal, Y. & Louw, N., 2014. HNP Business Plan. P&G Internal document.
161
Human Needs Project, 2014. About Human Needs Project. [Online] Available at:
http://www.humanneedsproject.org/about-hnp [Accessed 10 May 2015].
53
The aim of the KTC is to create a model for poverty alleviation that is environmentally,
socially and financially sustainable. The centre is independent from the Nairobi water
system, sourcing its water from a 1000-ft borehole. The water quality from this well is
extremely high and all wastewater is treated on site through a self-contained wastewater
management system.162 In this way, KTC addresses two key issues in the water and
sanitation cycle by selling clean, potable water for consumption and ensuring that all
wastewater is safely treated, avoiding contamination.
Although construction was funded by charitable donations, the ongoing operations of the
centre should be self-sustaining and as such, services are charged on a pay-per-use basis.
At the time of writing, the KTC has not yet reached sufficient levels of demand to achieve
its goal of financial self-sustainability, with revenue covering 28% of the centre’s
costs.163 This is largely due to lower than expected demand for drinking water, though
significant progress is being made in growing demand across the board. Although it is too
early to call the KTC model a financial success, there remains much to be learned from
the project’s experience and experiments in competing against community experiences
and expectations of free services.
Figure 5: The KTC at night164
162
Naufal & Louw, op cit.
163
Kibera Town Centre., 2015. July Dashboard. KTC Internal document.
164
Human Needs Project, 2014. We are brightening Kibera. [Online] Available at:
https://twitter.com/hnp_org/status/533008260748439552 [Accessed 2 February 2015]
54
Competitive Landscape
The scale of the KTC is unmatched in Kibera and there are no other centres offering
KTC’s full range of services in one place. There are, however, many smaller providers
who sell or offer access to most of these services in some form or another. The goal of the
KTC was to provide superior quality alternatives to all of these services, with
exceptionally clean water, hygienic and safe sanitation facilities, high speed internet and
advanced technology. In KTC’s words, the idea is that services must be “ better and
worth it”.165
The competitive landscape of each service varies greatly, as available alternatives range
in price and quality. The table below provides a summary of the key differences in quality
and price between the KTC and its main competitors. This table includes only the
services that are currently in operation, as not all services from the initial business plan
have been rolled out to date.
KTC Offering Competitor Offering

Quality Price Quality Price
Water
• High quality potable water 5 KSH per • Low quality, frequently 3-5 KSH per
• Available 7 days per week 20L contaminated water. Available 20L.
most days with occasional Prices rise in
shortages. times of
• Most water distribution is shortage to
controlled by illicit cartels, who 10-15 KSH.
set up illegal connections to store
and sell water at approx. 100
distribution points around Kibera.
Showers
• Running showers, warm water 12 KSH • Most people bathe at home with 10 KSH per
per use water purchased from nearby use
distribution points
• Some public facilities offer
‘showers’ which are typically a
bucket of cold or warm water to
be used in a private cubicle
Continues on next page.
165
55
Toilets
• Mixture of pit latrines and 7 KSH per use • Public toilet facilities are 5 KSH per use
flush toilets available around Kibera. These
• All waste is treated on site vary in cleanliness and upkeep.
• The most common types of
toilet are pit latrines and biogas
toilets.
• Most community members
continue to engage in open
defecation (See Case Study 2 for
more info)
Laundry
• Front loader washing Washing machine • There is a communal washing NGO area:
machines and dryers & dryer: area run by an NGO on the Free
250 KSH per use other side of Kibera, which
redirects water from the river. Home:
• Elevated hand wash basins Hand wash: 60 • Most residents do their washing Average cost
with individual taps and KSH per use at home, using water bought 88 KSH per
washing powder included from distribution points, soap load
and buckets.
• Full service laundry / Dhobi: varies, • Laundry can be done by Washing
“Dhobi” service priced per item washing services such as dry services: 300-
(e.g. 100 KSH for cleaners and washing ladies. 500 KSH per
a suit) load
Cyber cafe •
• High speed internet 1 KSH per minute • Cyber cafes around Kibera offer Cyber cafes: 1
internet access at a computer. KSH per
• Many people access internet minute
through low cost data bundles 3G data: 5
on 3G enabled devices KSH per 500
MB
Adult education •
• Computer Introduction 500 KSH per • There are many NGOs offering NGOs: Free
Package month classes on subjects of public or Participants
interest (e.g. Health, nutrition paid to attend
etc.)
• Some commercial providers
offer courses in vocational
topics.
Table 2: Price and quality comparison between KTC and competitors166
For a BoP social business, pricing and competition are inevitably complex challenges,
where the tensions between financial and social goals can often come to a head. On the
one hand, low prices can save the target population money and increase the number of
people who are able to access the service, therefore maximising a part of the social goal.
This strategy can, however, also act as a disruptive force to local markets, potentially
166
Naufal & Louw, 2014, op cit.
56
under-pricing or taking customers from local vendors who themselves are often part of
the target group.
Alongside this balancing act of maximising demand without threatening local businesses
is the financial constraints of operation. Even if a social business could provide their
services for free without disrupting the local economy, costs must be covered and if a
social business is to reach its goal of self-sustainability, this revenue must typically come
from customers. The question of how to optimise pricing is then crucial to a project’s
success and is often the source of significant scrutiny and disagreement.
This was certainly the case for the KTC, who integrated an intense process of co-creation
in the development of the Centre’s business plan. This co-creation process, though
facilitated with the best of intentions, was often a platform for conflict and power plays
between the community and HNP, the local NGO. This was particularly true of
discussions focused on questions of price, where many of the most vocal and influential
members of the community group felt that the KTC should provide their services to
Kiberans for free. This recurring tension was exacerbated by the miscommunication of
such information amongst the broader community, eventually creating a common
expectation that the KTC, once open, would indeed be free despite the fact that this
strategy was entirely unviable and never put forth by the KTC management.
Today, the KTC is pursuing a mixed pricing strategy, charging at or above market price
for its services and delivering superior quality across the board. The initial expectation of
free has presented and continues to present a significant barrier for the KTC to overcome
in pursuing their success. Countering the community’s expectations and establishing a
reputation as a business whose services residents are willing to pay for has not been easy.
It is this dynamic of competing against an expectation of free that will be the focus of the
analysis to follow. The information for this case study has been acquired through two
semi-structured interviews with Vanessa Catherine, the current leader of the project, as
well as internal documents. The intention of the analysis is to explore the relative
importance of the best practice principles identified in the literature and to recommend
additional factors not included in this list. The analysis will be structured in this vein,
firstly exploring the presence of each factor in order of importance and outlining
additional success factors for consideration in the following chapter of this thesis.
57
Competing Against Free: Analysis
Table 3: IMPORTANCE OF BEST PRACTICE PRINCIPLES TO COMPETING

AGAINST FREE STRATEGY: KIBERA TOWN CENTRE
Assess the threat: Decide whether and/or how to respond

