Direct Cost Recovery from Services vs Type of Service Provider
Key Messages
Our data shows remarkable results:
The data suggests that these results are due to three key factors:
Nature of the business model Indirect sources of value Development and aid-focused legacy
Keep reading to find out more.
Understanding how different types of companies charge SHFs for services
In the perception of development organizations, impact investors and NGOs, but also in the eyes of many consumers, the provision of goods and services to smallholder farmers is an activity designed to improve livelihoods and has been closely associated with development and aid. It is very unusual to charge beneficiaries for the aid that is provided to them.
Related, a pervasive belief in our sector is that the provision of goods and services to smallholder farmers is most often a loss-making endeavor that can only be sustained with internal CSR or sustainability funding or with external (often development) funding, and certainly cannot be profitable on its own, for instance by charging farmers.
Going into this work, we expected
Nevertheless, there is a lot of nuance behind these results - so keep reading to find out more!
The differences observed are substantial: Specialized service providers have by far the highest
- Models charging farmers nothing or almost nothing. This includes mainly global but also some local off-takers
- Models charging farmers at least 50% of the cost of service provision. This includes mainly local but also a small number of global off-takers
- Models charging farmers nearly all, all, or even more than their costs
These results have been validated using machine learning methods.
Link to other outcomes
When looking at the relationship between type of company and the other two outcomes analyzed in the FarmFit Insights Hub, we find that:
- For
Service Delivery Cost per Farmer , we find that results mirror those of direct cost recovery: median cost per farmer is higher for local compared to global off-takers. This means that on average local off-takers invest more per farmer and also recover more of these costs from farmers. Click here for more details - For
Farmer Value Created , we find no appreciable differences when looking at different types of companies. Click here for more details
In the following sections we dive deeper into possible explanations and nuances behind these results, as well as their implications.
Diving deeper: what do we think explains these results
We believe there are a number of compelling reasons for why we see the results that we see. The discussion below focuses on the difference between global off-takers and local off-takers.
Internal factors: Nature of the business model – The business of local and global off-takers are organized differently. Global off-takers have larger corporate behind them, separate sustainability teams, and offer less complex services, all of which allow (or lead) these companies to see service delivery less as a direct revenue-generating activity.External factors: Indirect sources of value – Global off-takers are more often able to subsidize their service provision through indirect sources of value, including sourcing, premium markets, and compliance-related valueDevelopment and aid-focused legacy – Global off-takers’ models often follow a legacy of development- or aid-focused interventions, in which charging farmers – who are seen as beneficiaries rather than customers – is not a norm
Clicking on each of the preceding reasons provides a longer overview of our thinking, including more supporting qualitative and quantitative insights.
Implications – what does this mean for you?
Based on our findings to date on this topic, we see the following implications for different audiences:
- Think critically about how you are approaching service delivery to smallholder farmers. Do you see it as primarily a way of providing aid or an extension of your CSR approach? If so, we highly recommend that you explore if and how a more commercial approach can help you recover some of your costs by charging farmers. Our data shows an added benefit; charging farmers for service delivery is associated with unlocking your ability to invest into more numerous, costly and complex services to smallholder farmers
- Think about your service provision from farmers’ perspectives. How can you help them to diversify their income in commercially viable way. Can you assist them to secure access to markets for other products by partners with other companies. And can you translate this value that you create for farmers into a direct source of revenues for you (by charging farmers at least part of the costs that you incur)
- Reflect on how you are organizing your service supply activities and your procurement activities. Our data shows that when these activities are integrated direct cost recovery is higher and more is being invested in service supply.
- Assess and quantify the “hidden” sources of value that you generate from your smallholder-inclusive business model. Does including these sources of value improve the business case of your investments in smallholder farmers?
- Assess and quantify the value proposition of your smallholder-inclusive business model to smallholders farmers. Are you creating enough value for farmers to justify charging (some of) them or for some of the cost? Are you able to show and prove this value to farmers?
- Consider the type and complexity of goods and services that you provide to farmers. FarmFit data suggests that lower-cost and lower-complexity services are much more frequently and easily subsidized, while higher-cost services such as inputs provision are much more often charged for. Are you able to create a strong value proposition to farmers by providing such goods and services, and translate this into direct revenues for your business as well? Consider how you can help farmer finance more costly services, such as providing these on credit yourself or partnering with a financial institution.
- We and many of our peers expect significant growth in regional value chains. (Read more in our publication on Unlocking Regional Food Trade.) This means that we expect huge investment needs and opportunities for local off-takers. We strongly recommend investors to develop strategies to meet these needs and capitalize on these opportunities, based on a more nuanced understanding of the profitability potential of local off-takers.
- If your investees include diverse companies and both local and global off-takers, explore whether knowledge exchange might be possible between these. Are there ways in which local off-takers that you support can inspire global off-takers – and vice versa?
- Encourage investees to measure the indirect sources of value of service provision to smallholder farmers by, for instance, tracking these sources within your own portfolio data and performance assessment.
- Use the Data Explorer to benchmark the companies currently in your portfolio, and work with your investees in understanding (and potentially addressing) those differences for improved financial and impact performance. Reach out to us so we can conduct a more detailed portfolio analysis of your investees and/or pipeline and create comparable insights and identify relevant investment opportunities and risks. When investing in such models, recognize that it may take more time for them to reach the stage of more efficiency and higher returns.
