Posts Tagged ‘consumer insights’

Top 3 Assumptions About the African Consumer Market

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Treichville Market, Abidjan, Cote D’Ivoire (Photo Credit: Niti Bhan)

Claims have been made about the Great African Market Opportunity – in retail, in real estate, in banking, and packaged consumer goods – that drive investment decisions and marketing strategies. Yet, reality has been less opportunistic than imagined – Nestle’s struggles in Kenya back in 2015 are one such example.

Here are the top 3 assumptions, if left unpacked or unquestioned, that can make or break a new market entry strategy in the African Consumer Market. For most of the continent, it’s safe to say that the majority of the mass market are primarily employed in the informal economy.

1. Price is the problem
Affordability is not a matter of price but access to payment means or method. Upfront lumpsum cash transactions will narrow potential customer base down, depending on the season, or the income source.

What this means is that there are whole categories of products that would have had a larger audience but do not due to barriers set up by their own transaction model.

Accessibility and Affordability are thus not a function of the Price itself but the lack of flexibility in the business model. Flexibility drives consumer segmentation in the African Consumer Market, as product purchase decisions get made based on cash in hand and cash flow patterns.

2. Consumer Segmentation Metrics are the Same
The factors that influence the segments of the population who have the potential to be consumers are the following:
– Urban or Rural
– Sources of Income

Factors that do not influence “poverty” (ref: textbook market segmentation)
– Education
– Location
– Employer

Example: Schoolteachers are considered part of the rural elite in Kenya, accruing community status and respect. Yet, they may be on a fixed salary within a lower pay grade, albeit teaching with a Master’s degree, with less purchasing power than a school dropout with a successful trading business.

Assumption: Demographic attributes traditionally used such as Education level or stability of Employer correlate to consumer purchasing power or disposable income.

3. Brand Loyalty is absolute and unconditional
Consumer insight reports on the African market opportunity tend to highlight the high degree of brand loyalty prevalent among customers, and leave it at that. Recommendations then emphasize first mover advantage or capturing customer loyalty, with the assumption that once locked in, this will create a committed customer for life. Why brands matter so much is rarely, if ever, asked.

The assumption is that this brand loyalty implies pricing blind consumption and status seeking behaviours. While this may certainly occur at the upper end of the income spectrum, these drivers are not likely to be as common for decision making among the mass majority audience. Demand drivers for brand loyalty more commonly noted are:

– the need to minimize risk (of loss)
– maximizing the return on the investment (in the purchase) including status signalling and reputation factors, which have a role in accrual of social capital leveraged for business activities in the informal sector.

Trade-offs are constantly being made in purchasing decisions, influenced by a variety of factors. Yes, compromises may be made on groceries in order to pay for a branded product, but simplistic interpretations of this behaviour lead to egregious errors in the design of customer experiences.

Why I’m cautious about most mobile platform consumer research in Africa

Standard-Chartered-and-Premise-Data-are-using-smart-phones-to-better-und...StanChart’s price tracker rolled out in Nigeria is a great example of where and how mobile phones can really add value in understanding the African consumer market and add substantially to its scarce database. What concerns me however is the increasing promotion of the ubiquitous cellphone as the means to gather consumer insights for all sorts of polls, surveys and sentiments.

Why?

Surveys conducted online and through the phone may not, at this point in time, offer a representative sampling of the relevant population, no matter how random. Ironically, in this context, its this very randomness that creates skewed results. Unless the results and the methodology clearly specify the gender, age, income and education breakdown of those responding to their survey, there’s little basis to assume that they are representative of the population. Reliance on such results should very much be contextual – which country, what are they aiming to show, who exactly did they survey, rather than accepting results from any old location on face value.

Here are some recent stats that help explain why:

The Mobile Africa 2015 study, conducted from GeoPoll and World Wide Worx, surveyed five of Africa’s major markets; South Africa, Nigeria, Kenya, Ghana and Uganda finding that mobile Internet browsing now stands at 40% across these markets – Ghana: 51% Nigeria: 47% South Africa: 40% Kenya: 34% Uganda: 29%

And these are the top 5 markets.

Let’s say you get results via mobile surveys – you’ve already narrowed down your sampling base to less than one third of the population. If you’re not calling them up, then you’re narrowing it further than those who can read and write, and if your survey was in English or French, its narrowed further to those educated in the language. By the time you actually get to the people responding to the survey, you’ve effectively sampled a tiny unrepresentative slice of the national population.

If I wanted to know what young tech-savvy men think, I’d never hesitate to use  the results of a mobile survey. If I wished to have a better idea of lower income or female heads of households, or even those in regional towns and cities, I would be sceptical of any research conducted without human intervention. There’s also a high risk of surveys being filled in for the nominal cash or equivalent rewards. There isn’t enough quality consumer research available on the African consumer market that we can risk further muddying the waters like this.

On the other hand, as this StanChart price tracking system shows, there’s a lot of untapped potential for the use of phones in consumer market research across the entire continent. It just may not necessarily be something that works in exactly the same way in the OECD world.

