Posts Tagged ‘asean’

Financial Behaviour Patterns Observed Among Households in Rural Informal Economy in Asia

This is the original working paper of the research conducted on rural household financial management, in developing country conditions, pioneering the use of methods from human centered design for discovery, during Nov 2008 to March 2009, aka the Prepaid Economy Project. It was peer reviewed by Brett Hudson Matthews, and I have incorporated his comments into the PDF.

This research study was carried out with the aid of a grant from the iBoP Asia Project (http://www.ibop-asia.net), a partnership between the Ateneo School of Government and Canada’s International Development Research Centre (www.idrc.ca)

The abstract:


The challenge faced by Bottom of the Pyramid (BoP) ventures has been the lack of knowledge about their intended target audience from the point of view of business development whereas decades of consumer research and insights are available for conventional markets. What little is known about the BoP’s consumer behaviour, purchasing patterns and decision making tends to assume that there are no primary differences between mainstream consumers and the BoP except for the amount of their income – pegged most often between $2 to $5 a day.

In practice, the great majority at the BoP manage on incomes earned from a variety of sources rather than a predictable salary from a regular job and have little or no access to conventional financial tools such as credit cards, bank accounts, loans, mortgages. This is one of the biggest differentiators in the challenge of value creation faced by BoP ventures, particularly among rural populations (over 60% of the global BoP population lives in rural areas).

Exploratory research was conducted in the field among rural Indian and rural Filipino populations in order to understand how those on irregular incomes managed their household expenses. Empirical data collected by observations, interviews and extended immersion led us to identify patterns of behaviour among the rural BoP in their management of income and expenditure, ‘cash flow’ and ‘working capital’ and the significance of social capital and community networks as financial tools. Practices documented include ‘conversion to goods’, ‘stored wealth’, ‘cashless transactions’, and reliance on multiple sources of income that mature over different times.

This paper will share our observations from the field; identify some challenges these behaviours create for business and also explore some opportunities for value creation by seeking to articulate the elements that BoP ventures must address if they are to do business profitably with the rural ‘poor’ based on their own existing patterns of financial habits and norms.


The Conclusion:

In sum, it can be concluded that the challenges for value creation can be quite different for BoP ventures interested in addressing the rural markets. From the observations made in the field, we can highlight three key implications for business development. These are:

  • Seasonality – with the exception of the salaried, everyone else in the sample pool was able to identify times of abundance and scarcity over the course of natural year in their earnings. Identification of a particular region or market’s local pattern of seasonality would benefit the design of payment schedules, timing of entry or new product and service launch, for example.
  • Relative lack of liquidity – The majority of the rural households observed tended to ‘store wealth’ in the form of goods, livestock or natural resources, relying on a variety of cashless transactions within the community for a number of needs. Conventional business development strategies need to be reformulated to take this into account as these patterns of behaviour may reflect the household’s purchasing power or income level inaccurately.
  • Increasing the customer’s span of control over the timing, frequency and amount of cash required – Since the availability and amount of cash cannot be predicted on calendar time, this implication is best reflected by the success of the prepaid mobile phone subscriptions in these same markets. When some cash is available, it can be used to purchase airtime minutes for text or voice calls, when there is no money, the phone can still receive incoming calls. Models which impose an external schedule of periodicity, frequency and amount of cash required may not always be successful in matching the volatile cash flow particular to each household’s sources of income.

Purchasing Patterns in Cash Based Markets and Informal Economy

When cash flow is irregular and not always unpredictable, both in amount and frequency, such as it is for the majority earning a living in the informal economy, buyer behavior is not quite the same as for mainstream consumers with access to credit cards and regular paychecks.

I’ve quite often made reference to how operating primarily in cash money influences purchasing patterns. Here, I cluster the patterns observed into 4 categories, based on a combination of need and money available.

prepaid-electricity-units-in-ho-ghana-1

Source: http://www.hobotraveler.com/electricity/prepaid-electricity-units-in-ho-ghana.php

1. Paid for in advance – Usually a service that can be utilized or consumed over time can be purchased in advance when funds are available and then made to last as long as possible. The best known example of course is prepaid airtime – voice, text and data for mobile phones. Consumers on limited budgets then seek coping mechanisms to extend the “life” of the service purchased.

