Archive for the ‘Business Models’ Category

Why does the prepaid model work so well and what are the lessons for business model innovation?

Increasingly, employment is becoming ad hoc and flexible. The gig economy and the informal sector share a common characteristic of incomes which are irregular and unpredictable, unlike the timely wages characteristic of formal employment. Both budgeting and planning thus become a challenge when there’s no predictable paycheck to rely on. Expenses are managed against cash flows to minimize volatility, and payments with calender deadlines become a challenge in planning.

It is in this scenario that the prepaid or pay as you go model works so well for the customer, one of the reasons why its ubiquity across the developing world drives the growth of mobile phones. It puts control over timing and amount of money spent in the hands of the user, allowing them juggle voice and data purchases against available cash in hand.

Here are the lessons for business model innovation applicable for a plethora of products and services, drawn from our decade of research into the financial frameworks underlying the operating environment characterized by unpredictability and volatility, and the success of the prepaid model.

Flexibility

The prepaid model is flexible. There is no rigid requirement on the amount that can be spent, beyond the voucher values of each telcom operator, nor are there periodic calender based deadlines such as those in a monthly bill. In Nigeria, traders have been found to top up their phones multiple times a week or even the same day, yet purchasing the smallest denomination of vouchers. High frequency of small amounts is a purchasing pattern that resembles their own cash flow while trading in the informal market. They don’t want to tie up their liquidity in airtime in case cash on hand is required for business, yet their trade is clearly dependent on mobile communication hence the frequent recharges.

This flexibility built into the business model clearly puts control over timing and amounts spent in the hands of the end-user who must manage a volatile cash flow situation.

Seasonality

In addition to the daily or weekly fluctuations in cash flow experienced by gig economy workers or those active in the developing country informal sectors, there are larger variations in income level over the course of the natural year. Unlike the regularity of a monthly salary, irregular incomes rise during peak seasons, such as festivals and holidays, and plunge during low seasons. Developing country economies are more closely linked to the seasonality of agriculture, given the greater proportion of the population’s dependence on farming. Incomes can vary as much as 300% for instance, for tea farmers in western Kenya’s Kisii region. Climatic effects also have greater impact on cash flows, and the current drought in East Africa is expected to depress livestock prices in the coming half year. On the upside, seasonal peaks in consumer durable sales are predictable as the regional harvest timings are a known factor. North India’s post harvest season in late October/November kickstarts an orgy of consumer spending during the festivals and the weddings which take place during this period.

Business models designed to take expected seasonal changes into account can minimize the dropout rate of customers when their income changes.

Liquidity

One of the biggest challenges we have wrapping our heads around when considering more rural or cash intensive economies is that liquidity is not equivalent to wealth, or even purchasing power. While this factor can apply to anyone relying on multiple income streams from a variety of sources, I’ll use the example of a small farmer to explain its importance to the design of business models.

The homestead is managed like an investment portfolio, with different sources of income maturing over different durations of time over the course of the natural year. This is also why control over Timing – frequency, periodicity – of payments, such as possible in the prepaid model, is so critical for the success of payment plans. A smartphone might be purchased after the major harvest of the annual cash crop, but its the daily cash from the sale of milk that would be used for recharges (and other basic necessities). Similarly, a calf may be purchased to fatten against the following year’s school fees.

Negotiability

This leads directly to a factor more relevant to heavily informal economies where variance in systems and structures means transactions are more human centered, depending on face to face communication, trusted references, and mutual compacts rather than legal contracts to enforce agreements. Negotiability of your business model, and its close relation, reciprocity – “the give and take” – is an element missing from faceless institutions that seek to serve this demographic.

This is one reason many prefer to seek solutions outside of formal banking institutions, for example, as their opening hours might not suit the trader’s business hours. In Busia, Uganda, most women traders had established trusted relationships with a mobile money agent, many of whom would show up at the end of the work day to assist the trader in transferring the cash earning safely onto the digital wallet. And, unlike the bank, the telco’s prepaid model allows customers to “negotiate” when and how much they’ll pay within the constraints of far more flexible terms and conditions than most other models.