- Stimulate your investees to look at service supply in a commercial way, rather than only as a CSR or sustainability initiative. Support them to build up services that meet the needs of farmers, allow them to invest more per farmer and incentivize them to charge for the services they offer.
- Adapt your ticket sizes to the needs and abilities of local off-takers and consider if and how technical assistance could be provided to strengthen their businesses. Consider partnering with support organizations, governments or donors.
- There is a large and growing set of specialized service providers, more and more of whom are approaching or even exceeding break-even. Consider developing investment strategies to target this exciting and growing segment.
- Global and premium markets can provide additional sources of value to strengthen smallholder-inclusive business models. Seek ways of supporting local off-takers with accessing global markets to allow them to generate additional value through higher volumes and higher margins, allowing them better opportunities for cross-subsidizing their service delivery activities.
- Work with companies to analyze how the inclusivity of their business models can be further increased. Subsidies might be required in the start-up phase or in particularly challenging contexts. This may be needed more often by local off-takers who have less mature business models and/or smaller corporate resources to build on, but whose business model foundations point towards financial sustainability. Apply subsidies to local off-takers in a targeted way, for example for developing the business model, reach specific farmer segments and/or support more longer-term outcomes like climate mitigation and climate adaptation (as local off-takers are often looking for short term benefits).
- Consider providing core business funding to help local off-takers and (smaller) specialized service providers become investment-ready and access more commercial sources of funding.
- For donors, broaden the view of commercial viability, encouraging investees to measure and track indirect sources of value.
- Consider whether your engagements in value chains dominated by global off-takers may have a distorting effect on the market. Are you subsidizing service delivery in these markets, making it harder for commercial models to emerge and compete? Are you creating the right enablers to encourage companies to invest more in farmers? Can you start a conversation with global off-takers with whom you work to explore whether they can approach service delivery in a more commercial way?
- Design standardized methodologies to evaluate indirect sources of value and provide technical support to global and local off-takers in identifying, measuring and tracking these indirect sources of value.
- Provide financial and technical support to local off-takers in earlier maturity models to help them reach scale and efficiency. We have observed that local offtakers often have relatively high costs because of the earlier stage of maturity of their models and often face severe challenges in accessing finance. For instance, senior company leadership is often directly or indirectly involved in designing, managing, overseeing and evaluating service delivery to smallholder farmers, rather than being able to fully delegate this to dedicated sustainability teams.
- Actively identify ways in which activities that you provide directly or indirectly with a development mindset can be gradually transitioned to the private sector. Are the subsidies you are providing to markets or companies in some cases distorting or hampering the ability of the private sector to take them on? How can you support the private sector in developing commercially viable, investable and scalable models to take over some of your activities?
- Be a sparring partner to your private sector partners and explore where a tighter integration between service supply and procurement can lead to higher direct cost recovery and higher investments per farmer.
- Organize learning exchanges on commercial viability between global and local off-takers and across different kinds of value chains. There is a lot of unmet potential for learning as companies most frequently engage with peers like them and often operating within their own value chains. We believe support organizations such as IDH, FarmFit and our peers can play an active role in showcasing and operationalizing learnings across different types of companies and value chains, and bring companies into contact with others that they might not normally meet.
- Global markets can provide additional sources of value to strengthen smallholder-inclusive business models. Seek ways of supporting local off-takers with accessing global markets to allow them to generate additional value through higher volumes and higher margins, accessing premiums, and allowing them better opportunities for cross-subsidizing their service delivery activities.
- We (and many of our peers) expect significant growth in regional value chains. This has huge potential benefits for local economic development, job creation, food security and more. (Read more in our publication on Unlocking Regional Food Trade.) Local off-takers have a key role to play in these value chains. Our data shows that local offtakers often have business models that allow them to recover costs and make higher investments in farmers. Because of higher cost recovery, the added value of service supply to the local offtaker and often the larger dependency of farmers in a region, there is the expectation that these businesses will continue with service supply in the medium to long term. The business models of global offtakers are often more dependent on premia and subsidies, which make them more vulnerable to changes in availability of premia and subsidies. We therefore strongly recommend that governments and donors continue to drive this process of growth in regional value chains, by supporting local offtakers develop smallholder inclusive business models.
- Actively identify ways in which public interventions can be gradually transitioned to the private sector. Are the subsidies you are providing to markets or companies in some cases distorting or hampering the ability of the private sector to take them on? How can you support the private sector in developing commercially viable, investable and scalable models to take over some of your activities?
Reflections on data limitations and further research
The FarmFit Insights Hub is an interactive resource which we are constantly updating with new data, new analysis, validation by our partners, etc. For the results on this page, we would like to emphasize the following:
Major caveats and limitations of our current approach
Limited visibility on the sources of “hidden value” Limited FarmFit data on the role of philanthropic funding
Updating these findings: Next steps
Inclusion of sourcing profitability into future analyses
Suggestions for additional research by our peers and partners
Build on our approach and methodology to study specialized service providers
Page content
Strength of Relationship 3/5
- Strong relationship between driver and outcome variables
- Results are largely consistent across analytical models used
- Several limitations regarding sample or indicator
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