Contribution
updated

Fertify

Though mineral fertilizers typically increase crop yields by 40 to 100%, only 26% of smallholder farmers in low-productivity regions of Kenya are fertilizer users. By providing fertilizer as a service, Fertify aims to reduce the barriers to usage faced by smallholder Kenyan farmers. Soil testing will assess farmers’ unique soil nutrient deficiencies, then a custom-blended fertilizer will be delivered to target their needs. Customers will pay a monthly fee to purchase fertilizer, rather than an upfront cost; by distributing payments throughout the year, affordability is increased. Access to fertilizer will increase the yield of farmers’ crops, and will therefore increase their incomes and financial resilience.

Customers

This service is aimed at smallholder maize farmers in low-yield regions of Kenya, which includes the eastern coastal area and the northern regions bordering Somalia and Ethiopia. The strongest reason to target these areas is that fertilizer usage rates among maize farmers there are much lower than in the more fertile western regions. In 2009, about 12 million people lived in these areas. Smallholder farmers in Kenya cultivate an average of 0.47 hectares of land, half of which is used to produce maize.

Value Proposition

The application of fertilizer could increase crop yields for smallholder farmers by as much as 40% to 100%. This increase in crop yields leads to more food for smallholder farmers, in addition to a higher income from selling the crops.

The subscription payment model has two significant advantages. Firstly, it spreads out the large investment of fertilizer over several smaller payments. This eliminates the need for farmers to put away money for months in order to buy fertilizer. Secondly, it transforms the choice of using fertilizer from an opt-in (the farmer needs to actively choose to visit a retailer and buy fertilizer) to an opt-out (where the farmer will have paid for fertilizer by the time of the sowing season, unless he or she actively chooses to cancel the subscription). This is a powerful change in mindset.

The proposed service also includes several mechanisms to facilitate the practical application of fertilizer. The customers receive the optimal blend and quantity of fertilizer for their land, minimizing the risk that they pay for too much or for the wrong kind of fertilizer. The subscription model includes continuous information such as timely reminders of when fertilizer should be applied and current crop prices in cities at the time of harvest. All in all, the model is designed to nudge profitable fertilizer use and empower farmers to make better decisions regarding their land.

Channel

A successful fertilizer distribution system must carefully balance the trade-offs between customer accessibility and delivery costs. Low customer accessibility (such as limiting distribution to major towns) will greatly hinder customer adoption of the service, while high costs (such as personalized deliveries) could make the service unaffordable to the target group. The proposed solution to this problem is to serve groups of smallholder farmers located in the proximity of a number of villages. Pending further research and data collection into the density of farms in Kenya, farmers would either receive their fertilizer shipment directly to their farm or deliveries would be made to a central location in a nearby village to be retrieved by farmers in the surrounding area. Assuming 10 customers per village, this would reduce the number of deliveries by an order of magnitude compared to direct deliveries. Deliveries could be performed either by renting a vehicle or by partnering with an existing shipping and distribution company. Due to limited availability of information about the costs of each of these options, further research is required to determine which is more cost-effective. For the purpose of cost estimates, shipping costs are modelled off of a quote from an existing shipping company in Kenya. This system assumes that the density of farmers is high enough for several farmers to be able to reach a certain geographical point conveniently. This is likely to be the case in most places; most Kenyan children go to a school, and it’s reasonable to believe that even smallholder farmers sometimes need to visit a general retailer or community centre. In the early stages of deployment, however, marketing efforts may need to exclude the most remotely located farmers.

Customer Relationships

Finding and retaining customers for a year-round fertilizer subscription requires successful management of customer relationships. A successful customer relationship management (CRM) strategy must answer two questions:
i. How can potential customers be found and encouraged to adopt the service?
ii. What communication between the service provider and the farmers is optimal in ensuring customer retention and satisfaction?

For the first one or two growing seasons, the program would be run as a pilot with about 10 customers in an appropriate geographical area. During this period, customer interaction is especially important for the service provider to understand how the service is being used in practice. Data could be collected through home visits, focus groups and SMS surveys. Personal interactions do not only help to improve the service, but also foster customer loyalty. A successful pilot will also make it easier to subsequently persuade new users to try the service, and create a snowball effect of adoption.