Find the scarcity: Differentiation
Divide and conquer: Segmentation
If you can’t beat them, join them: Collaboration & Acquisitions
Offer a better free
Know thy enemy: Imitate the free competition
Match or exceed convenience
Ensure the price is right
Maximise network effects
Rethink profit centres
LEGEND
High importance Moderate importance Low/No importance
Strategies of high importance

Of the identified best practice for competing against free, the one principle that stands out
as being the KTC’s most important success factor is Divide and conquer: Segmentation.
The segment of the population that the KTC now targets is a group they have labelled
“Striving Kiberans”167. This segment is characterised primarily by their desire to drive
change in their own lives and in their community and are typically young adults aged 15
to 35 years with the disposable income to spend in investing in this dream. The KTC
provides multiple opportunities for people to make such investments, be it through basic
needs such as clean water and improved sanitation or through more formal investments
such as education and the savings co-op. Targeting this segment is coherent with the
KTC’s philosophy “to create something solid and sustainable for people, to create an
economy for them to grow in and outside of Kibera and to give back to the
community”.168
167
Catherine, V., 2015. Personal Interview. Y. Naufal, Interviewer, May 12.
168
ibid.
58
This segmentation strategy is, however, a relatively recent change for the KTC and was
quite a significant shift from the centre’s initial plans. Throughout the construction of the
KTC, the local NGO engaged in a long co-creation process with a group known as the
Community Coordinating Committee, or “the 3Cs”. 169 The 3Cs were a group of
approximately 60 predominantly older community members who met with HNP on a
regular basis to discuss progress and collaborate on elements of the business plan. The
initial strategy of the KTC was not to perform any segmentation or targeting at all, but
rather to leverage the influence of the 3Cs to encourage the entire community to come to
the centre.
This turned out to be entirely unfeasible when, upon the centre’s opening, the KTC
management found that not only were the 3Cs not encouraging community members to
come, they weren’t coming themselves. “We thought those leaders would be the example
for the community but we realised that the 3Cs were not even trying our services. We
understood then that they will never be our early adopters because they will never be
striving to change, or at least they don’t strive for something in Kibera.”170 The 3Cs
averseness to change, combined with their lingering discontentment about the lack of free
services made the KTC reconsider their approach. Faced with very low sales, the KTC
conducted a market analysis, identifying the segment of Striving Kiberans as the most
promising group to help reach their social and financial goals. The change was made
shortly after the official opening and is believed to be the major driver behind the
significant increase in visitors that followed.
Though crucial, the task of identifying the target segment is only one piece of the puzzle.
In order to bring the segmentation strategy to life, the KTC engaged in a process of
Finding the scarcity: Differentiation. The key differences between competitor offers
and the KTC were identified through consumer feedback and qualitative research
focusing on specific services. Management has also been working towards instilling a
culture of feedback, as well as systems for continuous gathering of competitive
intelligence.
169
170
Catherine, May 12., op cit.
59
The insight gathered from these processes has allowed the KTC to understand their
market and shape their value proposition to fill gaps that are not being met. Specifically,
this has been around three key differentiating factors. Firstly, the KTC provides the
highest quality products and services: the internet is fibre optic cable, washing machines
are one of a kind in Kibera and business training courses are run by experts from P&G.
Secondly, the products and services offered by the KTC are reliable, with the aim of
providing 100% reliability. Even while the rest of Kibera suffers water shortages when
Nairobi City Water cuts supply to Kibera, the KTC is able to continue to sell water and
access to all its water-based services, thanks to its independent water source. Lastly, the
range and quality of services offered by the KTC sets the conditions for Striving Kiberans
to empower themselves and to improve their health and wealth. In essence, “you’re
investing in yourself rather than just purchasing.” 171 Driving home this concept of
investing in oneself has also been important to the centre’s strategy of breaking the
association with the NGO, which will be explored in great detail in the recommended
additions to best practice.
The positive change driven by the introduction of segmentation and differentiation was
closely linked to the process the KTC engaged in to Ensure the price is right. Committed
to the goals of creating a sustainable revenue model and delivering superior quality
products and services, the KTC’s pricing strategy has always been to charge at or above
market prices. Setting the exact price for each individual service has, however, been an
ongoing and iterative process, as management tests the appeal and price sensitivity of
different services and seeks to measure their optimal prices.
An example of one such pricing experiment is the KTC’s showers. In Kibera, bathing at
home typically involves washing oneself using a small bucket of cold water. While this
water must be paid for and fetched from communal water points, it has multiple purposes
and is often reused and as such, Kiberans rarely attribute a direct cost to the water used
for bathing.172 The cost of showering at a communal facility is therefore commonly seen
not just as an increased cost but as a cost that didn’t otherwise exist.
171
172
60
When the KTC first opened, demand for women and men’s showers was remarkably
polarised. While the men’s showers were proving to be one of the most popular services,
women were showering very rarely at the KTC, if at all. The lack of female visitors was
explained by two key barriers: firstly, the existing cultural habit was that women would
bathe only at home and secondly, the KTC showers was launched at a premium price
point. To test the hypothesis that removing one of these barriers would increase sales, the
KTC ran a price promotion.
The result clearly proved the hypothesis: while men’s showers showed only a moderate
increase in sales that was in line with the existing growth trend, the lower price point led
to a huge increase in sales for women’s showers. “It’s been interesting to test the
hypothesis that a premium price accumulating with another barrier may not work. If you
already have a market, it’s different. But if you want to stimulate behaviour change in
Kibera, it’s too much.”173 Though careful pricing is required amongst all segments, the
KTC experience reinforces that this is particularly true for groups without experience or
knowledge of the value of your offering. Lowering the price and thus the barriers to trial
can have a significant influence in converting these groups, though this must be balanced
with ensuring the target segment and their optimal price points are sufficiently profitable
in the long term.
Strategies of moderate importance

