What if we told you that:
- Regional agribusinesses invest 2x more in service delivery per farmer than global agribusinesses. This is driven by a combination of contextual factors as well as, crucially, conscious design decisions.
- Business models that charge farmers for service delivery (even if not fully recovering their costs) invest up to 7x more per farmer than business models that provide services to farmers for free. The implication is crucial: We know that investments in smallholder farmers need to increase and FarmFit data suggests that businesses require more direct cost recovery for increased investment to be feasible.
- Scale is no silver bullet solution but comes with important trade-offs: while working with more farmers is associated with more efficiency and higher direct cost recovery for companies, it often comes at the expense of the quality of service delivery to farmers.
Keep reading to discover more insights and understand the potential implications of these insights for you.
The case for change
Smallholder agricultural markets have enormous funding needs: farmers’ incomes are low, reducing their capacity to properly invest in their farms, and business models serving these farmers struggle to justify increasing their investments. Meanwhile, agricultural development funding is unlikely to increase significantly in the near future, and is often deprioritized due to competing environmental, social, geopolitical and economic challenges.
We are convinced, however, that under the right conditions, business models working with smallholder farmers can be inclusive, cost-effective and commercially viable – at scale. And that credible, comparable and accessible data to accelerate learning and identify best practices will help to make this a reality. The real and perceived risk of investing in the smallholder agricultural sector is high, but more rigorous, data-informed insights can and will help drive better allocation of investments – for the benefit of both businesses and farmers.
More and smarter investments into smallholder agricultural markets are needed, and are possible. The private sector – both companies and investors – play a large role as they can drive the development and scaling of business models. In turn, the emergence and scaling of more smallholder-inclusive business models develop and strengthen markets in which smallholder farmers have equitable access both as consumers of goods and services and producers of agricultural products. The public and philanthropic sectors also play a crucial role in providing
Read more on the paradigm shift we see happening.
The FarmFit Insights Hub explores where, why and how stronger smallholder-inclusive business models can be designed, implemented, scaled, and replicated for success. In the current iteration of the Insights Hub we focus on three core outcomes that provide insight into a business model’s strength and potential:
Service Delivery Cost per Farmer Direct Cost Recovery from Services Farmer Value Creation
We recognize there are
Smallholder service provision: Key insights
There is not enough data-informed awareness and insights of how context influences the performance of business models – both positively and negatively. We hope the Insights Hub can help spark more research into the importance of context to smallholder-inclusive business model success. In the near future, we plan to conduct a series of deep dives into specific contexts where we have sufficient data and know that there is a particular demand for knowledge.
We see many ways in which business models can be improved through conscious choices in business model design. For example, we find that working with farmer groups rather than only individual farmers, or leveraging intermediaries for last mile delivery, are two methods associated with more efficient service delivery and improved scalability.
However, design choices that work well in one context may not work in another, often due to factors out of a company’s control. For instance, certain characteristics (such as whether we’re working with a loose or tight value chain), the enabling environment and interventions of other actors can have real impact on the service delivery costs, value created and cost recovery patterns of business models active in those contexts.
Our data suggests that broadly speaking, there are two
- Context type 1: high spend and high direct cost recovery are the norm
- Context type 2: low spend and low direct cost recovery are the norm
Interestingly, our data does not show any significant differences in farmer value created across these different contexts, suggesting that the fundamental differences are in how business models are typically designed and operated, and how costs and value are perceived.
FarmFit data suggests that regional agribusinesses invest, on average, 2x more in service delivery per farmer than global agribusinesses and are much more likely to charge farmers for this service delivery. In fact, businesses that charge farmers for service delivery - even if not fully recovering their costs, invest up to 7x more per farmer than businesses that provide services for free.
