Last Monday, I attended a talk by David Green, a recognized social entrepreneur and thought leader in pricing strategies for developing countries. My friend Yin Yin insisted I attend but I didn’t think much about it, but after listening to Green for 2 hours I was so happy I attended. A lot of entrepreneur talks lack the kind of meaty details that practicing entrepreneurs seek (indeed, earlier that very day I was left unsatisfied by the lack of specificity at the philanthropy panel discussion), but Green provided actual numbers and helpful details of how he done what he’s done. As someone who was trying to work out pricing and scaling strategies for a high-tech product meant for the poor in developing countries, this was a truly engaging talk. This posting is my attempt at describing this information.
David Green has achieved remarkable success in bringing medical practices and technologies to people who lack the ability to pay the prices that those in the developing world routinely pay for such treatment. His talk was titled ‘Humanizing Capitalism’ and was wide-ranging in topic and scope. A small number of us, including myself, went upstairs for dessert with David to talk further. David Green, Ashoka Fellow (2002) and MacArthur Fellow(2006), keeps himself busy with more than 10 projects at at time. One of his critical successes has been Aurolab, which provide cataract surgeries and eye care products to people in India and works closely with Aravind Eye Hospital. He is currently working on projects with low-cost hearing aids and solar power.
First: pricing. Pricing strategy is what Green excels at. How do you address pricing disparity to make products affordable to those who really need them? How can pricing strategies be used to create self-sustaining (read: profitable) businesses that still keep the social good at its core mission? Green has gone about this from both angles: a) how much money does it really cost to make a final product and b) what sort of pricing system can yield the best possible business model? For example, there is a device for cardiovascular problems that is priced at $6,000 for people in the developed world. However, it costs less than a thousand to make. The manufacturer wants to go in developing world markets, but can’t figure out how to price it such that enough people would buy it and to avoid backlash in the developed-world when those customers see that the same product is selling at much lower prices elsewhere.
Let’s look at Aravind Eye Hospital. Blindless is an enormous problem and a majority of cases come from cataracts, which is when the intra-ocular lens becomes clouded. This kind of surgery is routine in some parts of the world, but there are million so of underserved people in India. With the idea of “if McDonalds can do it for burgers, why can’t we do it for eye care”, Green and a colleague set about creating Aurolab, a nonprofit company that manufacturers intra-ocular lenses and other materials/products used for eye care. Aurolab is situated next door to Aravind, but sells products worldwide (has around 7% world market share too). The difference between cost of an intra-ocular lens of Aurolab and its competitor is astonishing: $2 vs $160.
Aravind Eye Hospital (founded back in 1976) has performed 3+ million surgeries to date and last year’s profit was $8 million. It uses a tiered system of payment. Around 50% of its patients pay nothing, a quarter pay around $12, and the remaining quarter pays much more than $100. The differentiation comes in the experience of the patient and is driven entirely by consumer choice. The free service customers don’t have the nicest waiting room or living accomodation. Those who pay money would get a nicer waiting room or outpatient room (hypothetically, maybe the difference between being 2 in a room vs 10 in a room). And for better or worse, the consumer choice comes in because more wealthy patients will pay more for the surgery to avoid sitting with the lower income people. This being said, it is critical to note that the quality of care is the same. The same surgeons, the same materials, etc. When it comes to the actual procedure, everyone is the same.
What are ways that Aravind lowered their costs?
- Increasing staff efficiency. Aravind surgeons perform 2000 cataract surgeries a year, 6x the Indian average.
- Lowering operating expenses. By prepping a larger operating room and treating more people at a time, setup costs are reduced.
- Smart international purchasing.
- Community outreach. Community resources can be mobilized on a fairly massive scale for short period of times. Aravind sets up eye clinics in communities that serve as advance diagnosis, screening, and identification centers. It works with communities to provide transportation and meals to get people to and from the hospital, and later to assist in out-patient care and followup with Aravind doctors.
The “David Green Formula”
How do you go about figuring out a price? Appropriate prices change depending on your geographic and social position. When Green was working on expanding the Aravind system to Egypt, he had to determine the pricing structure.