Another way that the KTC has been successful in encouraging trial is to Offer a better
free. For the KTC, whose priority has always been to limit or avoid free distribution,
offering a better free has only ever been a moderately important strategy. Free services
are offered only as part of promotional bundles, where customers can take advantage of
deals such as ‘Pay to use the washing machine, get 15 minutes of internet for free while
you wait’. The free components of KTC bundles are typically services that carry low or
no variable cost and are natural complements to the primary service being purchased.
The goal of this cross-selling approach is both to attract new customers and to broaden
the range of services that existing customers are using. It is designed to align with the
common philosophy among the community; that seeing is believing. “I think the bundle
173
61
is something very different to giving for free. It’s about what makes the most enjoyable,
holistic experience for the customer and about driving repeat. Once they try, they want to
come back.”174 This has not been true for all services, however, as promotional offers for
water appeared to have no impact on demand.
Another moderately important principle present in the KTC’s strategy to compete against
free is If you can’t beat them, join them: Collaboration & Acquisitions. A key part of
the KTC business model is to leverage local NGOs to train people, deliver adult
education classes and to rent the meeting room. Although this includes NGOs who
provide their services for free, the KTC does not seek to exclude such organisations as the
benefit of integrating them has another important benefit. By bringing in local
organisations with existing roots in the community, the KTC is able to consolidate its
credibility as a Kiberan organisation, run for and by Kiberans. “It’s about changing our
positioning, who we are. The story is we are a Kiberan organization. We’re not a US
NGO coming with a US company to set up this program. We are a centre of the Kiberan
people, with Kiberan employees.” This native identity has proven to be one of the most
important factors in competing against free and will be outlined in detail in the following
section as a recommended addition to best practice.
Furthering these efforts of social embeddedness is the work being done to Maximise
networks effects. There are a number of key areas where the KTC is leveraging the power
of social networks to attract new customers and build customer loyalty. The dominant
marketing channel, for example, is through group messages on Facebook and WhatsApp.
The KTC is also experimenting with using social networking websites to start discussions
between customers though they concede that this has not yet been successful.175 In
addition to creating digital groups, the centre is also working to create physical groups,
such as the women’s group for cleaning ladies and groups within the savings co-op. All
of these networks help to ensure the KTC’s role as a meeting place and facilitator in the
community, though they overall have had only a moderate impact when speaking
specifically about the centre’s ability to compete against free.
174
175
ibid.
62
Strategies of low to no importance

The remaining four best practice principles identified in the literature were found to have
little to no importance in the KTC’s efforts to compete against free. Though initially
expected to be a major driver of visitation, efforts to Match or exceed convenience have
proven to be far less effective than expected. A large part of the reasoning behind offering
so many services at the KTC was to provide a ‘one stop shop’ to save Kiberans time and
energy. This value proposition has, however, had only lacklustre appeal, as the
convenience of accessing all services in one place is often perceived as inferior to the
convenience of having a number of different providers who are further from each other
but closer to the home. “Convenience is just not the main driver. For example, we had a
lot of ‘Buy One Get One Free’ offers with the water and it didn’t work at all. Distance
was actually the most important criteria when it came to water, not price.”176
Similarly, Know thy enemy: Imitate the free competition did not appear as a factor that
was important in the fight against free. Although the KTC has indeed gathered
competitive intelligence and replicated elements of competitor marketing strategy, it has
not specifically sought to understand its free competitors and how they may be able to
replicate specific elements of their success.
Although the KTC may one day work within the approach of Rethinking profit centres,
this does not currently form part of their aims or strategy. Presently, the financial goal of
the centre is to ensure each service is profitable in its own right; that is, that the revenue
from each service is in excess of its attributable costs. Although this is not currently the
reality, it is the goal they continue to work towards. There is, however, an openness
among management to the concept of cross-subsidising services in future once the centre
as a whole is profitable. If the centre can sustain itself and has a surplus of revenue in one
service, the option to reduce the price of a less popular service could indeed be put on the
table. “Our primary objective is making sure the structure is financially viable. But then if
that structure is actually allowing you to give access to clean water or toilets to more
people, then yes, for sure, let’s go for it.”177
176
177
63
The least important principle in the KTC’s plight to compete against free appears to be
Assess the threat: Decide whether and/or how to respond. This is because this principle
applies primarily to incumbents facing free entrants, who must determine whether their
current business model can survive or if transformation is required. In the literature, this
process is characterised as involving a comprehensive assessment of the competitive
threat to directly inform subsequent strategic planning. In the case of the KTC, who were
entrants in a market where incumbent free competitors and expectations already existed,
competitive landscaping formed a part of the KTC business plan development but no
business model transformation was put explored or planned specifically to address the
challenge of competing against free.
This section has explored the Kibera Town Centre’s experience of launching a business in
an environment where they faced significant opposition against charging for their
services. The following case study will follow this same structure, testing best practice
and uncovering new insights for another social enterprise in Kibera, looking specifically
at their experience of marketing a product for which a comparable substitute is available
for free. The two case studies will then be discussed and compared concurrently in the
final chapter of this thesis.
64
Case Study 2: Peepoople
Background
Founded in 2006, Peepoople is a social business based out of Stockholm, Sweden,

working towards the mission that “all people who so desire shall have access to dignified
and hygienic sanitation”.178 This mission is realised through the development, production
and distribution of the Peepoo Toilet, a patented design created in cooperation with the
Swedish University of Agricultural Science and the Royal Institute of Technology in
Stockholm.
The Peepoo toilet is a single-use personal toilet designed to provide maximum hygiene
and convenience using minimum material. Its design is heavily influenced by consumer
needs and current practices, taking the form of a slim plastic bag. The bag is self-
sanitising and biodegradable, with an inner layer that unfolds to form a wide funnel. It
remains odour-free for at least 24 hours after use, making it safe and convenient for use in
households, either day and night.
Figure 7: Functionality of the Peepoo Toilet179
Combined with the hygienisation process that urea initiates and completes, a used Peepoo
toilet transforms over time into high-value fertiliser. This waste valorisation forms a key
178
Peepoople, 2012. About Peepoople. [Online] Available at: http://www.peepoople.com/information/about-peepoople/
[Accessed 28 April 2015].
179
Peepoople, 2012. The Peepoo Toilet. [Online] Available at: http://www.peepoople.com/peepoo/start-thinking-
peepoo/ [Accessed 13 April 2015].
65
part of the Peepoople business model and value proposition. A single bag purchased for 3
KSH (US$0.03) can be used and sold back to the Peepoo collection drop-point for 1 KSH
(US$0.01). From this drop-point, used Peepoo are transported daily to be stored and
processed to create fertilised soil that can be distributed profitably to local peri-urban
farmers.180
Peepoople’s Kenya operations were launched in June 2010, when the organisation
launched its first pilot project in Kibera. Based on studies of the willingness to pay in the
targeted areas, Peepoople predicts a need for price support until 2020. One of the key
goals of the pilot project is to quantify this price support and identify the most effective
subsidy intervention point.181 However, the long-term goal of the project is that the
Peepoo system should affordable for consumers directly and self-sustaining without
subsidy. In their words, “The essence of the business model and the implementation
model is that we should be able to give them something that they can manage in the
community so they are not dependent on further aid”182.
Competitive landscape
In order to reach the goal of self-sustainability, it is necessary for the Peepoo Toilet to be
sold at a positive price at a large scale. While there are no other companies selling toilet
bags in Kibera, there are a number of competitive substitutes or alternatives in this space
with varying levels of hygiene, safety, convenience and price. The two primary sources of
this competition are public toilets and open defecation.
Public toilets are available throughout Kibera in the form of biogas toilets, pour flush
toilets, Ventilated Improved Pit latrines and unimproved pit latrines. 183 These are
typically owned and operated by community co-ops, small business owners, NGOs or
larger companies and are priced at around 5 KSH (US$0.05) per use. It is estimated that a
single latrine is theoretically shared by as many as 300 people.184 In reality, however, this
180
Peepoople, 2015. Peepoople Urban Slum Model. [Online] Available at: http://www.peepoople.com/how-we-
work/urban-slums/ [Accessed 2 May 2015].
181
Peepoople, 2015, op cit.
182
Nee, M., 2015. Personal Interview. Y. Naufal, Interviewer, April 1.
183
Schouten & Mathenge, op cit., p.819.
184
Peepoople, 2015, op cit.
66
figure is much lower, given that the vast majority of community members continue to
engage in open defecation, using flying toilets as their primary means of waste
‘disposal’.185
It is this segment of the population still engaging in open defecation that will be the
primary subject of the analysis to follow, as this group can be considered to have no
direct costs related to sanitation and as such, may be categorised as meeting their most
primary sanitation-related demands for free. While this simplistic categorisation does not
consider the indirect costs of open defecation, it does provide a basis for examining the
challenge of marketing a good at a positive price while a deeply embedded substitute is
available for free.
Competing Against Free: Analysis
Table 4: IMPORTANCE OF BEST PRACTICE PRINCIPLES TO COMPETING