Our detailed analysis on these drivers provide multiple reasons for this trend. The main reasons include:
- Ability to cross-subsidize with commercial revenues allows companies to invest more in service delivery and use different sources of funding
- Extent to which markets value “sustainability” (e.g., certification) can create additional indirect monetary value for businesses – and justify subsidizing service delivery to farmers
- Availability of goods and services provided by other actors influences farmers’ needs and which additional goods and services a business needs to provide
- Relationship with and positioning towards farmers often motivates companies’ degree of investment, with close relationships and (geographic) positioning associated with more investment
The implications are clear:
- On the level of individual business models, context always needs to be taken into account; there is no one-size-fits-all approach that will work best regardless of context. FarmFit’s analyses of smallholder-inclusive business models always include in-depth assessment of the context in which the business model operates (click here for our library of individual business model assessments)
- The insights and recommendations in the Insights Hub should not be read as “recipe-type” answers or a checklist that businesses can go through as a guarantee for business model success. Rather, our analyses and insights should be seen as a strong data-informed foundation for decision-making that always needs to be contextualized to be applied in practice
- Context-specific data and insights allow can inform benchmarking and allow better comparability
Importantly, the contextual patterns that we find are general: not all business models within a certain context are the same and there is a lot of room for conscious design. The way that individual business models are designed can lead to radically different outcomes, even within the same context.
The FarmFit Insights Hub looks at cost recovery in terms of direct cost recovery, i.e. revenues from fees charged to farmers. There are many
Read more about
The majority of business models delivering goods and services to smallholder farmers charge farmers a fee that is lower than the cost of service delivery, and about a quarter of the businesses that we have analyzed do not charge farmers at all. Implicitly, the companies running these models expect to receive other sources of value and/or funding that justify the subsidy to the farmers. But the reality is that, overwhelmingly,
While we see that many companies justify subsidization of service delivery to farmers because of indirect sources of value that they receive, we have not seen any companies that have a structured way of assessing and quantifying this value. This is a major opportunity that we see for the sector: improving visibility into indirect sources of value can create incentives for massive additional investment into the sector.
We believe that the development of commercially viable smallholder-inclusive business models is crucial to improving livelihoods of smallholder farmers, as these models can help bring the needed investment, innovation, quality and access of goods and services to farmers. Despite a common perception that service provision to smallholder farmers is inherent and almost inevitably a loss-making business, our data shows that under the right conditions, it is possible to create commercially viable business models that deliver value to smallholder farmers at scale. Many business models exist that are at or approaching commercial sustainability, even when only looking at a
A more commercial approach to service delivery to smallholder farmers is much more prevalent in food crop and loose value chains, and in business models run by agribusinesses serving national or regional markets, and with commercial objectives rather than only farmer impact. The FarmFit Insights Hub focuses in particular on the lessons that can be learned from these types of models and provides a range of recommendations, how-to guides, and areas for further research and collaboration, to help build on these lessons to drive more investment into smallholder agriculture.
A more commercial approach to service delivery (and one that remains inclusive) can help bring along the transformation needed in the sector. For example:
- Treating farmers as customers rather than beneficiaries, building in more demand-driven accountability
- Seeing investments as business opportunities rather than cost centers, encouraging further investment where viable opportunities exist
- Stronger focus on the cost-benefit of investments, leading to smarter investment, including of public, donor, philanthropic and CSR funding
Over a quarter of the 100+ business models that we have analyzed do not charge farmers at all for goods and services provided, with nearly another quarter charging farmers less than 30% of the cost while subsidizing the rest. In part, this can still make commercial sense to companies: the indirect value that these companies (expect to) receive from these subsidies can make up for the cost of providing the subsidies. Nonetheless, we believe the high prevalence of fully or heavily subsidized services reflects in part a still-pervasive legacy of aid-oriented models funded with public, philanthropic, development and CRS funding which sees farmers as beneficiaries rather than customers.
Such models are characterized by no or very low-cost recovery through charging farmers for services provided, but also tend to be smaller in scale, with narrower and simpler service offerings, and lower investment per farmer. While these models exist in many different contexts, they are more prevalent among the models of global multinational off-takers and in cash crop and tight value chains, rather than regionally traded, loose and/or food crop agricultural value chains.
We believe many of these models are not well-suited to helping bridge the gap in financing for smallholder agriculture. They rely on continued willingness and ability of other actors to subsidize farmers, creating a dependency and vulnerability in the long run. In addition, such models typically lack a demand-driven element whereby farmers’ use and (repeat) purchasing of goods and services respond to the quality and price of service delivery – and in turn the business models themselves can be adapted in response to demand. Such models also struggle to attract commercial funding to innovate and scale, and the existence of free or subsidized models in a market inhibits the emergence of commercial actors who cannot compete, reduces farmers’ willingness to pay and makes it more difficult to introduce an element of demand-driven accountability into smallholder-inclusive business models.