In the longer run, a promising way to reach potential customers would be to come into contact with key players in the current distribution chain that would benefit if the smallholder farmers in question used more fertilizers. One such player could be whoever currently buys the crops from these farmers and brings them to market. By partnering with local crop wholesalers, the team could come into contact with most smallholder maize farmers in the relevant areas. This would be in the interest of the wholesalers, since they would have access to larger quantities of crops in the same geographical area as yields increase because of fertilizer usage. At a future stage, partnerships with wholesalers could be developed further, for example by having them deliver fertilizers as they pick up every farmer’s crops. Another promising way of reaching new customers would be a referral system where current customers receive discounts in the form of account credits if they encourage acquaintances to sign up for the service.

The second question is that of maintaining efficient communication with customers. Research indicates that access to mobile phones and mobile payment systems is widespread across Kenya. Text messaging is an extremely affordable and efficient way of maintaining two-way communication with customers, as successfully shown by other organizations such as WeFarm. Some services that could be provided through text messaging include:
- fertilizer delivery information such as dates and quantities
- payment reminders
- fertilizer application reminders and instructions
- subscription renewal information
- crop price information from local cities

Cumulatively, the goal of this communication channel is to deliver sufficient value to the customers to ensure that they remain customers. This is especially important during the months when they are not delivered fertilizers, and the benefits of the subscription are less tangible. As smallholder farmers start transitioning to smart phones, the team could explore options to develop an app for communicating with customers as future work.

Key Activities

- Purchasing fertilizer. This will be a key activity since the main operating costs of the service are purchasing costs and distribution costs. The affordability of the service will subsequently correlate strongly with the price that the team would pay for the fertilizer. If the team could procure fertilizer in bulk with good delivery conditions, lower prices could potentially be offered to end customers.

- Soil sampling. The goal of the service is to deliver a customized fertilizer that caters to the need of every farmer. To do so, each customer’s soil characteristics must be measured or estimated. In many cases, it would hopefully be adequate to test the soil in a number of clusters and interpolate the results to the customers in the region. These tests would be conducted annually for each cluster, and the customers in the area would receive a blend of fertilizer that specifically addresses the nutrient deficiencies in that area.

- Mixing and repackaging the fertilizer. This activity adds value by ensuring that each customer receives the correct amount of blended fertilizer that caters to the needs of the individual farm. The mixing and repackaging would take place once per growing season (i.e., bi-annually) in a warehouse. Different NPK blends will be mixed into a new bag for each customer in proportions depending on soil quality of that customer’s land and in the quantity required by each customer.

- Delivering the fertilizer. Before every growing season, each customer’s bag of fertilizer will be delivered to their farm. By initially focusing marketing efforts at certain villages, the team will ensure that these deliveries are feasible. In areas where customer density is sparse, a possible alternative is to deliver several customers’ bags to a single delivery point such as a local villages instead of delivering to their doorstep.

- Delivering information on usage via text. This activity is thoroughly described in the customer relationships section.

- Marketing to customers. After the trial stage and proof of concept, a key activity of the program will be to find suitable customers to whom the service can be marketed.

- Creating partnerships. The program is heavily dependent on rewarding partnerships for funding, procurement, and distribution. Creating and maintaining these partnerships will require significant resources, particularly in the early stages of the program.

Financial Resources

Since the cost structure of the service is dominated by seasonal costs (such as warehouse rent) and variable costs (such as fertilizer purchase), the initial funding required for one-time costs is low. However, the business model is partly dependant on economies of scale for cheaper fertilizer procurement and distribution. During the first years, when the number of customers would be small, the business would likely operate at a loss. This loss would need to be covered by investments or grants; the team can apply for these grants from organizations such as KALRO, and possible loans could come from the government.

