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Home / Cyril Morong: Dangerous Economist / Toxic Smoke Is Africa’s Quiet Killer. An Entrepreneur Says His Fix Can Make a Fortune

Toxic Smoke Is Africa’s Quiet Killer. An Entrepreneur Says His Fix Can Make a Fortune

Summary:
By Peter S. Goodman of The NY Times.Eric Reynolds decided to give away stoves that burn clean wood pellets which he would sell (much cleaner than what people use now). That reminds me of the razor-razorblade model and "freemiums." He also needs very high sales to take advantage of "economies of scale." More on each of these later.Excerpts: "Philanthropic efforts were focused on distributing cleaner-burning stoves. For-profit ventures were developing models for sale. But all of these undertakings were bedeviled by the same problem. The high-tech stoves that limited toxic smoke were as much as 0 each — preposterously expensive for African villagers, many of whom lived on less than 50 cents a day. The cheaper models were useless. Most manufacturers were obsessed with keeping costs

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By Peter S. Goodman of The NY Times.

Eric Reynolds decided to give away stoves that burn clean wood pellets which he would sell (much cleaner than what people use now). That reminds me of the razor-razorblade model and "freemiums." He also needs very high sales to take advantage of "economies of scale." More on each of these later.

Excerpts:

"Philanthropic efforts were focused on distributing cleaner-burning stoves. For-profit ventures were developing models for sale. But all of these undertakings were bedeviled by the same problem. The high-tech stoves that limited toxic smoke were as much as $150 each — preposterously expensive for African villagers, many of whom lived on less than 50 cents a day. The cheaper models were useless.
Most manufacturers were obsessed with keeping costs low, given that customers were poor. But the stoves still produced smoke, or took too long to cook, or required that the wood be chopped into little pieces — an extra burden. The women doing the cooking (and it was overwhelmingly women) were not inclined to use them. As Mr. Reynolds returned to Rwanda for research, he saw many of these models stuck behind houses or propped up by the cooking fire as stools.

To succeed, a stove had to be so convenient and clean burning that women preferred it over their existing cooking method.

Mr. Reynolds began testing stoves made in Italy, India, the United States and China. He tried making his own."

"He settled on a Dutch-made stove that reduces wood down to clean-burning gases. Using pellets reduced the need for wood by 90 percent compared with charcoal. But those stoves cost more than $75.

Then came the epiphany: Inyenyeri could supply the stoves for free while collecting revenue from subscriptions for pellets. Rwanda was urbanizing rapidly, and city dwellers rely on charcoal. They would be eager to switch to pellets, which were 30 to 50 percent cheaper.

“If you sell fuel every day rather than selling a stove every two years,” Mr. Reynolds says, “that’s a business.”

Customers in rural areas could not afford to buy pellets, but Inyenyeri could serve them with a barter system. People could gather sticks, though less than they needed for cooking, and exchange them for pellets. Inyenyeri would use the sticks to make more pellets.

In this way, Inyenyeri would effectively become a utility providing clean cooking fuel. It would construct a network of factories to produce pellets. The bigger the business grew, the cheaper the cost of making them. As charcoal rose in price — a trend propelled by growing numbers of people flocking to cities and needing the product — the more appealing pellets would look."

But one crucial element is still missing — scale.

In every company projection, a steep increase in customer numbers is required for the business to become profitable. Inyenyeri now needs to persuade investors to deliver the cash to buy hundreds of thousands of stoves and erect new pellet plants."
Economies of scale-That is when average cost falls as quantity increases (think of a factory that produces thousands of cars compared to producing only one car-the average cost is lower the more cars you produce, up to a point, since you spread the fixed cost of the factory over more cars).

Razor-Razorblade Model by Will Kenton of Investopedia. Excerpt:
"The razor-razorblade model is a pricing tactic in which a dependent good is sold at a loss (or at cost) and a paired consumable good generates the profits. Also known as a "razor and blades business model," the pricing and marketing strategy is designed to generate reliable, recurring income by locking a consumer onto a platform or proprietary tool for a long period. It is often employed with consumable goods, such as razors and their proprietary blades. The concept is similar to the "freemium," in which digital products and services (such as email, games or messaging) are given away for free with the expectation of making money later on upgraded services or added features.

If you've ever purchased razors and their matching replacement blades, you know this business method well. The razor handles are practically free, but the replacement blades are expensive. The strategy has been erroneously attributed to King Camp Gillette, who invented the disposable safety razor and founded the company that bears his name. Today, Gillette (and its parent Procter & Gamble) employs the strategy to great profit."

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