How a water filter company turns a profit while helping Central America’s poor.
Like many social enterprises, Ecofiltro started out wanting to help the rural poor in Guatemala and elsewhere in Central America get access to clean water without much thought to making money. The company makes a water filtration device that families could use to purify their water instead of having to boil it. But CEO Philip Wilson soon realized that changing the entity into a for-profit company actually helped him realize his social goals. In part, he decided not to look at the rural poor as objects of pity for whom help is limited by the extent of donations – the typical template of the area’s NGOs and foundations – but rather as potential clients of a financially sustainable business. Ecofiltro’s strategy was to start selling to the relatively better off urban residents and using profits from this market to subsidize an installment payment plan for the rural poor. Ecofiltro is now profitable and expanding in the region.
Knowledge@Wharton recently caught up with Wilson to talk about his company’s development, strategy and future plans. The following is an edited version of that conversation.
Knowledge@Wharton: How serious is the clean water situation is in Central America and how did it inspired you to start Ecofiltro?
Philip Wilson: The two big problems are a lack of water … and the quality of water. In Central America, we have quality of water issues. Let’s take, for instance, Guatemala. Ninety seven percent of the rivers, lakes and streams are contaminated with bacteria of fecal origin. Over half of the population does not have access to clean water – and one out of 20 kids doesn’t reach the age of five because they get an intestinal infection that they die from. It’s a really big problem in Guatemala.
Knowledge@Wharton: How did that inspire you to start Ecofiltro?
Wilson: It all started with my sister, who’s a social worker and a nutritionist. When I was [around] 15, 16, 17 years old, I would go out [on her rounds] with her. She was doing chlorination programs because back then everyone [used] chlorine as the main way to purify water. The problem was that it wasn’t culturally accepted. We’d go back to the families we taught [about water purification] and ask them how the chlorination program was going. They’d say, “oh, great! Our clothes are clean, our plates are clean.” They would use it as a household cleaner, not as a vehicle to purify water. It was like a 3% usage rate.
At that young age, I fell in love with rural areas and rural people, and understood the predicament they were in and how lack of access to water held them back. But I also realized that if you didn’t have a culturally accepted product, you wouldn’t be able to solve their problems. Ecofiltro came about because my sister failed and then I subsequently failed [too] on the chlorination program.
Then we discovered this locally made product that was based on clay and ceramic pot filtration. People loved drinking out of a ceramic pot filter. We’re like, ‘aha!’ We have something that’s affordable — and people really like the taste of the water.
Knowledge@Wharton: Your first efforts to distribute Ecofiltro were done through a family foundation in the 1990s. What were the pros and cons of that approach?
Wilson: There are lots of NGOs [non-governmental organizations] and foundations in Central America and they look at the rural, poor families as objects of pity. And their ability to reach these people is determined by how many donations they receive. So you’re never going to have enough donations to reach all the families who don’t have access to clean water. I looked at the model and I thought that it wasn’t sustainable and couldn’t scale. I knew there was a better way. That’s when I talked to my mother and my sister and I asked them if I could do an experiment of taking the water element out of the foundation and creating a social business.
Knowledge@Wharton: When did you do that? And how did you go about it?
Wilson: Five years ago I said, ‘okay, I’m not going to look at the rural poor as objects of pity. I’m going to look at them as potential clients, which changes the game completely.’ I went into the rural areas and I asked a lot of questions: What are poor families doing to purify water? How much are they paying? I found out that some were using firewood to boil water and purify it. Some were buying bottled water. I asked them how much they were spending on medicine because many times they wouldn’t do either one of those two.
After asking questions, I realized that if I [offered an installment payment plan] and set the price of the Ecofiltro at a certain level I could distribute them for a price higher than what it would cost me. I would then be able to scale and reach my goal of a million families. It wouldn’t be a pipe dream; it would be a reality. So the real way to solve a lot of social problems is to understand people’s [habits], delivering the right product and understanding the economics behind it so that you can produce affordably.
