1. Gross margin is king
CBS won’t gain recognition as an improved sanitation facility unless the model can be shown to achieve public health benefits at scale. In turn, CBS enterprises won’t be able to achieve that scale unless they have a financially viable business model, capable of sustaining itself for a realistic number of customers. For this reason, it’s essential to start with a clear understanding of the drivers of sustainable performance.
When it comes to understanding basic financial viability, there’s really only one indicator that matters — gross margin*. Our analysis of the CBS enterprises suggests that you can’t build a self-sustaining CBS business without achieving a gross margin of at least 50%. Any lower and the business will struggle to cover all its costs (i.e. breakeven), let alone make the ~10% net margin needed to attract local entrepreneurs to run CBS enterprises as “normal businesses”.
With the high price elasticity of demand for CBS enterprises (see Building Block 2), significant improvements in gross margin are unlikely to come from raising prices, so that means focusing on the biggest cost drivers. In our experience, these were frequency and cost of waste collection and the time and cost associated with collecting customer payments.
* Gross margin is gross profit divided by net sales, expressed as a percentage. It represents the percentage of total sales revenue that a business retains, after incurring direct costs. The higher the percentage, the more the business retains and the more capable it is of servicing its other costs and debt obligations.