Human Resources

Knowledge of local conditions is a crucial success factor for the service. This knowledge can be divided into three main categories. Firstly, local soil and agricultural expertise. This knowledge is useful in determining optimal fertilizer composition and quantities as well as in delivering relevant and correct information to the customers. Academic researchers and NGOs (such as KALRO) are both promising partners in attaining this expertise. Secondly, distribution network knowledge. The service must be designed in a way that is compatible with the current value chain of smallholder farmers. Knowing how these networks function will be valuable for marketing and operational reasons. Thirdly, generic local problem-solving savvy. Starting an enterprise requires a great deal of ad-hoc logistical problem-solving. This skill is highly local and would need to be a part of the organisation.

Physical Resources

Most resources required to run the enterprise would be needed only on a seasonal basis in the weeks preceding each growing season. These resources include the rented warehouse facility and a rented truck (if the arrangement of third-party deliveries is infeasible).

Intellectual Resources

With ambitious measurement and growing numbers of customers, the program would rather quickly collect data on crop yields, fertilizer usage, incomes, etc. This data could be used internally to more efficiently target the farmers that are likely to benefit the most from the service, and shared externally for research purposes. Although the fertilizer market is traditionally undiversified, developing a recognisable brand could also contribute to the success of the program.

Key Partners

- Soil testing partners. SoilCares is an organization which will be required to perform soil testing for customers, which will be used to ensure customers are receiving the required mixture of fertilizer. Other soil testing companies could also be explored as alternatives.

- Government. A partnership could be formed with the government to subsidize the service in order to make it more affordable for customers.

- Transportation and distribution. Partnerships can be pursued with existing distribution companies to ease in the delivery of the fertilizer product.

- Fertilizer companies. The team will purchase fertilizer from existing fertilizer retailers or wholesalers.

- M-PESA. Payments will be facilitated through this mobile payment system, which is connected to 96% of Kenyan households.

- KALRO. Nonprofit focussing on research and development in agriculture, with whom the team could partner to guide the implementation of the plan [34]

- World Vision. World Vision can provide expertise and connections with local knowledge in addition to funding for the implementation of the program.

Unanswered Questions

- Today, we do not know the extent to which soil test results can be interpolated over spatial and temporal distance, i.e., at how many places and points in time soil test will be necessary. Additionally, we have assumed that information about soil quality is helpful in determining the optimal blend and quantity of fertiliser, but we have found little research on the topic.

- How do we deliver to farms which don’t have addresses?

- Can fertilizer be imported and distributed for a lower cost per kilogram than it is currently sold at its government-subsidized cost?

- How geographically dense are smallholder farms in low production regions?

- How much additional labour will be required for business development, accounting, partnership development and associated activities?

- What are the current soil nutrient characteristics, and what are the specific nutrient deficiencies? Can a single application of fertilizer sufficiently address these deficiencies, or are years of application required to rebuild nutrient density in soil?

Revenue

Revenue comes from selling the product, and is determined by the product’s price. Please refer to the Profit/Breakeven section for an outline of the required pricing in order to break even, and also to turn a 5% profit.

Pricing will be set based upon what is affordable for the customer. In the first few years of the service’s existence, customer base may be low and thus the cost to the customer would theoretically be high. To mitigate this, the team plans to partner with organizations able to provide funds to subsidize the cost of the service, if necessary. As the customer base grows, the cost to the customer will fall thanks to a wider base of customers across which the fixed costs are distributed.

Costs

Fixed costs - those which do not increase with number of customers - are listed here:
- Warehouse rental. For two weeks, twice per year, a small warehouse will be required to store the purchased fertilizer. Additionally, this will provide the space required to perform the mixing of fertilizer to create the final tailor-made products. Warehouse rentals are generally available in monthly increments, and so two months of space rental costs approximately 140,000 Ksh per year.
- Business license. This is a one-time cost of 10,500 KSh.