We advocate that heavily subsidized development-focused service delivery has a role to play in smallholder agriculture, but should be targeted in a smart way. Subsidies should be used to develop models serving particularly vulnerable farmer population sub-segments, meet goals that may not be met with more commercial models (such as certain environmental and social goals) and to help the initial design and development of commercial business models at early stages of maturity. Subsidized service provision can help get farmers on a pathways towards commercialization and reach the stage where they can be served by market-based (on no longer free or subsidized) service delivery. For many farmers, initial subsidized professional service provision is needed to get them on this pathway, but the long-term goal should be to make such subsidies less and less needed while making service provision itself more and more commercially viable.
As a sector, we should also have tough conversations on what kind of support to provide to those segments of farmers who have no potential of reaching a viable income and resilience in a markets-based system. For these segments where there is not a viable end-state within farming, the sector should explore and invest in creating employment and entrepreneurial opportunities both within and outside of agriculture.
If you want to navigate all of our analytics and insights, please use the Insights Explorer.
Trade-offs and tipping points: What have we learned?
FarmFit data shows that smart business model design can have a significant impact on business model performance. At the same time, our data strongly suggests that there are often trade-offs between the business case of the model itself and the amount of value that it can create for farmers.
Among dozens of design drivers analyzed by FarmFit, three jump out in particular:
The trade-offs are not a given and well-designed business models can overcome these trends. The implications of this are crucial. It appears that the key is creating business models designed in a smart way to improve economics and scalability, while maintaining the better value creation for farmers of smaller models working with a higher degree of control.
A strong and pervasive perception in the sector is that service provision to smallholder farmers is inherently and almost inevitably a loss-making business. Our data shows that under the right conditions, it is possible to create commercially viable business models that deliver value to smallholder farmers at scale – and our data is likely far underestimating commercial viability because it only looks at one source of value for companies, revenues received by charging farmers. Indirect sources of value, such as more, better, more stable and more efficient sourcing, improved compliance and stronger image towards consumers, are all sources of value that we have not (yet) looked at.
Many models are able to combine both high investment per farmer with high cost recovery through charging farmers. In fact, looking at both the mean and median values, we see a positive correlation between gross investment per farmer and cost recovery. Charging farmers for service provided, even if not fully cost-covering, also adds a demand-driven component to business models: farmers can “vote with their wallets” and businesses can use demand-based insights to learn and adapt their models as needed.
The spread of results is wide and there are many other drivers at play influencing these results. In addition, it is a nuanced topic that also needs to consider questions of inclusivity, quality and affordability. Our data does not strongly suggest that higher cost recovery is driven by higher service delivery cost per farmer, or vice versa. However, the results suggest:
- Service delivery to smallholder farmers can be a commercially viable business, and higher-cost models more often charge for service delivery
- Scaling and broadening service delivery to smallholder farmers will require us to look at ways of increasing cost recovery rather than relying only on heavy subsidization. This can be a gradual process over time which can help to build a demand-driven component into service delivery to smallholder-inclusive business models, and expanding beyond training-focused (or even training-only) service delivery to include more complex services that meet the broader needs of farmers
- Providing farmers with entirely free services is highly unlikely to drastically increase investment into the sector. Research suggests that while the development impact of public and philanthropic capital is higher, the total amount of capital is limited
All else being equal, investing more in smallholder farmers should in general create more value for those farmers. Models that operate at a higher cost because of having higher staff-to-farmer ratios or more numerous and complex services, unsurprisingly also show higher changes in farmer net income. However, the value created proportional to the amount invested goes down at higher cost: higher-cost models actually tend to create less farmer-level value for each (net) dollar that they invest. Both under and over-investment should be avoided to optimize farm-level impact.