AGAINST FREE STRATEGY: PEEPOOPLE

Offer a better free
LEGEND
Strategies of high importance

The strategies that Peepoople has successfully leveraged to compete against free are
closely aligned to the best practice principles identified in the literature review. It would
appear that the most important of all has been Know thy enemy: imitate the free
185
Schouten & Mathenge, op cit.
67
competition. Peepoo bags were designed as a direct response to the traditional custom of
“flying toilets”, replicating its functionality and eliminating its harmful side effects. As
described above, the Peepoo is a simple plastic bag; easy to carry around or to use in the
safety and privacy of one’s own home. However, unlike a normal bag, Peepoo bags
contain sanitising ingredients that transform their contents over time into high-value
fertiliser, avoiding the spread of disease and valorising waste.
By allowing their product to be easily integrated with existing habits, Peepoople reduce
the burden of the need for behaviour change. It is well established that sanitation
solutions that respect and respond to people’s actual needs, preferences and demands are
most effective 186 and on these criteria, the Peepoo design clearly excels. This
effectiveness and innovation was recognised in 2012 when the Peepoople Design Profile,
which also includes a specially designed seat known as a Kiti was awarded an
Honourable Mention in the Design for Global Health category of Sweden’s most
prestigious design award, Design S.187
Figure 6: Peepoople Design Profile. From left: two Kiti seats and Peepoo Personal Pack (contains 28
Peepoo bags)188
186
UN Water, 2008. The Sanitation Challenge. Presentation. UN Water.
187
Peepoople, 2012. Design S for Global Health awarded to Peepoople. [Online] Available at:
http://www.peepoople.com/news-media/news/38/ [Accessed 20 June 2015].
188
ibid.
68
Another key approach in easing the burden of behaviour change and competing against
the free alternative has been to Offer a better free. For Peepoople, this has been through
two main strategies:
1. Bundling Peepoo bags with complementary products, and
2. Sourcing donor funds to provide Peepoo bags to school children free of charge.
The primary bundle promotion used thus far is ‘Buy two Peepoos, get a Kiti free’, which
has been the basis of a large number of campaigns. 189 This has allowed Peepoople to
promote the use of their Kiti, which was developed as a hygienic alternative to using
multi-purpose buckets to seat children while they use the bags. This promotional offer has
been an effective way of encouraging trial of the Kiti, which makes the usage of the bags
more hygienic and comfortable, supporting long-term adoption of the product. This
approach has also been important to Peepoople’s efforts to break the association with
being an NGO, which will be discussed in further detail in the following chapter.
The other channel through which Peepoople has offered a better free is through
approximately 100 schools in Kibera. Originally created as a customer revenue
generating channel, Peepoople quickly found that schools did not receive enough funding
to consistently purchase the bags. “We saw that they could buy Peepoos when they had
funding but it went really up and down from week to week, from month to month.
Sometimes they could have Peepoos and sometimes not. What we felt is that it was really
necessary for the community to start working long term to really make a foundation for
behavioural change. We felt that by being able to secure hygienic spaces and basic
sanitation at school, the impact is so big for these children.”190 With this goal in mind,
private donor funding was secured in order to be able to distribute the bags in schools for
free.
According to Peepoople, providing Peepoos for free in one channel has not impacted
sales in other channels. This is believed to be because community members do not expect
to receive the same donations as schools and thus do not see an incompatibility in paying
189
Nee, op cit.
190
Nee, op cit.
69
for something a schoolchild can receive for free. Indeed, rather than undermining sales of
Peepoos, the business is finding that the integration of Peepoos in schools has been
instrumental in growing demand in the community as a whole. This notion of investing
in one channel to grow sales in another is closely aligned to the principle, Rethink profit
centres. This balancing act has allowed Peepoople to continue to address a part of the
population who would otherwise almost certainly be engaging in unsafe low or no cost
solutions. While the short-term revenue growth resulting from the increased demand does
not compensate for the cost of free distribution, it certainly contributes towards a non-
financial source of profit, the project’s social goals.
The major reason the school program has been effective in growing sales is due to its
ability to Maximise network effects. While the social taboo around talking about
sanitation has been a major barrier with adults, children have been open to learning about
health and hygiene and have been the key to opening the dispersal of this critical
information into the community. “For children, it’s so much easier because they don’t
have those social boundaries of taboo and so convincing them is really easy. And then
what we see is that they go home and take their newly-won knowledge back to their
family members and we see parents coming back to the school saying, ‘What is this
Peepoo toilet? My kids won’t use anything else. What is this?’”191
Improving sanitation in a community is an extremely positive example of network effects

in action in a non-digital context. The more people within a community use Peepoo, the
lower the risk of disease becomes and the more the health of the community as a whole
improves. This in turn has a positive impact on the perceived value of the product,
growing demand and continuing the virtuous cycle. This has been exactly the experience
Peepoople has seen in Kibera, as the popularity of the offering grows and the critical
mass required to begin seeing improved health outcomes is achieved. “When they start
using the Peepoo and when they get their neighbours to use the Peepoo and also when
children start using the Peepoo at school, they see a difference in their health and they
don’t want to use the flying toilet anymore.”192
191
Nee, op cit.
192
ibid.
70
The need to educate the community on health and hygiene has been a critical part of
Peepoople’s strategy around Finding the scarcity: Differentiation. As previously
detailed, the key differentiating factor between Peepoos and flying toilets is the
sanitisation of waste. This has, however, been a difficult value proposition to sell, as it
has required extensive education and information programs around health, hygiene and
sanitation. “In Kibera you have very low understanding and very little knowledge around
the links between hygiene and health. People know that they’re sick but they don’t know
why. Through informing them, educating them, telling them how they get sick, why they
get sick and what they can do about it, we have created a market for a hygienic solution
like the Peepoo.”193 This account is consistent with WHO research that shows that raising
awareness of why sanitation and hygiene are important will often increase motivation to
change harmful behaviours.194
Further incentivising people to change harmful behaviours is the Peepoo’s move to