Knowledge@Wharton: What was the cost of producing the Ecofiltro and at what price did you need to provide it to the rural consumer to treat them as clients and not as objects of pity?
Wilson: We found that if we could price the rural model between $35 and $40, and provide a minimum of five payments, it was cheaper per month than what they were doing right now which was buying lots of firewood or buying bottled water. That took us about a year to really figure it out.
A funny story — at first we provided 24 payments because I figured, a longer [payment schedule similar to a long-term mortgage] is better, right? But we found out that the rural families wanted us to make the payment scheme shorter because they felt like they would be in debt with you forever. We tried a few models that I thought would work at first — as you know, we have the fail fast mentality at Ecofiltro. We found that five payments was something that was affordable and it was short enough [to alleviate] the anxiety that many bottom-of-the-pyramid families feel about being in debt to someone else.
Knowledge@Wharton: When you started your for-profit social enterprise, you also targeted the urban consumers. You used it as a cross-subsidy — can you explain your strategy?
Wilson: From the beginning, we knew that entering the rural market would be quite costly because Guatemala doesn’t have great roads and it’s very difficult to get to the areas that we want to deliver clean water to. So we started by focusing on urban areas.
At the time, I was buying bottled water and it was costing me $200 a year. So I brought in an Ecofiltro. My wife didn’t like what the Ecofiltro looked like, so I said, “what if I put it in a beautiful ceramic receptacle?” We found these beautiful ceramic receptacles. I brought it home. My wife said, “wow, I have art in the kitchen — no longer a big plastic bottle.” I said, “aha, if I can start reaching the 600,000 families that buy bottled water in urban areas and sell it at a … reasonable profit, then I can establish cash flow that will allow me to provide [a payment plan] in rural areas.”
That’s how it happened. [But sales to] the first 100 families were difficult. They were like, “you want me to drink out of a flower pot?” That’s what the filter looks like. But … because the water tastes so good, they started falling in love. And it looks beautiful with the ceramic or clay receptacle. But the first 1,000 units were difficult to sell. The next 10,000 were easier. We’re up to 92,000 urban customers, who provide a nice cash flow that [supports] a financing mechanism for the 170,000 rural families that buy the Ecofiltro. It is the same filter unit, but it goes into a plastic bucket to keep the price low.
Knowledge@Wharton: Is Ecofiltro profitable now?
Wilson: Yes, we’re profitable. This year, we’re not only profitable in the urban area, which we were from year one, but the rural area is profitable now too. Last year, we reached just over 50,000 families. This year we’ll be just over 80,000. The economies of scale has allowed us to lower the cost of the filter and it has made us profitable in the rural and urban areas.
I have always wanted to be profitable in both because in the first four years the urban business was subsidizing the rural. But now the rural business can stand by itself. I have always wanted to prove that if you put together a good go-to-market strategy and had a good payment scheme, the rural poor can finance your venture. Water is a big problem in many countries and I would love people to study our model and replicate it in other countries.
Knowledge@Wharton: Since you are not just a for-profit business but also a social enterprise, apart from profitability what are some of the other metrics you use to measure your impact?
Wilson: We did a study right at the beginning [to discover] what kind of impact a filter would have on a rural family. [We found out that] intestinal infections decreased by over 65 percent just by having the filter inside the home. But most importantly — and this is significant — Guatemala and most of the countries in Central America, Honduras as well, they burn a lot of firewood boiling water. When a filter goes into the homes of a rural family, the average family reduces its consumption of firewood by 21 pounds, which is a significant economic savings for the ones buying the firewood and significant time savings for those who chop down the trees and collect the firewood.
Now the family has more time and more money for more and better food, as well as school supplies. Just as an urban family saves $200 a year on water by having the Ecofiltro, the rural family saves about $120 a year, and that’s money that’s desperately needed for [necessities such as] school supplies. It’s a great example of where that money gets directed.
Knowledge@Wharton: Organizationally speaking, you’ve run a nonprofit as well as a for-profit social business, what have been the main differences between those two models?