A farmer has “purchased” this solar panel after coming to an agreement with the shopkeeper. He will pay off the total, over time, as and when he has spare cash, and collect the panel when payment is complete. There is no interest charge. The shopkeeper has put the farmer’s name on the panel but will keep hold of the item.

The greater the span of control over timing and amounts, the greater the success of the payment plan

The prepaid model bridges the critical gap between the predictable formal structures of the large institution and the dynamic challenges of the informal. The bottomline is that the flexibility, negotiability, and reciprocity of the model are more important factors for its success than the conventional understanding of permitting micropayments in advance. Numerous consumer product marketers entering emerging markets experienced this challenge when their micropayment hire purchase models failed customers who might have to miss one or two week’s payments due to illness or other emergencies – their products were repossessed without any recourse to adjustment. Its the rigid calender schedule embedded in a payment plan that is often the barrier to a high ticket purchase than the actual price itself.

None of these factors are insurmountable with today’s technology, and the field for business model innovation for irregular income streams such as those in the gig economy or the informal sector is still wide open for disruption.

Connectivity, Communication, and Commerce: The 3 Cs of Africa’s Smartphone Led Future

Recent headlines touted the decline in marketshare being seen by smartphones on the African continent, and the concurrent increase in sales of basic devices. Yet a closer look shows that this shift might only be numerical due to the opening of new markets in heavily populated DR Congo and Ethiopia – first time buyers are likely to start with entry level phones.

In fact, role of smartphones in Africa is not only likely to grow and evolve over the coming 3 to 5 years but its very likely that it will be connectivity apps driving their adoption. We Are Social’s latest report shows Africa’s internet user numbers have been growing by over 20% year-on-year.

The 4th C – the Challenge of Unquestioned Assumptions and Great Expectations

With connectivity and communication, commerce was expected to take off but anyone tracking the headlines would notice the challenges faced by African e-commerce platforms. Some point fingers to connectivity as the issue, expecting to reap benefits from scale of penetration. Others point to high costs of data and devices, or challenges with completing the transaction online.

Looking at the patterns exposed by all the reports and the articles makes one wonder whether it’s the underlying assumptions and expectations that are the real problem. The untapped market is hyped out of proportion by each new entrant who rush in with their disruption to revolutionize the African consumer, only to rush back out again when the traction fails to succeed. This has been muddying the waters of what could have been a considered thoughtful opportunity to transform the social and economic landscape.

Yet its not all negative. If someone was to ask me about how connectivity and communication are driving commerce in the African context, I’d point to the plethora of informal trade in goods and services being conducted daily across social media platforms. Everyday there’s a new product or service launched with a tweet. Groups on Facebook encourage and support the entrepreneurial journey. Cryptocurrency trading is making Kenya famous as a first mover.

The difference in traction seems to be that which is self organized and organic vs that which is institutionalized and/or introduced from elsewhere. The external pressure to succeed in the same terms as that visible in the Silicon Valleys might actually be a greater barrier to the sustainable development of the African online community led commerce, increasing pressure on founders and startups with every negative headline. Maybe the lesson from the informal organic growth online is that might actually be a matter of throw the technology at them and see what emerges without lifting the lid every other second to check progress?

Maybe all that is needed is more locally relevant content, such as already being seen emerging from Nigerian and Kenyan tech blogs, rather than the imposition of metrics and heuristics from developed nation contexts.

Mobile First Africa: Social Media’s Boost to Rural Productivity in Kenya

Now in business for just six months, he also uses social media pages to sell his products, improving his customer reach.

“Through Facebook posts I receive enquiries and orders from Kenyans in the diaspora living in the US, South Korea, South Sudan, UK, Switzerland and Botswana who want the splits to be delivered to their families in Kenya,” he said.

“I also use the page to educate farmers and friends more about brachiaria grass.” ~ How farmers look for new markets every season

Continuing with yesterday’s theme of business productivity in mobile first Africa, this story caught my attention for the way this farmer leveraged the reach and discoverability of social media to grow his business.