Variable costs - that is, all costs that scale based on the number of customers - are listed here:
- Fertilizer purchases. Annually, and on average, each farm will require 50 kg of fertilizer for each of the two growing seasons. At a cost of 1,800 KSh per bag, this will cost 3,600 Ksh per customer annually. Fertilizer is available at this price when subsidized by the Kenyan government. As operations and customer base grows, fertilizer could instead be purchased in bulk directly from an importer if this was found to decrease the cost per kilogram of product.
- Transportation costs. There are two stages of transportation: transporting the fertilizer from its point of purchase to the warehouse, and later delivering the product to the customers. A truck will be rented to perform these actions. It is estimated that the pickup and delivery will require 300 km of distance driven per year, plus an additional 3 km per additional customer. This will cost approximately 95 KSh per km.
- Labour. It is estimated that processing the fertilizer will require a base of 30 hours of labour, plus an additional one hour of labour per additional customer. The hourly cost of a worker is 65 KSh. In the future, additional labour will be required for business development, accounting, partnership development and associated activities. These costs are not currently included in the model because the founders will handle these tasks in the first stages of the program.
- Soil testing. One test will be performed per 10 customers; this will allow the team to tailor fertilizer composition to regional nutrient needs, while keeping the cost of testing low. The cost per test is 1,300 Ksh.

Profit/Breakeven

In order to break even with only 100 customers in the early stages of roll out, the monthly cost of the service must be set at 490.74 Ksh ($4.86 USD) per two 50 kg bags of fertilizer, which is the annual need for the average size of a smallhold farm in Kenya; this price will differ by customer depending on the size of their farm. As more customers are gained, the cost of the service is driven down: when 1000 customers partake, the cost of the service is lowered to 355.04 Ksh ($3.52 USD) per month. However, it is not the team's intention to adjust the cost of the service once it has been launched; a pricing structure would be developed and stuck to.

The average Kenyan smallholder farmer’s annual income is $2,527 USD (using 2009 conversion rates), and it is estimated that an annual product cost exceeding 5% of their income will require subsidy. At a customer base of even 100 farms, the monthly cost of the service for the average farm size is $4.86; this is below $10.53 (5% of the average monthly income) and thus is deemed affordable. However, the average income may mask variation; some customers located particularly in low-production regions of the country may have a significantly lower monthly income, and thus this service may exceed what is affordable. In this case, the team will seek ongoing subsidy to decrease the financial burden.

Because affordability for poor smallholder farmers is the goal of this project, the monthly cost of the service will be set to 341 Ksh ($3.38 USD) per month for the average farm size; again, this will differ based upon the size of eazch customer's farm to to differing needs in fertilizer quantities. 15,000 customers would be required to provide this cost while breaking even. This would no doubt take several years to achieve, but it is not unreasonable: 15.9 million Kenyans are smallholder farmers, and can be reached through effective marketing. The monthly cost of 341 Ksh is selected because a value lower than this would not allow the program to break even; at this point, fixed costs are divided across a sufficient number of customers such that they are nearly negligible.

Profiting is not the goal of this enterprise, but a 5% profit margin would help to cover unforeseen costs. If this is the goal, the monthly cost of the service would need to be set to 358 Ksh ($3.55 USD) per month. Though this could potentially decrease affordability to some farmers, the increase may be worthwhile for the sake of Fertify's financial stability.

Mission

The team’s mission is to expand access to fertilizer to smallholder farmers in Kenya; access to fertilizer will increase the yield of their produce, leading to higher incomes and financial resilience.

Competition

Through research, it was found that there were no other existing organizations or companies which offer the same service as Fertify. That said, there exist companies in Kenya which broadly focus on aspects of increasing access to fertilizer or use of fertilizer. Namely, FarmDrive is a startup which operates in Kenya and focuses on increasing fertilizer access to farmers, whereas WeFarm and Apollo Agriculture provide farmers with advice on farming practices specific to their situation.

WeFarm has been successful at linking farmers with each other by providing answers to approximately 1.5 million questions which farmers have had worldwide. This has allowed farmers to share innovative ways of dealing with climate change and other agricultural challenges with each other, allowing them to produce higher yields. Because WeFarm overlaps only with the SMS information system aspect of Fertify’s activities, it is not considered to be in competition with this service. In another example, FarmDrive provides farmers with access to credit and loans as well as information about farming practices using machine learning; because their goal is to increase access to financing for farmers, it is unlikely that FarmDrive will be a source of competition for Fertify.