Wilson: For me, when I say social business, I put social in lowercase and business in uppercase for a reason. It’s got to be profitable so that the social [portion of the business] can continue to grow. At Ecofiltro, we have a very significant school program where the philanthropy is directed. We’ve partnered up with companies like Coca-Cola, Visa, the largest telecom company in Guatemala, the Swiss government — and they donate filters to rural schools. We use that filter in the rural school as the go-to-market strategy and we leverage that to get into the homes of the rural families that live around the school. All the philanthropy is directed at schools and we’ve had an incredible amount of ambassadors created for our product, which are the school kids.
In this school cycle, which just ended in October, we reached 822 rural schools and provided clean water to 173,000 rural school children. These rural school children became our ambassadors because part of the program in schools is we educate them on the importance of always drinking clean water, of not polluting the rivers and lakes. They would go home after school, and if they didn’t have an Ecofiltro at home and they don’t like the taste of boiled water, they would say, “look mom, look dad, there are these new Ecofiltros at school and the water tastes great. You shouldn’t be drinking water that’s contaminated.” So it’s guerrilla marketing at its best. Any organization that wants to help us, we focus them on the school program because that’s what’s going to get us to the million families quickly.
Knowledge@Wharton: What has been the role of foundations and NGOs in amplifying Ecofiltro’s impact?
Wilson: Right now, it’s been significant. A lot of corporations in regions like Central America want to help but they don’t know how. My role has been explaining how providing clean water in a rural school can be leveraged and help us get clean water into all the community. We have corporations lining up now because we’re one of the few organizations in the region that will multiply the donation. It’s a good idea to bring clean water in the school, but if you can help us put filters in schools and provide clean water to all these school children, but also have clean water in the entire community through that donation, that’s something that corporations like because they want to squeeze the most out of every dollar that they donate to a social enterprise
Knowledge@Wharton: What do you think social entrepreneurs in other parts of the world could learn from Ecofiltro’s experience?
Wilson: The most important thing is really to get to know your end user. If you’re a social entrepreneur in a developing country, people at the bottom of the pyramid — the rural family — is going to be your customer. So ask a lot of questions.
Many times people go into a developing country, even social entrepreneurs, and they feel like they have the solution but harbor a very patronizing attitude. And they’re like, “here, take this.” Social entrepreneurs need to ask more questions, go into the field and exhaust every single angle of what you’re trying to do. Ask what their needs are. You’d be surprised that what you think their needs are may be different from what your perception was at the beginning. So ask.
It’s also very important that [your enterprise is] financially sustainable. It’s very important that whatever product you deliver to the rural poor, they have a payback period that’s very quick. For instance, in Ecofiltro’s case, the family pays off the filter in a few months. If you really want to scale and be a successful social entrepreneur, it’s got to be a product that pays off really quickly and the culture acceptance has to be there. Remember the chlorination program? You have to have a product that rural families are going to feel good about using. So provide a short payback period, gain cultural acceptance and ask a ton of questions – all of these are very important.
Knowledge@Wharton: I’d like you to dream about the future. Where would you like Ecofiltro to be in the next five years? What are some new programs that you would want to do?
Wilson: In the next five years, we want to be used by a million families in Guatemala. I don’t want there to be one family that doesn’t have an Ecofiltro or access to potable water. We recently entered Honduras, El Salvador and Mexico. Mexico is going to be a significant enterprise but it’s going to be a challenging one because in Mexico it’s about serving families in urban poverty. The urban poor in Mexico receive water one or two days out of the week. When they open the spigot it’s green, and so it’s going to be very challenging.
But I foresee, in the next five years, that we will be putting a lot of time and resources into Mexico and solving the problems of the urban poor. Right now they’re the ones suffering the most with lack of access to clean water in Mexico, which is ten times bigger than Guatemala. That’s going to be a big challenge, but I’m looking forward to it. We have the right solution and we’ve picked partners that are very innovative and young, and excited about improving the health of the folks at the bottom of the pyramid.
Republished with permission from http://www.knowledge.wharton.upenn.edu -- the online research and business analysis journal of the Wharton School of the University of Pennsylvania.