Match or exceed convenience of the alternative. In Kibera, the value of convenience
extends far beyond ease of use as going outside to go to the toilet can be dangerous,
particularly in the evenings and for women and children. In this sense, the convenience of
being able to relieve oneself hygienically in the home provides safety and dignity,
retaining the positive aspects of the flying toilet while eliminating its associated risks.
Strategies of moderate importance

The one best practice principle identified in the literature that was only of moderate
importance to Peepoople’s success is Ensure the price is right. The reason for this is not
because customers are not price sensitive but because the company’s experience of
pricing has thus far been a matter of trial and error, with few conclusive results. Strategic
pricing has therefore not been a very effective mechanism in competing against free,
though this is not to say that it may not in future. “People will always say they want it for
free so it’s not always very constructive. But we also have a lot of people saying, ‘I would
pay more for it’. So I don’t think we have perhaps landed on the right price yet. I think it
193
ibid.
194
World Health Organisation, 2013. Sanitation challenge: Turning commitment into reality. [Online] Available at:
http://www.who.int/water_sanitation_health/hygiene/envsan/sanitchallenge/en/index5.html [Accessed 20 June 2015].
71
will be continuously developed and we need to continuously benchmark and follow the
economy and see where we land.”195
Strategies of low to no importance

The final principles which can be seen to have little to no importance in Peepoople’s
strategy include Divide and conquer: Segmentation and If you can’t beat them, join
them: Collaboration & Acquisitions. Similarly, as in the previous case study, Assess the
threat: Decide whether and/or how to respond has little specific relevance as this
principle typically applies to free entrants.
This section has looked into the experience of Peepoople, a social enterprise in Kibera
whose success depends on converting people to a paid sanitation solution. The following
section will discuss and compare this case study with the preceding case study, seeking to
gain new insight into their challenges and to make recommendations for additions to best
practice.
195
Nee, op cit.
72
Analysis And Discussion
Table 5: IMPORTANCE OF BEST PRACTICE PRINCIPLES TO COMPETING AGAINST FREE

