The road less traveled: Achieving business success in frontier markets

This article is brought to you thanks to the collaboration of The European Sting with the World Economic Forum.

Author: Lisa Satolli, Project Lead, Humanitarian and Resilience Investing, World Economic Forum

• Frontier markets have a set of unique characteristics. Their promise hinges on the ability of businesses to innovate and adapt to their unique conditions and behaviours.
• Innovative business models demonstrate ways to successfully operate and scale in the world’s most underinvested markets.
• These models hold the potential to deliver both positive impact and economic growth by paving the way for entire industries to emerge.

Frontier markets are home to the poorest two-thirds of the global population. With significantly fewer economic resources, these populations are much more risk-averse, making them less inclined to spend their money on unfamiliar products, even if they could bring significant benefits. Similarly, there is a general aversion to paying higher prices, even for products and services that pay for themselves or offer savings when purchased in larger quantities. These markets are often harder to reach as they often include remote rural areas or informal settlements in urban areas.

In addition, they generally possess limited infrastructure, underdeveloped financial systems, lower levels of industrialization and often have limited access to public goods and services.

Due to these characteristics, most social business in frontier markets cannot simply adopt the established business models that function successfully in more developed markets. The promise of frontier markets hinges on the ability of businesses to innovate and adapt to the unique conditions and behaviours of these markets and their participants.

How to make business work in frontier markets

There are already numerous examples of successful business models tailored to these conditions that offer the potential for scalability while successfully and sustainably servicing frontier markets.

These pioneering models pave the way for other businesses to follow suit and for entire industries to emerge.

Understand customer behaviour

The most common mistake among unsuccessful businesses is to confuse what low-income customers or suppliers supposedly need, with what they actually want.

People in frontier markets should be seen as customers, not beneficiaries. Like in more developed markets, they are attentive to their own needs and preferences. They will only spend money on a good or services if they perceive significant benefits, and, as in any market, one size simply does not fit all.

This creates an important distinction between businesses selling “push products”, which provide unknown or uncertain future benefits with no immediate demand (e.g., insurance or mosquito nets), and those selling “pull products”, which are highly valued products with immediate demand and low perceived risk. While push products can significantly improves lives, scaling their business models may require extensive and costly awareness strategies.

Make target communities part of the solution

Many successful business models in frontier markets have found ways to integrate target communities into the solution. These can take various forms, such as partnerships for distribution and sales. This helps in creating employment and in building a more resilient and widespread distribution network that can penetrate markets traditionally considered hard to reach. In some cases it can even help reduce important risks, such as community rejection.

Embrace circularity

Circularity is increasingly recognized as a core element of successful business models in frontier markets. This approach not only addresses environmental concerns but also aligns with the economic realities and needs of these regions. By designing circular products and systems, businesses can lower production costs, create new value out of waste (e.g. through waste-to-energy models), foster resilience against common challenges of resource price fluctuations, mitigate risks of supply chain disruptions and solve for an often lacking local energy infrastructure.

Place impact at the centre of value creation

Embedding social and environmental impact into the core of value creation represents a transformative approach for businesses operating in frontier markets. An example of what this could look like is through impact credits such as plastic credits or carbon credits, whereby climate change mitigation efforts unlock new revenue streams and competitive advantages for businesses.

A more nascent model includes peace positive business models. The peace-positive finance approach encourages the development of enterprises and projects that foster community resilience, promote inclusive growth and mitigate conflict risk. By doing so, they have the potential to mitigate some of the major project risks related to community rejection, social unrest or political instability, thereby lowering the risk pricing of a potential investment and safeguarding long-term returns.

Take a dual market approach

Numerous businesses have adopted cross-subsidized business models, serving products and services to both the poorest populations and higher-income groups or development and humanitarian organizations at different price points. This model allows businesses to deliver high-impact activities even if they are not profitable or scalable, while ensuring an alternative and more secure revenue stream.

Harness innovation

A critical factor in addressing some of the limitations of frontier markets is the role of technology to leapfrog traditional stages of development. As technology continues to evolve, it has the potential to bridge gaps and connect previously isolated populations to deliver services, such as mobile and digital-based solutions including mobile money, e-learning and telemedicine. Other examples include innovating logistics and distribution models to overcome infrastructure challenges in these markets, localizing supply chains, adopting more asset-light strategies or adopting innovative payment models, such as pay-as-you-go models, to respond to the challenges of affordability.

Scaling successful business models in frontier markets

Businesses that pioneer innovative models face significant first-mover disadvantages. Their commercial viability may be unknown to investors, customer awareness and skills may need to be created, distribution channels or supporting infrastructure may need to be built from scratch and government regulations may need to be streamlined. In addition, innovating and scaling new business models takes time. As a result, these businesses experience difficulties in accessing the capital at the critical stage when growth begins to accelerate and the conditions for greater scale are created.

Nevertheless, these businesses have a significant development impact as they pave the way for entire industries to emerge. New entrepreneurs can replicate proven models, using them as case studies to build investor confidence and benefitting from increased market activity.

That is why the Humanitarian and Resilience Investing (HRI) Initiative was launched in 2019 as an approach to unlock impact investing in frontier markets and help scale purpose-driven businesses with the goal of measurably benefiting and increasing the resilience of at-risk and crisis-hit communities.

HRI has launched its second UpLink challenge to source innovative healthcare solutions, nutrition and food system solutions and safe water services in frontier markets.

Find out more here.