Social biashara such as this is diffusing outwards from the urban centers where it first began. Expect to see many more such stories emerge from the unexpected places.

Lessons for development from the demand driven investment strategies of the informal sector

This shopkeeper in Laare, Kenya provided me with deep insight on how investments in expensive inventory are managed in a heavily cash based economy. He runs a consumer electronics store stocking everything from solar panels, music systems, spare parts and batteries, through to mobile phones and accessories.

His purchasing decisions are based on visible consumer demand, he said, preferring to stock what he calls “fast moving items” that sell and keep the cash flowing than to risk tying up capital in something that might not sell. For instance, he pointed to a dusty 5W solar panel, this has been sitting here for a year since most customers in the area prefer buying 20W or larger.

In this context, “fast moving items” are not the same as the marketing term “Fast Moving Consumer Goods” or FMCG which refers to over the counter perishables and consumables like tea, shampoo, biscuits or soap. Instead, they refer to the product range that sells in the local market, and as my visits to electronics stores in different parts of Kenya back in 2012 quickly showed, each market had different price points and products which tended to be “fast moving”.

In a more economically challenged region, it was black and white 14″ TV sets, smaller solar panels and no name Chinese mobile phones, while in the wealthier region around Kilgoris as we see in the previous post, its flat screen Sony Bravias and very large solar panels that sell.

Local demand drives decisions, and thus business growth strategies and investments. Can this insight not also inform development strategies?

The Economist has just published this article on how fish farms are experiencing a boom in response to the growing demand for food from the big city:

The task of feeding that huge population has not been accomplished by the government, by charities or by foreign agricultural investors. It is the work of an army of ordinary Bangladeshis with an eye for making money. Mr Belton’s research shows that the number of fish-feed dealers in the main aquaculture areas more than doubled between 2004 and 2014. So did the number of feed mills and fish hatcheries. Mr Belton has found similar trends in Myanmar, where the fish farms are often larger than in Bangladesh, and in India.

As well as transforming landscapes in a large radius around Dhaka, the fish boom has changed many people’s lives. Aquaculture requires about twice as much labour per acre as rice farming, and the demand is year-round. Many labourers who used to be paid by the day are now hired for months at a time. Seasonal hunger, which is a feature of life in some rice-farming regions of Bangladesh, is rarer in the watery districts. People are eating more protein. Mohammad Shafiqul Islam, a feed dealer, points to another advantage. Because food is now so cheap in the cities, migrant workers are able to send more money back to their families in the villages.

I believe this element of assessing local or regionally accessible demand for a product or commodity before investment is often missing even from the private sector influenced “making markets work” philosophy now prevalent in development strategies. Too often, the “market” is framed as an international one, and an e-commerce platform devised as the bridging solution. Local intermediaries are demonized as “brokers out to squeeze profits at the farm gate” without once considering their role as infomediaries of supply and demand. The very information networks that provide the shopkeeper with guidance on what would sell and what to order are often erased and replaced with an app. Little or no attention is paid to existing consumer demand nor any attempt to link to the existing ecosystem. The informal becomes invisible.

How many of these pilots fail to sustain themselves once the project’s funding cycle ends?

Why the African Consumer Market is NOT the same as the African Middle Class

Consumer goods store, Kilgoris, Kenya (March 2012)

The biggest challenge faced by consumer facing companies looking at the African Consumer Market is the age old positioning of the “middle class” as the ideal target audience. This middle class is segmented by the same attributes as the original middle classes who formed the consumer markets of the developed world.

This is the outside of the same store. Its located in a town called Kilgoris, situated at the edge of densely populated Kisii in western Kenya, and the sparse land of the nomadic Maasai pastoralists.

When you consider the range, the variety, and the price of the products displayed for sale, and compare it to the small dusty town with just one modern building, you wouldn’t imagine that solar panels worth USD 200 or Sony Bravia flatscreen TVs would be selling like hotcakes. But they do.

No dealer in a heavily cash based consumer market such as upcountry Kenya would tie up his working capital in expensive consumer electronics if there wasn’t a demand for it that meant the products sold quickly enough to keep the cash flowing in. My assumptions were completely upturned by this shopkeeper’s insights – it was the Maasai making purchases after attending the weekly livestock market.