Despite these findings seeming obvious, their implications are crucial:
- Addressing the underinvestment challenge is key: more investment into smallholder agriculture will unlock large amounts of additional value creation
- Efficiency will continue to be important. Especially as farmers receive access to more numerous and complex services, more scalable and efficient means of service delivery can better balance cost, value creation and ultimately commercial viability and investability of business models. Our growing library of innovation guides provide insights on how to design business models for scale while continuing to optimize for farmer impact
- Both companies and investors should seek to optimize their models and be aware that “tipping points” exist: below a certain investment it is difficult to create a commercial viable model, but above a certain investment the return on investment might no longer be sufficient
The premise for this analysis is simple: we would expect that the more value a business is able to create for its customers, the more those customers would be willing to pay, in turn helping the business to grow.
However, there is not yet a clear link between the absolute value a business model is able to create at farm level and its ability to charge a larger percentage of its costs to farmers. The amount of subsidy that a model provides to farmers does not show a clear relationship to higher or lower value creation. One exception is that models that provide farmers with goods and services for free – and therefore have no direct cost recovery – see relatively high value creation; this is unsurprising as farmers receive benefits without needing to pay for the goods and services driving those benefits.
Ultimately, building commercially viable, scalable and investable smallholder-inclusive business models requires creating enough value for both farmers and businesses to justify the investments. For each individual business model analysis that we do, identifying win-win situations for farmers and businesses has been central to our approach since 2015. At an aggregate level, the implications of our analyses are:
- While our data is a start, much more research is needed into the value proposition of smallholder-inclusive business models to smallholder farmers: how much value does a business create for farmers and how can this be translated into farmer willingness to pay for (part of) the cost of these services? This may require analyses of a sample of closely related models
- While there is research into and data available on the link between various interventions and farm-level impact (including but not limited to income), there is a lack of data linking farm-level impact to data on business models delivering those interventions. The Insights Hub presents our approach, data and insights, and can hopefully serve as a foundation for our peers to build on and collaborate with us. We see opportunities for:
- Link data on service delivery cost, direct and indirect cost recovery for businesses, and farmer value created a standard part of business case design, assessment, and investment decision-making
- Improve the interoperability of such data to allow for better collaboration between different organizations
Implications – What does this mean for you?
So what do these insights mean for you? And how to put these insights to the test?
The answer to these questions depends on what type of organization you represent.
How to action these insights?
- Create clarity on why you are offering services to farmers and what you intend to achieve. Do you intend to meet buyer requirements for example or do you want to improve your core business operations? There are most likely sources of value that are not (yet) seen that you can unlock to increase your investments in service supply. Higher investments in service supply can help to create more value to farmers.
- Use a human centered design lens to analyze whether you are creating enough value for farmers to enable them to pay for the goods and service that you provide / plan to provide. Use this lens also to assess how you are reaching women and youth. Consider how to create opportunities beyond farming as well, for instance for rural entrepreneurship through agent models.
- Include such other sources of value into an economic and financial overview of your business model to attract investors.
- Create a clear vision on what is most important for you (commercial viability, business performance, farmer value, scale) and be aware that it is not feasible to create maximum outcomes for all KPIs. Think ahead about which outcomes have highest priorities and why and be ready to accept the trade-offs and willing to transparently communicate about such trade-offs with clients, investors, etc.
- Holistic service packages (service packages that include training, access to inputs, markets and finance) are more effective. Consider to segment your farmer base and (re) design your service packages for different segments.
- Invest in Farm Management Information Systems to be able to make data-driven decisions and link such a system to your core business information.
- Be aware of the context in which you operate and find the opportunities and accept the limitations of the enabling environment. Use smart design choices to fit the context in which you operate. Team up with others to influence key limiting factors in the enabling environment.
- Ensure that you have the data, systems and capabilities in place to evaluate your business model success and impact in a credible and ongoing way, and that you use the insights to learn and adapt. The outcomes and drivers analyzed in the Insights Hub and our Methodology can be helpful as guidance.
- (Re)design your business model:
- Benchmark your performance against that of peers and learn from the best practices of others. Our analytics have mainly focused on the entire universe of business models that we have analyzed. However, you may want to compare yourself against a closer set of peers. Using our data explorer, you can filter for similar companies when comparing performance.