First, figure out the paying capacity. Segment the society into high/middle/poor and determine each segment’s average monthly income. For each segment, forecast what % of those you might have as customers.
Now, for Aravind there is a formula: per surgery cost = total operating expenses / # of surgeries performed = the average monthly income for the bottom 60% (income wise) of the population. A word of caution: this is what I quickly jotted down during the talk, so don’t take this at 100% face value, and this is how it has worked out for Aravind. Smart purchasing and community outreach are drivers to reducing operating expenses a big reason why Green knew Aurolab was an important link in the chain), and staff efficiency is a way to increase # of surgeries. Green said that when he arrived in Egypt, he started talking to everyone he met to get some data points, and then guessed the pricing breakdown. After the deep dive was concluded, the numbers matched Green’s quick estimate. He’s good at this. Very good.
By no means are the results 100% reproducible. Each place has their own sustainable point. In Egypt, 55% of patients are free and 45% are paying. In Nepal, only 7% are free, 4% pay $12, and 89% pay over $35. But we’re still talking millions in profit.
A word on Aurolab. When I say non-profit producer of eye care products, I don’t mean low quality. Aurolab’s products meet the FDA mark regulatory requirements and get the same approvals as the commercial ones that sell for much more. Aurolab has customers in 120 different countries. Aravind and Aurolab also carry out major education and training projects — a school to train eye care personnel and researchers.
Financing for Social Ventures, Finding Talent
Something Green has been examining is the financing process for companies that have social good as their fundamental goal, rather than shareholder return. Self-sustaining businesses are one that turn profit, and in our case, re-invest the profit into the company. One observation he’s made: registered non-profit organizations are not allowed to use leverage to increase the valuation of its assets, which is something that for-profit companies can and do routinely. The trick is to have a for-profit company with strong and bulletproof governance principles to ensure the social mission is the top priority, but the advantages of this structure are significant. I need to think through more of what this observation means. Another tactic that has become viable in the last few years is obtaining funding from foundations. Typically they aren’t allowed to give to for-profit companies, but there is some form of ’social mission of investment’ clause where they can give foundation money as long as the mission of the investment is for social return — or rather, it’s about aligning the social mission with the foundation’s tax-exempt status.
The challenge in taking equity financing is creating the right structure. Green has worked with the Deutsch Bank to serve as the ‘first-loss cushion investment’ for these types of social ventures.
One person asked Green how he gets these collaborative projects started. He said that he doesn’t work with companies; he works with individuals. Individuals with extreme technical competence and with deep rooted integrity.
Hearing Aid Project & Solar PV
Hearing loss is a big problem and developed world solutions are expensive, requires multiple setup and fitting visits, etc. Green is working with experts in the Chicago area in a new venture, Conversion Sound, to create a hearing aid device for the developing world. They are using innovative technology to dramatically shorten the fitting and calibration process.
Another thing endeavor Green has taken up is to figure out a better way of bringing solar cell electricity generation to low-income people in developing countries. He seems to be approaching it more from the financing side and logistics — where & how can the production and distribution costs be lowered. He helped bring people from different backgrounds (entrepreneurs, academics, foundation, venture firms, investment guys, technologists) for a 1 day summit to figure out the problem areas and possible ways of moving forward. Green envisions a sort of Solar Fund that will invest in opportunities towards this purpose.
A final thought.
Green described what drives him with a sort of Chinese accupuncture analogy. How do we redirect flows of energy from where its concentrated most to where it is needed most?
It was a great talk and Green was such a down-to-Earth and honest person to talk with. He spoke plainly on some of the luck that he has had: he found a trusted colleague because a current partner was in the midst of an embezzlement charge and felt so bad that he was stealing from a non-profit org that he told Green that a competitor was a really good honest man. At a summit, he happened to sit next to the 2nd-in-command and Wal-Mart’s health and wellness group who was excited to hear about Green’s hearing aid project that she invited him to speak to Wal-Mart’s executive team. Or a contact in Mexico he made through a network that proved to be extraordinarily well-connected and influential. It really showed me the power of networking.