A maasai manyatta Source: https://bushsnobinafrica.wordpress.com/tag/maasai-mara-game-reserve/

They’d pack 6 foot long solar panels, flat screen TVs, and satellite dishes onto the tops of hired trucks and take them off to their thornbush and mud manyattas. Yet neither you nor I would classify them by any of the traditional marketing department’s attributes as being part of the “middle class” consumer segment.

On the other hand, they were undeniably part of the African consumer market, and as the shopkeeper informed us, they were not only willing to spend on their homes, regardless of what they looked like from the outside, they could afford the best that he had to offer. He showed us his entire stock of kitchen appliances, water filters, jugs, mugs, and even children’s toys and fake flowers from Dubai! It is dealers like this who know best what their customers want and they range as far away as Nairobi to obtain the products in demand.

But I wonder if the marketers and the analysts still seeking the middle class have a clue about this huge market invisible to their eyes? And, whether, they’re looking in the right places?

Trading economics: a new theoretical system

From the Financial Times, a snippet from a guest post by Wang Zhenying, director-general of the research and statistics department at the PBoC’s Shanghai head office and vice chairman of the Shanghai Financial Studies Association, summarising the arguments in his new Chinese-language textbook on economics.

“Trading economics” is one new theory emerging against this backdrop. Mainstream economics deduces the macro whole by extrapolating from the behavior of individual “representative agents”. Trading economics replaces this with a systematic and comprehensive analysis approach. It stresses that in an interconnected world, the interaction between trading subjects is the fundamental driving force behind the operation, development, and evolution of economic systems.

Trading economics first analyses the actions of trading subjects, then builds a dynamic trading network among trading subjects through trading relations, and finally reveals the operational rules of the economic system. The rules could be examined from two perspectives: short-term and long-term. The business cycle and price changes are examined in the short-term perspective. The long-term perspective would focus on the rules of economic evolution as well as changes in technology, knowledge, system, and network.

Throughout the history of economics, trading economics is the first and foremost theory to incorporate all economic phenomena into an all-encompassing logical system. It changes the long-standing scenario in the economics field, that is, the macro was separated from the micro, and the short-term from the long-term. Trading economics is a revolution of mainstream economic theories and is bound to exert a great and profound impact on all areas, including economic theoretical research and practical application.

 

NB: I thoroughly enjoyed reading this summary and expect to contextualize future research with some of the theoretical frameworks as presented here.

 

 

Mobiles at the Border Post: Anti-Atlas of Borders Exhibition Slides (Jan 2016)

In January 2016, our submission for the Anti-Atlas of Borders Art Exhibition in Brussels was accepted for a commission of 500e. We were thrilled and surprised since we’d never imagined our work on mobile platforms, technology, and the borderland biashara could be considered from the arts and culture point of view.

Here is our story in the form of slideshow – each of these was printed in full size and hung on the walls.

A Unique Path to Development Seen for the Informal Economy

Just recently I stumbled over this slim book < 60 pages that analyzed existing data sources in order to frame an answer to the research question they posed:

How did the informal economy―markets and the private sector―develop in the absence of legal and administrative frameworks to support it?

Some of the most intriguing insights extracted here:

And they echo my own statements regarding the East African Community that its the informal sector that’s growing faster and responsible for employing the majority of the population. This makes integration and bridging efforts between the formal and global together with the local and informal even more critical.

The path to integration as described in the book may not apply to the African economies but holds some unusual insights for those in eastern Europe which may struggle with some of the same issues of top down planning and grassroots income generation.

All in all, the step by step approach over the past decade to recognize, and thus integrate the informal sector was much appreciated and if you’re interested, you can download the book here.

