Exploring Sustainable Revenue Models: Cross-subsidy

3 min read

Managing a social venture requires meticulous planning, especially with regard to your finances. It is important to plan and implement a revenue model that will help you become financially sustainable to effect continuous positive social change. There are many revenue models that you can implement to set your venture up for success. In this blog, we’ll be discussing the Cross-Subsidy pricing strategy as an option for your venture.

In a cross-subsidy strategy, the venture sells the same product in two different markets, one which can afford a higher price (and therefore has a higher gross profit margin), and one that is a lower price market. Profits from the high-margin market can then be used to subsidise the low-margin market. This way the venture can break even or be overall profitable while still providing goods or services to those who need to be able to access them. These two markets can be geographically separate (e.g. a developed and a developing country) or they could be differentiated in some other way, such as being sold under different brands. However, the underlying product remains essentially the same.

There is a way to find out whether the cross-subsidy strategy is suitable for your venture by following a few steps. First you need to do an assessment of whether your product or service can be sold in a ‘high price’ market and a ‘low price’ market. Start by writing down all the different geographic markets where your product or service might be sold. In your list, include geographic variations such as rural versus urban areas, different cities or countries. Once you have a list of all the geographic regions you can sell to ask yourself:

“Within these geographic regions are there any identifiable high paying markets and low paying markets?” 

Take some time to also consider whether your product has different potential customer groups in the same geographical region. A main example of a market distinction you can make for each location is socio-economic factors (i.e. income). You can price differently for socioeconomic status by using the power of branding. You can package the products differently to appeal to different groups and you can also sell on different channels targeting the different markets.

Once you have a complete list with geographical locations and the different markets you can sell to within each you can consider one last tactic. Brainstorm whether there are any additional ‘add-on’ services that you could provide with your core product to enable you to differentiate it for higher paying customers. For example, if you provide delivery services you could offer to send people to help customers carry products up the stairs for an added fee. The possibilities are endless with this tactic.

Stay tuned to the SIC Blog for more ideas on how to sustain your social impact venture!

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