Measurement

The 10-customer pilot will allow for precise, qualitative data to be collected and used to improve the service and provide indications as to whether fertilizer usage has a significant positive impact on crop yields. After proof of concept, when scalable operations have been implemented and the number of customers is higher, a thorough RCT should be performed to statistically evaluate the effects of the program on yields, incomes and user satisfaction. For credibility, the RCT would need to be performed with external (academic) partners and include a control group. If the results are decisively positive, the study will provide strong leverage in applying for funding and persuading customers to adopt the service.

In alignment with the mission, data collected from the customers must serve three main purposes:
1. to estimate the effects of fertilizer use on crop yields as accurately as possible
2. to communicate these estimates to smallholder farmers and external stakeholders in a convincing, honest and transparent way, empowering them to make evidence-based decisions
3. to find ways in which the business model fails to meet the needs of its customers

Some possible metrics that could help achieve these goals include:
- Percentage change in self-reported crop yields from the year before adoption to the first year of adoption. It is especially interesting to determine the return on investment of fertilizer, i.e., the ratio between how much the farmers’ revenue increased and the cost of the fertilizer service. However, since crop yields depend non-linearly on a range of external factors, crop yield changes alone will not constitute robust statistical evidence of the efficacy of fertilizer use.
- Customer retention rates. This metric complements the above, as it evaluates the customer experience of the service as opposed to only the effects of the fertilizer delivered. The decision to remain a customer or not gives insight about how well the offer is tailored to the farmers.
- Qualitative surveys of customers abandoning the service. Through these surveys, aspects of the service that are poorly designed can be brought to our attention. This would in turn allow for iterative business model improvement.

In addition to metrics of the effects of the service on customers, it may be of interest to evaluate how increased fertilizer usage affects long-term soil quality features such as nutrient density and organic carbon levels. This issue is relevant to both farmers and academics. Within time and money constraints, we would happily cooperate with researchers interested in this subject.

Strengths & Weaknesses

Research suggests that affordability is not enough to increase fertilizer access in these regions; fertilizer must be made accessible. This service provides improved accessibility in three aspects:
- Financial accessibility. By converting what is traditionally a one-time payment to a year-round subscription, the service makes the cost of buying fertilizer much more manageable for its customers.
- Geographical accessibility. The service makes fertilizer available in low-yield regions, and makes sure that the investment is worthwhile even for farmers with atypical soil characteristics.
- Information accessibility. By delivering well-timed, highly relevant information on fertilizer usage and market prices, farmers are empowered to make better decisions about their land from day one.
In addition, the product is affordable and designed for the needs of each farmer.

The service has, however, been designed far from the context of use and by a team without personal experience of Africa South of the Sahara, let alone Northeastern Kenya. While relevant information can certainly be found in research and online media, there is a significant risk that the team has failed to account for certain contextual factors. Additionally, the team has no educational background in chemistry of agricultural studies, which would prove useful in designing an efficient fertilizer product. These knowledge gaps are “unknown unknowns” in that they are not design weaknesses at this stage, but risk factors in a future implementation of the service.

The team has several strengths as well which are assets in implementing this service. Firstly, the team’s industrial engineering background lends itself to creation and optimization of processes. Additionally, one team member has experience with policy making and analysis; this could be useful when navigating the implementation of the service in collaboration with government organizations. Furthermore, one team member has taken several courses in the field of business during undergrad; this knowledge is useful at creating and iterating upon the service’s business plan, as well as creating business processes to ensure operations run smoothly.

Critical Assumptions

For the service to be successful, the following assumptions must be at least partially true:
- Yield increases as a consequence of fertilizer use must be significant even in arid regions.
- Mass text messages can be sent to participating farmers.
- Fertilizer can be purchased at the government-subsidized rate.

Most Significant Challenge

After researching the background context and solution space, several challenges remain in designing a successful service. The most likely and significant of these are:
- Obtaining realistic cost estimates & other regional information.
- Obtaining financing for the initial stages of the service implementation.
- Understanding how much potential customers are able and willing to pay for the product.
- Finding and persuading farmers to adopt the service.
- Gaining trust from the farmers.
- Building a positive reputation in the Kenyan agricultural community.
- Barriers of language, culture and bureaucracy.

Brief URL

Fertilizer. Accessible.

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