Household energy consumption behaviour in East Africa: Lighting & Conclusion (3 of 3 Parts)

 

Jua Kali Kerosene Lamp, Kenya

The following is extracted from a six month study during 2012 on household energy consumption behaviour in rural Kenya and Rwanda among the lower income demographic, that led to an understanding of some of barriers hampering the sales of client’s solar products in this market. This 3rd and final part will focus on fuel usage and consumption behaviours for lighting. Users sampled for this study were selected based on varying fuel consumption patterns, ranging from a single homestead to a rural hotel open from dawn to 1am offering solar powered football on television.

Fuel Choice and Consumption Behaviour is Influenced by Duration and Timing of the Need

Kerosene is the primary source of fuel for lighting for those who live without access to electricity, regardless of whether its on their shamba, or in a building in town. Not only is the reach of grid access limited to a small percentage of rural Kenyans but the cost of the final connection to the dwelling is also a barrier for many. Due to the nature of this project’s focus, the majority of homes visited were without a solar home system.

Hurricane lanterns are the most popular lighting devices among kerosene users, as the glass covering the lamp protects the flame as well as contains the smell and smoke. With prices as low as 250Kes, everyone has at least one, if not more at home and the number maintained depends on size of the family, number of buildings on the homestead and the fluctuating ability to purchase fuel.

Pressure lamps can cost ten times as much and consume far more fuel although they offer a brighter light – they were not seen in Makueni households and the only regular user was the furniture maker who restricted its use to times of high productivity during the Christmas season. In Kisii, they are owned by members of the congregation who use them once a month for religious functions and the fuel is provided by the church. Gregory the schoolteacher called them “gas guzzlers” whose bright light was not worth either the high running cost or price of the device itself.

Everyone owns a few small tin lamps but they were referred to as something discarded during the upwardly mobile climb to a hurricane lantern – “Oh, we must have a few lying about somewhere in a dusty corner” said one wife while Mama Grace only used it in the confines of the kitchen building where the open flame, with its attendant smoke would make no difference. However, due to their small size, they require very small amounts of kerosene and tend to be kept as a backup for times of need when the fuel supply runs low or to be used by the aged, such as Kilonzi’s grandmother who finds the hurricane lantern difficult to maintain.

In addition to kerosene fuelled lamps and lanterns, every home owned at least one flashlight of some sort, whether powered by dry cell batteries, grid rechargeable or disposable for what they referred to as “emergencies or needing to go outside at night”. By emergency, they meant that this form of light was faster and easier to turn for sudden need than the more complicated task of lighting a kerosene lamp, plus it could be used in wind or rain. For many, this item received first priority if resources such as batteries or cash for charging were limited.

What stood out across the board was that everyone knew, almost to the minute in some cases, exactly when they used their light source. This behaviour was evident regardless of the household’s energy source including if it was solar power and thus “free”. Answers would range in specificity from estimates “around 7pm to maybe 10pm, sometimes later” to on the dot timings “from 5.45am to 6.30am in the morning”.

“I only use it for children to study” Mama John who scrimped and saved for solar

This gives rise to the conjecture that the fundamental observation in household financial behaviour of being able to control time (duration, frequency, periodicity) and money(whether prepaid source of fuel like kerosene or postpaid like electricity), is an ingrained habit even after upward mobility has removed the need for such stringent conservation. SHS do not require the same frugality daily use and cost and this can be seen in increased use of entertainment appliances like televisions and radios but lights still follow this pattern. However, it can also be said that rural life is slow to change in response to the introduction of modern conveniences and this may also be a significant factor.

The dry cell battery

Similar patterns of duration and accuracy of timing were also observed in choice and purchase of dry cell batteries, particularly for the radio. People knew which specific programs they wanted to listen to thus the
time and duration of their use of the radio. Everyone wanted to be able to listen to the radio more often but conserved battery life for as long as possible. Many even acknowledged that expensive brands like Eveready which cost 65Kes a pair lasted three times as long as the cheaper Chinese Lion brand costing only 30kes the pair but their irregular cash flows acted as a barrier to purchase dependant as they were on what cash was available on hand (or in pocket) at time of need.

