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Brief Explanation Introduction

How to implement a Cross Subsidy strategy

Whichever revenue model you select, cross-subsidy may be a strategy that could enhance the income of your business. Many ventures use cross-subsidy as a means to becoming financially sustainable. 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 low price market. Profits from the high margin market are used to subsidise the low-margin market, so that the venture overall is profitable (or at least breaks even). 

The two markets might be geographically separate (e.g. a developed and a developing country) or might be differentiated in some other way, such as being sold under different brands. The underlying product remains essentially the same. 

Case Study

Aravind in India is a celebrated example of a sizeable social enterprise using the cross-subsidy model. Aravind operates a chain of eye hospitals across India providing eye surgery for all. In India about 5 million people become blind each year due to cataracts. A simple operation to replace diseased lenses changes lives, but is often prohibitively expensive for the typical patient, who earns less than $4 per day. Aravind provides affordable, high quality surgery to all regardless of income levels or ability to pay. 

Aravind defines two sets of customers: 

  1. High paying customers: receive eye surgery, offered slightly better after-care services including private room, better food etc. 
  2. Subsidised customers: pay little or nothing, receive eye surgery, more basic outpatient services such as a shared ward 


Two thirds of Aravind’s patients fall into the second category and pay little or nothing for their surgery. On the other hand, the high paying customers are charged just enough to cover the costs for themselves, as well as pay the costs for the subsidised group. 

All patients of Aravind receive the same service (eye surgery). The only difference between the two customer groups is that the higher paying patients receive a slightly better quality of pre- and post-operative secondary services such as their own private room. Aravind is able to segment its customers from its beneficiaries by distinguishing them according to their income level. 

Exercise

Can your product or service be sold in a ‘high price’ market and a ‘low price’ market? 

  1. Write down all the different geographic markets where your product or service might be sold (e.g. rural v. urban, or different countries). Are there high paying and low paying markets? 
  2. Consider whether your product has different potential customer groups in the same geographic region, distinguished e.g. by socio-economic factors such as income, and then consider if some of which might be able to afford more. Sometimes all that is required is a different brand, other sales channels or different packaging for the same product. Write down what these different markets might be. 
  3. Are there additional ‘add-on’ services that you could add to your core product to enable you to differentiate it for higher paying customers? 

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