STRATEGY
KTC Peepoople
Offer a better free
LEGEND
Key Themes
The best practice principles identified in the literature appear to apply in notably different
ways to the two cases, with only two of the ten principles sharing the same importance
ranking across both projects. With only two case studies to examine and with so few
common points, drawing generalisations from these experiences would be a problematic
endeavour. Nonetheless, there are a number of key themes that emerge from the two
studies that are worthy of highlighting. This section will explore these themes, detailing
how they are characterised in the case studies and linking to relevant literature where
appropriate.
Lowering barriers to trial through price promotion
In both the cases of the KTC and Peepoople, price promotion serves as an important tool
to encourage trial. This experience is consistent with research that demonstrates that sales
promotion is an effective tool in encouraging trial by new buyers.196 The preferred
196
Yeshin, T., 2006. Sales Promotion. London: Thomson Learning., p. 117.
73
methods used to execute this price promotion differs in the two cases, as the KTC favours
a discounted price approach, while Peepoople regularly offers promotional bundles.
The tactic of discount pricing has been instrumental to the KTC’s ongoing pricing
research, as they seek to better understand their customers’ willingness to pay. It has also
been key to encouraging trial in certain services, as illustrated previously in the example
of the women’s showers. Despite this success, it must be said that price promotions are
not without their risks, as temporarily lowering the price of an offering can disturb the
market in the medium to long-term by changing customers’ reference price, undermining
the brand’s price credibility and increasing consumer’s price sensitivity.197
These risks related to price perception are particularly salient in BoP markets. With such
extremely price sensitive customers, companies must treat all pricing decisions with
extreme care to avoid compromising the trust between themselves and customers and to
uphold the perceived customer value of their product. One of the best ways to mitigate
these risks is to leverage the power of bundles, which can be an effective way of
disguising price promotions. Research has shown that bundles are likely to be perceived
as granting savings on an entire bundle, rather than a single product. 198 This lessens the
effect of resetting price expectations of any product, making it a more prudent strategy to
encourage trial, particularly at the BoP.
The ‘Buy One, Get One Free’ type bundles offered by Peepoople have been a highly
successful method of encouraging trial of Peepoos and complementary products. The
company also believes it has been effective in promoting long-term adoption of their
products in some cases, which is consistent with BoP research that shows that receiving a
product for free can increase willingness to pay for it later.199 This research also goes on
to highlight that neighbours of people who receive free products are more likely to
purchase later as a result of directly or indirectly experiencing the product’s benefits, a
situation which was echoed in Peepoo’s experience.
197
Smith, T., 2012. Pricing Strategy: Setting Price Levels, Managing Price Discounts and Establishing Price
Structures. Mason, OH: South-Western Cengage Learning., p. 128
198
ibid., p. 128
199
Holla & Kremer, op cit.
74
Complementary services and products
The customer loyalty driven by the price promotions described above may also be
partially explained by the complementarity of the goods promoted. Though it was a more
strategically significant tool for Peepoople, both case studies revealed examples of
conscious efforts to sell pairs or groups of products to increase the appeal of both the
overall offering, as well as its individual components.
For Peepoople, offering their custom-designed toilet seat, the Kiti, with the purchase of a
set number of Peepoo bags facilitates the creation of a habit associated with their product.
Once an individual has a Kiti in their home, using Peepoo bags becomes more hygienic
and comfortable. Brand recognition and loyalty also benefits, as the presence of the
branded seat serves as a subtle reminder to individuals to maintain the habit. This
synergistic approach has increased the appeal of Peepoo bags and the Kiti and
consequently has increased the value of the offering as a whole. This result is well
documented in the literature, where complementary goods have been shown time and
time again to positively impact the usefulness or desirability of an offer, making these a
significant force in driving the adoption of the dominant offering.200
This approach has also yielded encouraging results for the KTC, who, over time, have
been discovering where the natural complements lie within their service offerings. The
initial idea behind offering such a wide variety of services was to create a ‘one stop shop’.
Although this had significantly lower appeal than was expected, the power of bundling
only two to three complementary services is proving to be an important progression on
this idea. Bundles are informed by observations on how people actually use the centre.
For example, KTC staff noticed that many men were using showers as an opportunity for
social interaction, which they often followed up directly with a coffee. This unlikely
match has led to an unintuitive but effective bundle: showers and coffee, an appealing
offering to existing customers, as well as those who may otherwise have washed
themselves at home for free.
200
Economides, N. & Viard, B., n.d. Pricing of complements and network effects. In Faulhaber, G.R., Madden, G. &
Petchey, J. Regulation and performance of communication and information networks. Cheltenham, UK: Edward Elgar.
pp.157-89., p. 158
75
Younger people with more open minds
As discussed in previous chapters, research has shown that as people become accustomed
to free offerings in one market, they come to expect free offers increasingly in related
markets.201 It stands to reason, therefore, that the reverse of this finding is true; that the
less people are accustomed to free, the less they come to expect it. This has certainly been
the case for the KTC and Peepoople, who have both found younger people to be
important early adopters for their products and services.
For the KTC, the shift towards targeting a younger segment has been driven largely by
this segment’s aspirational outlook. While older residents of Kibera have experienced
many years of adversity, transient NGO projects and distrust of outsiders, the younger
residents are less encumbered by this experience. Though certainly accustomed to the
hardships of the slum, this younger group is characterised by strong ambitions for change
and progress, making them more receptive to the messages and mission of social
enterprise and thus more willing to pay for the KTC’s valuable services.
In contrast, the significance of young, open minds to Peepoople’s strategy has been less
about their willingness to pay as it has been about their willingness to listen. The key
barrier for Peepoople to overcome in converting people from open defecation has been to
educate them on the importance of doing so. Given the taboo surrounding the subject, this
has been an arduous task but the lack of sensitivity that children have about this taboo has
given them far more open ears than their parents. This has made schools fertile ground for
raising awareness about health, hygiene and sanitation, crucial messages clearly not just
for the success of Peepoople’s strategy but for the wellbeing of the community as a
whole.
201
76
Recommended Additions to Best Practice
The previous chapter addressed the second objective of this thesis; to assess and discuss
the relevance of developed world best practice to the BoP. This section will address the
third and final objective of this thesis by exploring success factors not accounted for in
the literature, with the intention of proposing them as recommended additions to best
practice on competing against free at the BoP.
Breaking the association with NGOs
Cultivating a brand image as a commercial enterprise has been crucial to both the KTC
and Peepoople’s successes. In many ways, breaking the association with being an NGO
has been the key to breaking the association with free. For Kiberans, whose only
experiences of NGOs had been through the lens of charitable giving, the idea that NGOs
may charge for its services is often seen at best, as puzzling and at worst, as morally
wrong. “If you come as an NGO, you must be for free. Or else people are like, why are
you here? There is a belief that ‘NGO’ equals ‘free’.”202
This has certainly been the case for the KTC, who has undergone a significant rebranding
to break this association. During development and construction, the KTC was initially
prominently branded by Human Needs Project (HNP), the American NGO who founded
the project. The centre was known as the HNP Town Centre and was widely supposed to
be run by a wealthy NGO. This caused tension among the community, who were
unaccustomed to NGOs charging for their services and felt as though free services were
not just something that HNP should be capable of providing but something the
community deserved.203 Renaming the centre the Kibera Town Centre was a crucial move
in breaking these tensions and allowing the KTC to become known and respected as a
commercial enterprise.
It is interesting to note that while the community expected an NGO would be free, it did
not expect the same from the corporate partner, P&G. In the KTC’s laundry room, for
example, where the P&G brand is highly visible, the KTC has not encountered any
202
203
Internal docments
77
expectations that these products or services be free. “It’s normal for them that it’s not for
free. The company face is bringing something else, another element rather than just being
an NGO.”204
Figure 7: P&G Chief Sustainability Officer, Virginie Helias (right) with local Kibera resident in KTC
laundry room
For Peepoople, who have always operated as a social enterprise, the challenge has not
been to rebrand from an NGO beginning but to fight against the expectations that the
proliferation of NGOs has created in the community. This has been a matter of
reinforcing the message that they are working towards creating a financially sustainable
solution, not a philanthropic project. “It’s really been a key to make people understand
that this is not an NGO providing aid for free. We’re trying to establish something
sustainable here through a commercial model. So it’s been really important to get the
market to understand that this is a commercial product.”205
The approach that Peepoople has used to drive home this message has predominantly
been to mimic the traditional marketing and promotional practices of commercial
products. Promotions through radio shows and road shows are commonplace in Kenya
and have been leveraged to market Peepoo’s portfolio as consumer products. Campaigns
including free offers, such as the Buy 2, Get 1 Free offer described above, have also been
valuable in clarifying Peepoople’s position as a profit-seeking venture.
204
Catherine, May 12., op cit..
205
Nee, op cit.
78
Infusing local ‘flavour’
Though this second success factor was not raised in the case of Peepoople, it was so
instrumental to the KTC’s success in competing against free that it warrants inclusion in
this list. For the KTC, infusing “Kibera flavour” into the feel and branding of the centre
has been a critical point in breaking the price impression. “It’s extremely important to
have this Kibera flavour, this Kibera spirit. After that, you see for our typical customers
that the reason they’re coming is that the place is nice, you know, ‘I feel good here’. And
then price is coming as a secondary question.”206
“What we understood at the beginning was the main barrier to people coming to the
centre was the feeling, ‘This is not meant for me’. They were calling it ‘the mzungu
[white man] place’, which was totally not intended.” 207 Infusing Kibera flavour has
involved an iterative process of ensuring people feel that the centre was made for them;
that there is an appropriate balance of the aspirational elements the business model was
built on and an embracing of the vibrant, dynamic local culture. This mix is known as
“outside Kibera standards with Kibera flavour” and has been the most effective change in
reducing the importance of price as a driver of visitation.208
The recipe for Kibera flavour is a constant work in progress, though it is characterised by
the feeling, “It’s like my home. I can meet with people, it’s messy, it’s noisy and I can
make that noise.”209 Part of this feeling is quite literally introducing flavours of Kibera,
removing the more Western items from the café menu and incorporating more traditional
dishes. Food and drink items that were predicted to have aspirational value were
ultimately rejected by the majority of the community, who saw the premium price and
Americanised offering as a signal the centre as a whole was not for them.210 For the KTC,
the combination of infusing Kibera flavour and moving away from the association with
the NGO has been incredibly successful and the two factors combined are credited with
the positive growth trajectory the centre is on today.211
206
207
ibid.
208
ibid.
209
ibid.
210
ibid.
211
79
Limitations and Opportunities for Further Research
In an effort to explore how BoP projects can compete against the alluring power of free,
this thesis has examined the lessons learned in developed markets to assess their
relevance to the BoP. The case study approach taken, while providing a rich focus for
analysis, does not facilitate generalisation and the conclusions made from these case
studies cannot be generalised to the whole of the BoP. As previously discussed, the BoP
is far from a monolith and it is certainly not a given that the lessons from one
geographically and culturally distinct group are relevant elsewhere. It would be
interesting for the findings of this research to be expanded upon by testing the same
framework with additional organisations in Kibera, particularly ones who have already
reached the point of financial sustainability. Revisiting the cases of the KTC and
Peepoople in a few years time could also enrich the research, to build on their learnings
and compare the data across time.
80
Conclusion
This thesis is positioned at the confluence of two major business trends of the previous
decade. First is the emergence of business models that offer valuable goods or services
for free. Second is the challenge of profitably meeting the needs of the world’s four
billion poorest people, the so called Bottom of the Pyramid. This thesis has strived to
contribute to both fields by extending the lessons from one to another, looking at how the
experiences of companies competing against free in the developed world might relate to
social enterprises struggling to overcome expectations of free at the BoP.
The first chapter of this thesis illustrated the scale of the challenge for companies
competing against free by detailing the many ways that zero interferes with logical
reasoning, as well as the economy that has emerged around leveraging this effect. The
second chapter looked at the experience of companies competing against free rivals,
meeting the first research aim of this thesis by synthesising the literature to identify ten
best practice principles.
After setting the scene for the analysis to follow in the third chapter, the fourth chapter
addressed the second aim of this thesis by exploring how the best practice principles from
developed markets applied in two distinct case studies: the Kibera Town Centre and
Peepoople. The principles applied in notably different ways to the two cases, with only
two of the ten principles sharing the same importance ranking across both projects.
Despite these differences at the principle level, three clear themes emerged when
examining the cases overall. Firstly, both the KTC and Peepoople found price promotion
to be an effective tool in lowering barriers to trial, through discount pricing and
promotional bundles, respectively. Secondly, marketing pairs or groups of
complementary products positively impacted the utility and desirability of their offers,
further incentivising trial and encouraging long-term adoption. Lastly, as the group with
the least exposure to free offers, younger people were a key strategic segment to both
organisations, bringing an openness to change and to the messages of social enterprise.
The last chapter addressed the final research aim of this thesis by identifying unforeseen
success factors to put forth as recommended additions to best practice. The two additional
81
insights were complementary, both relating to branding. For both cases, breaking the
association with NGOs was critical to being taken seriously as commercial ventures and
ultimately breaking the association with free. Infusing local “flavour” into the KTC built
on this effect by giving the community a sense of ownership and belonging, reinforcing
the idea that the centre is there to empower them to empower themselves.
The BoP is a disparate group and it is problematic to generalise from one community to
another, much less to the BoP as a whole. Nonetheless, the general findings of this
research are well supported by BoP literature and the themes and principles identified
could be insightful lines of inquiry for similar organisations. It is hoped that this piece of
research provided a novel contribution to the literature and that the findings outlined
above can serve as the basis for further case study research.
82
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Table of Contents
Table of Contents ............................................................................................................................................ 3
List Of Abbreviations And Acronyms .......................................................................................................... 5
Abstract............................................................................................................................................................ 5
Acknowledgements ......................................................................................................................................... 7
Introduction ..................................................................................................................................................... 8
Overview of Thesis Structure ....................................................................................................................... 9
Zero & the Economy of Free in Developed Markets ................................................................................. 11
Zero: A Unique Number, Probability, Reward & Price ............................................................................ 12
Psychology of zero ................................................................................................................................ 12
Zero as a unique number, reward, probability and price .................................................................. 12
Zero comparison effect .................................................................................................................... 12
Zero price effect ............................................................................................................................... 12
Psychology of free................................................................................................................................. 13
Free breakfast eeffect ....................................................................................................................... 13
Simplicity of decision making for free offers .................................................................................. 13
Impact of agent's endogenous price threshold ................................................................................. 14
Nudge qualities of free offers ........................................................................................................... 15
The Economy of Free ................................................................................................................................. 16
Gilette's razors and blades strategy .................................................................................................. 16
Free as a Business Model ...................................................................................................................... 17
Introduction to free business models ................................................................................................ 17
Freemium.......................................................................................................................................... 17
Freemium examples ......................................................................................................................... 18
Three party markets .......................................................................................................................... 18
Three party market examples ........................................................................................................... 19
Cross-selling ..................................................................................................................................... 19
Cross-selling examples ..................................................................................................................... 19
Non-monetary ................................................................................................................................... 20
Non-monetary examples................................................................................................................... 20
Other ................................................................................................................................................. 21
Other examples ................................................................................................................................. 21
Criticisms .............................................................................................................................................. 21
Christian Michel's philosophical objections to free ......................................................................... 21
Deceptive free offers ........................................................................................................................ 22
Non-monetary cost of free offers ..................................................................................................... 22
Antitrust examples ........................................................................................................................... 22
Competing Against Free ............................................................................................................................... 24
Introduction to best practice principles list ........................................................................................... 23
Types of Free Competition ........................................................................................................................ 25
Best Practice Principles for Competing Against Free ............................................................................... 26
1. Assess the threat: Decide whether and/or how to respond ................................................................ 26
Decision making matrix explanation ............................................................................................... 25
Figure 1: Competing against free decision-making matrix .............................................................. 25
2. Find the Scarcity: Differentiation ...................................................................................................... 27
Identify and leverage needs not met by free offers .......................................................................... 26
3. Divide and Conquer: Segmentation .................................................................................................. 28
Importance of segmentation ............................................................................................................. 27
91
Premium and niche segments ............................................................................................................27