FOURfridge

Source: Niti Bhan, South Africa January 2008

An example is this refrigerator powered by LPG available in rural South Africa. It helps conserve the electricity consumption (South Africa was the first to install prepaid electricity meters) and is a parallel investment in ‘prepaid’ energy – the LPG cylinder.

DSC01550

Source: Niti Bhan, South Africa, January 2008

2. Bought in bulk – Usually food staples or something you cannot live without would be purchased in this manner, either when there is a sudden influx of cash or a payment at the end of manual labour, or, if managing on a fixed amount each month such as remittances from abroad. This ensures that there is something to eat even if money runs out before the next payment might be due. If it’s a sudden influx of cash for someone not on a pension or remittance, then this lumpsum is also the source of funds that may go towards a consumer durable purchase or big ticket item of some kind. In rural economies, the harvest season is major shopping time and boost to local commerce.

Freshly shredded cabbage (Photo Credit: Niti Bhan)

Source: Niti Bhan, rural Kenya, February 2012

 3. On demand or daily purchase – mostly perishables like bread, eggs, fresh vegetables purchased for the day’s needs. Partly cultural but also influenced by availability of cash in hand. Cigarettes sold loose or two slices of bread and an egg are some examples we’ve seen. Indian vegetable vendors are also willing to sell you a small portion of a larger vegetable either by weight or by price. You can buy 50p worth of cabbage for a single meal. Mama Mboga in Kenya will even shred it for you. Minimizes wastage whether you’re cooking for one or have no fridge.

This is also the most common pattern if you earn small amounts daily, like the vegetable vendor, shelling out what you have for what you need and then if there’s some change, debating what do with it.

DSC05007

Source: Niti Bhan, The Philippines, January 2009

4. Single use portions – A form of on demand purchase. Interestingly, I came across this working paper by Anand Kumar Jaiswal at IIM, saying that sales results in rural India seemed to imply that only shampoos and razor blades were more successful in sachet form, whereas things like milkpowder, jam etc sold more in the larger size.

DSC01736

Source: Niti Bhan South Africa January 2008

The author cautions against assuming all sachets will sell. I believe it could be based on the usage pattern of the product in question or its nature – what if you packaged a perishable item in single servings that didn’t need refrigeration until opened? Formal packaging in sachets – the kadogo economy – emerged from existing behaviour in informal retail. Breaking bulk down into smaller portions is popular across the developing world’s informal markets.

Single meal portions of vegetables, Cabatuan market, Iloilo February 2009

Single meal portions of vegetables, Cabatuan market, Iloilo February 2009 Photo: Niti Bhan

This shopkeeper in The Philippines has gone a step further to offer you the convenience of purchasing all the vegetables you need for stew – carrots, beans, cabbage – without the financial burden of having to purchase the entire cabbage or carrot. Its a combination of the single use packaging (not quite a sachet) and the on demand purchase of what’s immediately required or affordable. The Philippines has some of the most creative variations of the kadogo or sachet economy that I’ve seen in informal retail.

Business Models for the Informal Economy

You can see the roots of the many variations on business models in these purchasing patterns. As people told me over and over during a project on household solar in East Africa, it wasn’t the price of the product that was the problem but the payment plan which didn’t fit with their existing behaviour. Both must be designed to meet the needs of your intended target audience.

Contact me if you need insights on consumer behaviour, household energy consumption behaviour and financial management behaviour in the rural and informal markets of the developing world. Note, this is not a free offer.

 

Source: These insights are drawn from patterns of behaviour observed among consumers in cash based and informal markets in South Africa, The Philippines, India, Kenya, Rwanda and Malawi. Primary research led and conducted by Niti Bhan. Citation.

Reflecting on this blog’s genesis after 5 years

I started this blog in late December 2008, in earnest and every day during the first prototype fieldwork for The Prepaid Economy project, one of the iBoP Asia Project’s first batch of Small Grant winners from the ASEAN region. For the first 5 months of 2009, this blog was on the mainpage of my website as I felt my entire enterprise – Emerging Futures Lab – was being entirely supported by this grant.

It was only in April 2009 that I began my next phase in advancing my experiential knowledge of preparing, planning and programming research using design ethnography tools from the field of user centered design (UCD) when I moved to Helsinki, Finland on a project with the then Helsinki School of Economics (HSE) and now a part of Aalto University. This university is the result of an academe-led innovative merger of the independent schools of business, design and engineering (science) which was manifest tangibly in the form of an experimental platform for interdisciplinary innovation research and pedagogy known to all as the Design Factory.