Concluding Remarks

Consumers with limited incomes prioritize household energy and fuel spending according to importance for survival. Food and thus cooking come first followed by light. Everything else depends on the criticality of need against funds available. For example, Muthoka, who was unemployed and living on his small subsistence farm deep in the interior away from a market town, said that if he had to choose between 20Kes worth of kerosene or charging his mobile phone, he would choose kerosene first for lighting was more important to him than his mobile.

Similarly, Gregory the schoolteacher, put batteries for the emergency flashlight as more important than for playing the radio. The question becomes “What can we do without?” and only one of the many respondents of the more general household survey prioritized her mobile phone over light but she was a business woman whose income depended on her being available for calls.

The caveat here is that these answers are not absolutes and while most people will say that the phone is less important, there will be times of need when charging the phone or topping up airtime will be critical.

However, unlike kerosene or dry cell batteries for light, one can always borrow a friend or neighbour’s phone for an emergency phone call. These are the kinds of trade-offs people make when living on the edge on limited and irregular cash flows.

Pricing is rarely the problem

These insights on people’s household energy management and purchasing patterns, based as they are on the limitations and timing of their income sources are what led to the conclusion that the actual price itself was not the barrier to sales but instead it was a combination of factors starting with the choice of packaging and the subsequent pricing and sales strategy.

 

Part One: Introduction to Household Energy Consumption Behaviour Study in East Africa (2012)
Part Two: Cooking

Household energy consumption behavioural study in East Africa: Cooking (Part 2 of 3)

Scrap wood fueled three stone fire in sheltered corner

The following is extracted from a six month study during 2012 on household energy consumption behaviour in rural Kenya and Rwanda among the lower income demographic, that led to an understanding of some of barriers hampering the sales of client’s solar products in this market. This 2nd part will focus on fuel usage and consumption behaviours for cooking. Users sampled for this study were selected based on varying fuel consumption patterns, ranging from a single homestead to a rural hotel catering for more than 12 hours a day.

Fuel Usage Behaviour is Influenced Greatly by Location

Choice of fuel and decisions on quantity kept in stock for cooking is dependent on the location of the primary residence rather than income. Rural homesteads in Kenya have a separate outhouse for cooking and firewood is the preferred choice of fuel even in those regions where shambas are too small to support their own grove of trees.

Kilonzi’s wife dreams of upgrading to an LPG cookstove some day in the future

That is, while Kilonzi’s wife on a large shamba in Makueni might stack enough firewood for just two or three days, collected for free from her own backyard, Mama Grace the tea farmer with land constraints in Kisii will purchase an entire tree to last her for a month. Meanwhile, the more economically challenged on small shambas devote a week foraging far and wide for enough brushwood to last for two or three months before needing to take time away again from more pressing household duties.

Charcoal is also used on the homestead but only for certain tasks like making chapatis or for quickly brewing tea for visitors or in the morning rush before school or work. Even if the charcoal is made right on the shamba from a tree that needed felling, most of it is kept aside for sale and considered a source of cash money rather than consumed as fuel.

Residents who live away from their shambas, taking up rooms in town due to their work where cooking must be done in the same space as living and other activities, cannot use firewood. In fact, if renting, landlords clearly state that the use of firewood is banned, as a safety precaution. Thus, urban residents are forced to choose fuels that can be used in small, portable cooking stoves and charcoal ends up being the most common due to its relative cost as compared to kerosene. Those who do own a kerosene stove are in the minority and again, its use is only for very specific tasks that require speed such as making tea for visitors or in the morning.

Heavy Duty Charcoal Usage by Hotel

For those whose primary fuel for cooking is charcoal, the quantity purchased is dependant on cash in hand if their income is not from a salaried position and this ranges from a ‘deben’ which lasts for about 5 or 6 days and costs around 100 – 130 Kes to an entire sack which ranges from 500 to 750 Kes and can last as long as a month. Pricing for fuel is closely related to its proximity to the source, since transportation can be expensive and convenience is a service that comes with a premium. Kerosene which sells for 83 Kes a litre at the petrol station in town was found to be selling at a rate of 140Kes/litre at a small duka deep in the interior.

Part One: Introduction to Household Energy Consumption Behaviour Study in East Africa (2012)
Part Three: Lighting & Concluding Remarks