- (Re)assess your service package to farmers. Our insights show that more holistic service packages (service packages that include training, inputs, access to markets and finance) are more effective. Consider to segment your farmer base and be intentional about which services packages to offer to which segment
- Learn about the limitations of context and how design choices can help you optimize performance, through our how-to-guides to get practical tips. Our analyses have highlighted a number of trade-offs when it comes to designing your business model. For instance, working with intermediaries can lower cost, but also increases risk and reduces value creation. Smart design choices can mitigate some of the risks and downsides and even turn trade-offs into win-win situations.
- Think out of the box and look beyond your own context to get inspired from companies active in very different markets.
How can my team collaborate with IDH FarmFit?
- Reach out to us to explore how we can work together. We can analyze your smallholder-inclusive business model (click here for examples of such analyses), support you with technical assistance, and more.
- FarmFit is experienced with primary data collection on the farm-level. Reach out to us to discuss ways of introducing better farm-level data collection in your business model.
Dive into more of our insights to explore more analyses and implications for your business!
How to action these insights?
- Ensure that your investment strategies consider context. For instance, employing different strategies for investing in food and cash crops, or regional and global value chains.
- Encourage your (potential) investees to continuously assess their performance in a data-informed way and to continuously reflect on the successes and trade-offs of their businesses model design choices.
- Encourage and support your investees to assess and quantify their return on investment (ROI) when working with smallholder farmers. We believe much (or even most) of the ROI remains “hidden” causing companies to underappreciate the value of expanding their investments. A better view on the ROI can also strengthen your case for investment.
- Benchmark and better manage the performance of your investees – use our Data Explorer. Our insights can also help inform M&E requirements. Consider using some of the same metrics we use in a standardized way to allow for more effective portfolio benchmarking and accelerated learning in the future
- Get a more nuanced understanding of performance drivers and the influence of context in the path towards commercial viability, to adjust your investment structures and terms to the capital needs of different business models.
- Evaluate whether you are missing out on viable investment opportunities due to perceptions and investment restrictions. For instance, our data suggests that the general underinvestment in food crops and smaller regional agribusinesses may be impacted by:
- Perceptions: our data suggests that business models in food crops invest (much) more and recover more by charging farmers than those in cash crops – despite worse access to investment.
- Investment restrictions: working with businesses active in food crops and/or with only a regional focus often means having to work in (and be exposed to) local currency. Explore partnerships with local financial institutions to help channel investment to underserved market segments.
- Invest in companies that have integrated their service delivery and sourcing activities, or encourage your (potential) investees to do so. This can help better quantify the return on investment and can help strengthen a business mindset in service delivery, which we have seen can increase investments, demand-driven value creation and direct cost recovery.
- Be aware that there are important trade-offs in business model performance that we have highlighted on this page and which should inform your investment strategy. These include diminishing impact per dollar invested at higher spend, and, more fundamentally, potential trade-offs between business model performance (service delivery cost and direct cost recovery) and farm-level impact created.
How can my team collaborate with IDH FarmFit?
- Our approach and methodology can be well-suited to helping you assess and benchmark your current and pipeline of investees. Reach out to us if you are interested in working with us or using our methodology.
- Reach out to us if you are interested in (joint) research on specific sectors or geographies to help inform your future pipeline development.
How to action these insights?
- Integrate context into your private sector development strategies:
- Adapt your support strategies to the contexts in which you (plan to) operate. Be aware of the different patterns, behaviors, challenges and opportunities that smallholder-inclusive business models face in different contexts.
- Consider how you can influence the context to better enable smallholder-inclusive business model success. This could include supporting strengthening of the regulatory environment, physical and digital infrastructure, but also thinking about how the role of grant and development funding and efforts can create (dis)incentives for businesses
- Continue to support the private sector by channeling your resources in a smart and targeted way. Our data and insights can help identify areas in which the private sector may need more or less support, and what kind of support would be suited to different contexts and at what stage of development of a business model. For instance, our data suggests that regionally-active agribusinesses tend to struggle more often with reaching larger scale and global agribusinesses active in cash crops rarely include a demand-driven component (e.g., by charging farmers) in their business models. FarmFit data also suggests that there are tipping points and trade-offs that need to be managed, such as a minimum scale above which business models generally start to generate higher direct cost recovery and efficiencies, but also trade-offs between larger scale and farmer impact. These trade-offs and tipping points are often context-specific.
