Preview

Brief Explanation Introduction

Time to define your payment method

Alongside the question of pricing is the question of how your customer pays you? In other words, you need to decide a payment model for your business. Do you charge upfront for your product, or can you allow your customer to pay you in instalments over time? For goods that have a high cost relative to customer income, some kind of ‘payment over time’ may be more affordable.  

Here are six typical payment models: 

  1. Give for Free: most charities offer a ‘give for free’ model. They fund all of their costs through donations, and provide the services for free to their beneficiaries.
  2. Pay on Delivery: the customer pays you a single fee once the product or service is delivered.
  3. Pay with a loan: the customer receives a loan (either from you or from a partner bank) so that they can buy your product upfront and pay back the loan over time.
  4. Hire / Purchase: the customer receives the product or service for free upfront, and makes monthly payments over time. After a certain number of payments, the customer owns the product outright and ceases further payments.
  5. Leasing: the customer never actually owns the product, but makes monthly leasing payments. The social business retains ownership of the product, and takes responsibility for ongoing maintenance. The business takes back the product when leasing stops.
  6. Pay for Service: instead of buying a product, the customer instead pays for services from the social business. For example, some solar companies don’t actually sell panels to their customers. Instead, they set up kiosks in villages where customers can come to charge their batteries. So what they sell are ‘energy services’, rather than actual energy producing products. Many communities find this a much more affordable and effective model, with the customer only paying for services when they have the cash.  


The key to payment models 3-6 is helping your customer to spread out payments over time. For many customers, the biggest challenge to affordability is how much they can spend
per month. By helping customers spread out cost over time, you might be able to greatly increase the number of customers who can afford your product. 

Case Study

Our SolaRise team explored several of the above payment models. Initially SolaRise began as a charity, raising donations and using these funds to buy the Solar Kits, which they then distributed for free. 

However they quickly realised that this was not a sustainable business model – they simply wouldn’t be able to raise enough funds to reach as many people as they wanted. 

SolaRise then switched to a ‘pay on delivery’ model, charging customers upfront to buy their kits. However the cost of the Solar Kits, at over $250 per unit, was simply too much for most of their customers to be able to afford. 

SolaRise realised that they had to develop a payment model that would enable their customers to be able to pay over time. They decided to team up with a local micro-finance bank to offer a ‘Solar Loan’ to their customers, under which the customer could borrow $250 to buy the Solar Kit, and then pay that loan back over 48 months. This meant that the monthly payment would only be around $10 per month, which was below the $20/month which customers were currently paying for low quality kerosene products. 

Some of SolaRise’s competitors adopt the hire/purchase or the leasing model. SolaRise expects to move to leasing its Solar Kits in due course. The leasing model is more complex, but means that they have an ongoing relationship with their customers, and can monitor the performance of the Solar Kits going forward. They are also willing to take back defective Kits and replace them for free, which is a very attractive feature for their customers. 

Exercise

As a group brainstorming exercise, consider each of the six payment models outlined above, and explore what that payment model might look life for your social business. Is there more than one solution? What are the pro’s and cons of each, and which payment model do you think is best? 

Tips

  • If you have personal involvement with the issue, this will be appealing to an investor.
  • If you are addressing a problem that you don’t have any, or much, personal involvement with (particularly if it is for a community that isn’t your own) then it is important to show how you have “apprenticed with the problem” and really built up your understanding of the nuance of the context.

This topic has been insightfully explored by Daniela Papi-Thornton and can be found here.

Back to: Business Model > Business Model

Want to stay updated? Join our newsletter