4. If you can’t beat them, join them: Collaboration & Acquisitions .....................................................29
Co-opetition .......................................................................................................................................28
Mergers & Acquisitions ....................................................................................................................28
Affiliate marketing ............................................................................................................................28
5. Offer a better free ..............................................................................................................................30
Types of free strategies .....................................................................................................................28
Bundles ..............................................................................................................................................28
6. Know thy enemy: Imitate or match free competition .......................................................................31
Importance of knowing competitors' strengths .................................................................................30
Netflix programming based on piracy ...............................................................................................30
7. Match or exceed convenience ...........................................................................................................31
Differentiating on time and effort .....................................................................................................30
Free and Open Source Software ........................................................................................................30
Facilitating ease of purchase .............................................................................................................20
8. Ensure the price is right .....................................................................................................................32
Importance of setting fair prices........................................................................................................32
Netflix pricing in Australia ...............................................................................................................32
9. Maximise network effects .................................................................................................................33
Networks effects definition ...............................................................................................................33
Microsoft Office ................................................................................................................................33
Ideal scenario to leverage network effects ........................................................................................33
10. Rethink profit centres ......................................................................................................................34
Structural obstacles to adopting free strategies ................................................................................20
Google's approach ............................................................................................................................20
Doing Well by Doing Good ........................................................................................................................36
The Bottom of the Pyramid ...................................................................................................................36
Introduction to the Bottom of the Pyramid ......................................................................................35
Figure 2: The World Economic Pyramid .........................................................................................35
Income levels at the BoP ..................................................................................................................36
BoP as a business trategy .................................................................................................................36
BoP seminal works ...........................................................................................................................37
Social Business ......................................................................................................................................38
Definitions of social business ...........................................................................................................37
Criticisms of BoP and Social Business .................................................................................................39
Romanticising the poor ....................................................................................................................38
Lack of profitability .........................................................................................................................39
Price sensitivity of BoP customers ...................................................................................................39
Hand Ups vs. Hand Outs .......................................................................................................................41
Free products engender dependence .................................................................................................41
Positive prices restrict access to the poor ..........................................................................................41
Customers and Communities ................................................................................................................42
Risk averseness at the BoP ................................................................................................................42
Free offers reduce decision costs ......................................................................................................42
J-PAL research into effect of free distribution ..................................................................................42
Local Economy & Competition ............................................................................................................44
Local vendors are impacted by free distribution ...............................................................................43
Applying Best Practice from Top to BoP ...................................................................................................46
Methodology .........................................................................................................................................46
Case Studies: Best Practice Applied ............................................................................................................48
Background ................................................................................................................................................48
Kibera slum ...........................................................................................................................................48
92
Overview of Kibera .......................................................................................................................... 47