- Stimulate business to integrate their CSR and core business activities and require from potential investees to be clear in the priorities and hierarchy of outcomes they are looking for with their business model.
- Be critical when assessing the service package to smallholder farmers. Is it a holistic package, are the services meeting the needs of farmer segments and are the services adding value to increase the payment capacity of farmers?
- Beyond supporting individual business models, invest into broader market enablers. Such support can focus on policy, public goods, economic resources (finance) or research and intelligence, that can help lower the barriers for private sector investment and scale up. Such enablers can also be in the form of risk mitigants.
- At a systemic level, the high resource requirements for evidence-backed insights can be considerably offset through common data standards that promote interoperability and sharing. Much more effort is required to promote such standardization, as currently, organizations focused on learning often use their own standards, resulting in siloed databases, rather than potentially aggregating data for higher quality analysis and insights.
- Assess whether subsidies that you provide may have unintended consequences of indirectly inhibiting investments into smallholder agriculture. For instance, subsidies can increase farmer dependency, have sub-optimal effects on farmer impact, reduce demand-driven elements that can help drive accountability and quality, and make it difficult for private sector initiatives to compete.
- Benchmark and better manage the performance of your grantees. Our insights can also help inform M&E requirements. Consider using some of the same metrics we use in a standardized way to allow for more effective portfolio benchmarking & accelerated learning in the future.
How can my team collaborate with IDH FarmFit?
- Our approach and methodology can be well-suited to helping you assess and benchmark your current and potential portfolio of supported companies, or to assess your private sector development strategy. Reach out to us if you are interested in working with us or using our methodology.
- Reach out if you are interested in (co-)funding research that will improve visibility into companies’ return on investment (ROI) in smallholder agriculture. Our insights today focus on a narrow portion of the ROI, only looking at revenues from charging farmers for services and certification premiums. There are many other sources of value that remain hidden to companies. More visibility on these sources of value and guidance to companies on how to identify and quantify these would help strengthen the business case for investments into smallholder agriculture.
- Reach out to us if you wish to apply our methodology and approach to a wider range of organizations, specifically farmer organizations, financial service providers and specialized service provider. Our current analyses predominantly draw from certain types of providers (mostly global and regional offtakers). There are many other actors engaged in smallholder service provision, including farmer organizations, specialized service providers financial service providers, digital service providers and digital platforms. Our work would benefit from deep analysis of such organizations in a similar methodology as used in the Insights Hub.
- Consider working with us and others on harmonizing indicators and sharing financial and impact performance data so what we can collectively have a larger pool of businesses and data to analyze, and continuously validate, improve and adapt our insights and learn from.
- FarmFit has collected a wealth of data at both the business and farm levels. Reach out to us to discuss ways of sharing our data sets and apply your analytics to our data.
How to action these insights?
- Acknowledge the key role the private sector plays and can play to improve smallholder farmer markets and think about possibilities to work together. Consider how you can accelerate private sector engagement in line with your national agricultural transformation goals e.g. commercializing subsistence farmers or ensuring food security. Our insights on the performance of business models can help you kick start a conversation with the private sector to go deeper into their constrains and needs and reflect on:
- What a conductive enabling environment needs to look like. This includes considering the broader policy and regulatory framework, the need for more or improved public infrastructure or the reach and quality of public extension systems; and how changes in these would impact outcomes at business and farm level
- How to directly incentivize more private sector investment, such as through differentiated taxing schemes, direct government subsidies, guarantees, public insurance or farmer capacity building. Our data and insights can provide a starting point to assess what incentives might work best for different models based on what drives their performance today and the challenges they might be facing
- Use our insights on the financial and impact performance of different business models in different contexts to help you make better informed decisions on your role as a provider of public goods such as extension services or input subsidies. In particularly use our data to start getting a more nuanced understanding of what segments and / or services might not deliver attractive enough returns for the private sector and might need long term public subsidy
How can my team collaborate with IDH FarmFit?
- Reach out to FarmFit to help us identify suitable topics for a series of Policy Papers that explore the policy implications of Insights Hub findings.
- Get in touch with IDH country teams to explore how to collaborate / strengthen existing collaboration
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