Everything that I came to understand about the patterns at play in the informal rural economies of the developing world was in one way due to conversations and whiteboarding exercises with the wide variety of people accessible to one in the factory. It was only later that it received the formal name of Aalto Design Factory, for most of its first year of existence it was simply “the df” or “df” to all of us early adopters and believers in removal of barriers and silos to effective communication, cooperation and collaboration.

In retrospect, I could have analysed a lot more with the rich deep dive of data I had gathered after my immersion in the field. I had spent 10 days off the www in a rice growing barangay in Iloilo, The Philippines and a similar amount of time but less direct inhome experience in rural Rajasthan, India. On the other hand, in the numerous projects since then, the layers of understanding the balance of flow – the give and take of transactions of value between trusted referrals, juggling the factors of “time” and “money” in order to smoothen the volatility between in the incoming cash and outgoing for daily needs and other expenses – have only deepened in nuance and understanding.

This research path was set upon in late 2008 – just around now, in fact since the deadline for applying for the iBoP/IDRC’s Small Grant was the first week of September. It has been 5 full years on wondering about the inherent conflict between periodic, calender based payment plans, monthly subscriptions and other regular inflows of cash, often paid as a bill of unknown amount due in the near future or as hire purchase payments AND the irregular and sometime unpredictable income streams from a variety of sources relied upon by the vast majority of the world’s households for managing their household finances.

Why the prepaid business model works so well for the informal economy, the base or bottom of the pyramid (BoP) and the seasonal ebbs and flows of the rural economy can all be explained by simply pointing out the fact that this pay as you go system hands over the control over amount to be paid and date it is due to the end user – something that Donald Norman, father of user centered design (UCD) has also pointed out as a factor in user satisfaction with a product and its design.

About 12 months ago I completed fieldwork that took my original primary research on the prepaid economy and its decision making behaviour in order to better inform business models and payment plans and went a few steps further into comparative analysis of experimental results. I was able to compare the sales results of a product line across 4 different variations of payment plans being pilot tested among rural offgrid residents in 2 East Africa Community countries.

This was almost as good as a direct test of the original hypothesis that the greater the span of control over time (duration, frequency, periodicity) and money (amount, cash or kind) a business model offered a member of the informal economy, the better the long term chances of sustaining the enterprise. In fact, I was able to add one more factor to the equational mix which was not considered when I first began this work.

This is what I call “Face time” or combination of social capital, daily proximity and interpersonal relational mix – that which allows you to negotiate on terms of payment such as time and amount with someone to whom you owe this cash or payment and the limits of this negotiation are bounded by the limits of trust between the two of you.

Face time  and Flexibility were the two main attributes of the 4 business models being pilot tested that seemed to capture the range of responses, performance and feedback, yet allow us to distinguish what was different in each model, thus what might have influenced a change.

None of this research was quantitative but completely qualitative groundclearing work to discover insights that would inform more relevant and appropriate business models and other market entry tactics to maximize, within constraints, the adoption rate of innovation (a new venture, a service or business model, an invention) among the population without regular paychecks and easy access to consumer credit. This work has also validated my hypothesis that the tools from user centered design could be used to advantage to grasp and make sense of more complex and wicked problems than could be understood by simple numbers alone.  The methodology being part of product development process also allows for company’s to reach a faster path to market with an innovative product or service or revenue stream in entirety.

The original fieldwork in agriculture dependent rural economies in ASEAN and South Asia and the early work in Africa, all looked at the bulk of such a population, the lower income segments at the BoP. But now with the rapidly emerging global middle classes i.e. those displaying regular patterns of consumption, this knowledge gained can also help assess the worldview and consumer mindset of the emerging consumer markets of sub Saharan Africa.

There is so much yet to be learnt and every single actor is breaking new ground, whether its Econet Wireless and MKopa with their airtime or mobile money pay as you go solar lights and charging or whether its every social enterprise trying to sell a cookstove, a lantern or a water pump to the subsistence farmer. We need to document every instance of success so that patterns of what worked might be of help to better refine and improve our models for market creation at the very end of the global value chain.