The Water and Sanitation Challenge ..................................................................................................... 49
Figure 3: Map of water points, sanitation and waste collection in Kibera ....................................... 49
Figure 4: Millennium Development Goals Sanitation Ladder ......................................................... 50
Case Study 1: Kibera Town Centre ........................................................................................................... 53
Background ........................................................................................................................................... 53
Table 1: Categorisation of services at Kibera Town Centre ............................................................ 52
Figure 5: The KTC at night .............................................................................................................. 53
Table 2: Price and quality comparison between KTC and competitors ........................................... 52
Case study analysis ............................................................................................................................... 57
Table 3: Importance of best practice principles to competing against free: KTC............................. 57
Strategies of high importance ........................................................................................................... 58
Strategies of moderate importance ................................................................................................... 61
Strategies of low to no importance ................................................................................................... 63
Case Study 2: Peepoople ........................................................................................................................... 65
Background ........................................................................................................................................... 65
Competitive landscape .......................................................................................................................... 66
Case study analysis ............................................................................................................................... 66
Table 4: Importance of best practice principles to competing against free: Peepoople .................... 66
Strategies of high importance ........................................................................................................... 67
Figure 6: Peepoople design profile ................................................................................................... 67
Strategies of moderate importance ................................................................................................... 71
Strategies of low to no importance ................................................................................................... 72
Analysis And Discussion ............................................................................................................................... 73
Table 55: Importance of best practice principles to competing against free ................................... 72
Key Themes ................................................................................................................................................ 73
Lowering barriers to trial through price promotion .............................................................................. 73
Discount pricing at KTC ................................................................................................................. 72
Risks of discount pricing ................................................................................................................. 73
Bundling as optimal approach ......................................................................................................... 73
Complementary services and products .................................................................................................. 75
Peepoople's approach ...................................................................................................................... 74
KTC's experience ............................................................................................................................ 74
Younger people with more open minds ................................................................................................ 75
"Striving Kiberans" segment ........................................................................................................... 75
Children's willingness to listen........................................................................................................ 75
Recommended Additions to Best Practice ................................................................................................. 77
Breaking the association with NGOs .................................................................................................... 77
Figure 7: P&G CSO, Virginie Helias with local Kibera resident ................................................... 77
Infusing local ‘flavour’ ......................................................................................................................... 79
Limitations and Opportunities for Further Research ................................................................................ 80
Geographical constraints ....................................................................................................................... 79
More case studies needed ...................................................................................................................... 79
Conclusion ..................................................................................................................................................... 81
Works Cited................................................................................................................................................... 83
Table of Contents .......................................................................................................................................... 91
Table Of Figures ........................................................................................................................................... 94
Table Of Tables ............................................................................................................................................. 94
93
Table Of Figures
Figure 1: Competing against free decision-making matrix.............................................................................26
Figure 2: The World Economic Pyramid. .......................................................................................................36
Figure 3: Map of water points, sanitation and waste collection in Kibera .....................................................50
Figure 4: Millenium Development Goals Sanitation Ladder ..........................................................................51
Figure 5: The KTC at night .............................................................................................................................54
Figure 6: Peepoople Design Profile. From left: two Kiti seats and Peepoo Personal Pack (contains 28
Peepoo bags) .........................................................................................................................................68
Figure 7: P&G Chief Sustainability Officer, Virginie Helias (right) with local Kibera resident in KTC
laundry room .........................................................................................................................................78
Table Of Tables
Table 1: Categorisation of services at Kibera Town Centre ...........................................................................53
Table 2: Price and quality comparison between KTC and competitors..........................................................56
Table 3: Importance Of Best Practice Principles To Competing Against Free Strategy: KTC ......................58
Table 4: Importance Of Best Practice Principles To Competing Against Free Strategy: Peepoople .............67
Table 5: Importance Of Best Practice Principles To Competing Against Free Strategy ................................73
94

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Masters of Science in Sustainable Development

Written and presented by

Under the supervision of

- Alfred North Whitehead, An Introduction to Mathematics, 1911.

List Of Abbreviations And Acronyms 5

Zero & the Economy of Free in Developed Markets 11

Competing Against Free 24

Case Studies: Best Practice Applied 48

Analysis And Discussion 73

List Of Abbreviations And Acronyms

3Cs Community Coordinating Committee

Background & Objective

This research question will be answered by addressing the following aims:

Overview of Thesis Structure

Zero & the Economy of Free in Developed Markets

It was in around 650AD that renowned Indian mathematician, Brahmagupta first

Zero: A Unique Number, Probability, Reward & Price

The Economy of Free

Free as a Business Model

Notable examples of freemium companies include:

Three party markets

Examples of businesses operating in three party markets include:

Other examples of cross-selling in action include:

Notable examples include:

Competing Against Free

Types of Free Competition

Indirect competition (Substitutes)

Best Practice Principles for Competing Against Free

1. Assess the threat: Decide whether and/or how to respond

Rate at which paying

Free offering’s growth rate

Figure 1: Competing against free decision-making matrix.44

2. Find the Scarcity: Differentiation

3. Divide and Conquer: Segmentation

4. If you can’t beat them, join them: Collaboration & Acquisitions

5. Offer a better free

6. Know thy enemy: Imitate or match free competition

7. Match or exceed convenience

8. Ensure the price is right

9. Maximise network effects

10. Rethink profit centres

.Competing Against Free at the Bottom of the Pyramid

Doing Well by Doing Good

The Bottom of the Pyramid

Annual per Capita Income* Tiers Population in Millions

More than $20,000 1 75-100

$1,500-$20,000 2&3 1,500-1,750

Less than $1,500 4 4,000

*Based on PPP in US$

Figure 2: The World Economic Pyramid.77

prospective rewards including “growth, profits, and incalculable contributions to

Criticisms of BoP and Social Business

Hand Ups vs. Hand Outs

The traditional BoP approach, as described by Prahalad102, follows a distinctly for-profit

Customers and Communities

In contrast to these findings, a 2014 study by Christensen, Siemsen and Balasubramanian

Local Economy & Competition

Applying Best Practice from Top to BoP

1. Assess the threat: Decide whether and/or how to respond

Case Studies: Best Practice Applied

The Water and Sanitation Challenge

Figure 3: Map of water points, sanitation and waste collection in Kibera149