Understanding-Nigeria-economy-through-smartphones

Retail ranking metrics vs Readiness for formal retail #AfricanConsumerMarket

The-ARDI-top-15-18133Continuing the thoughts expressed by Yacine in the previous post, I’d like to explore these rankings and their value. We’ll use the example of Tanzania, ranked 5th by AT Kearney in their 2015 African Retail Attractiveness Index (ARDI).

The ARDI states:

Tanzania is starting from a low base: With only 30 percent urbanization, high poverty levels, and less than $2,000 GDP per capita, Tanzania is in the early stages of development. Therein lies the opportunity—the unsaturated market has one of Africa’s fastest growing retail sectors, boosted by new shopping malls. Compare this with Kenya, which has one of Africa’s most developed markets—but also one of its most saturated.

By the less than clear metrics used in this Index (Kenya, for example, has surprisingly never managed to be ranked at all), Tanzania is a high potential market for a long term retail investment strategy. Yet nowhere is there any mention of local consumer behaviour or purchasing patterns.

The ARDI assumes that a “shopping culture” attractive to modern retailers will emerge organically as these nations develop economically and infrastructure wise.

Last year, South African retail giant Shoprite pulled out of Arusha in Tanzania. Arusha is a major international diplomatic hub, thus no less attractive to supermarket chains than Tanzania’s commercial capital Dar es Salaam.

Here’s some insight from the local paper, that offers some food for thought, and a clear signal that one cannot rely on metrics and rankings alone when considering an opportunity in these attractive yet challenging markets.

With many of Arusha residents still living in single rooms, thus few can afford to buy groceries in advance due to lack of storage space and therefore choose to shop when the situation arises then consume whatever was bought on spot.

A child will be sent to buy things like sugar, rice, cooking oil and charcoal for fuel three times a day; for breakfast, lunch and dinner, the shopping trend will again be repeated on daily basis.

As the result, the city is now dotted with hundreds of small grocery stores capable of breaking their stock down to the last grain in order to accommodate the economy and space conscious customers.

Boasting a population of 500,000 residents and additional 100,000 daily visitors, it comes as surprise that ever since it was made a township in 1948, Arusha has had only one supermarket to date.

Even worse, the one and- only supermarket, which opened here in 2002 courtesy of South Africa’s Shoprite- Checkers, has just fled from the city citing the lack of supermarket culture among Tanzanians but especially those living in Arusha.

[…]

But come 2014 and Shoprite, the supermarket which started it all, announced that it was closing shop, complaining that the large store business had totally failed to pick up even after 12 years of operating in the city.

The South African Supermarket chain somehow did not conduct any research prior to venturing into the Tanzanian market especially Arusha where people buy their groceries only during the time when they need them.

Supermarket shopping usually means walking into the large department store, pushing a cart and then loading one item after another onto the basket before checking out through the computerised counters handled by bored ladies.

It also means that a person or family has to make their weekly or monthly purchases once, and then store everything in the house until the next shopping date. That may require special storage cellars at home, refrigerators, deep-freezers and cabinets, not forgetting the cars required to carry everything home in the first place.

However, in Arusha where accommodation space is hard to find, most residents are forced to live in single rooms or cubicles that serve as living rooms, bedrooms and kitchen at the same time.

With hardly any space to store rice, flour, oil and other groceries, for future use, few ever think of practicing supermarket shopping.

It is the unquestioned assumption that lack of modern retail or formal economy institutions imply lack of an existing shopping culture – local & relevant & appropriate to its context and conditions. The real question is whether a region or country is ready for formal retail culture.

This newspaper article isn’t hard to find, supermarkets in Tanzania would uncover it easily, were the analysts working on these indices and reports considering the entire ecosystem of the operating environment in which retail would operate rather than easily measurable indicators.

These insights are not enough on which to base one’s market entry strategy but more than sufficient to make one pause and evaluate whether a more qualitative and exploratory market survey offering consumer insights and buyer behaviour might actually be worth investing in far more in the first instance than years of losses later. This is exactly the kind of moment you’d want to call us in to help you craft your strategy.

African consumer market insight from Chinese flip flop manufacturer in Tanzania

This recent interview of the Chinese owner of a flip flop factory based in Tanzania offers some interesting insights into the mindset of the East African consumer.

Trade in commodities has been the dominant feature of China-Africa relations over the past 20 years, but many traders, particularly those who arrived in Africa early, are now well aware that there must be more to the relationship than that.

“It’s very important to set up a factory in Africa to ensure that one’s products have staying power in this market,” says Wu Quanman, owner of Li Lai International in Dar es Salaam, which makes flip-flops.

He first came to Africa in 1998, to Rwanda, and moved to Uganda in 2000, and set up the factory in Tanzania in 2006.

With a bit of search, I was able to dig up this BBC article from 2006 about the state of the flip flop market in Tanzania.

But at Tanzania’s only flip-flop factory, these are dog days.

A few years ago 3,000 people worked at OK Plast and their wares were exported to 22 countries across the region.

Today the factory employs just 1,000 and Fadl Ghaddar, the Lebanese general manager, told me it was struggling to break even.

All but a few varieties of Africa’s flip flops now come from China and local companies cannot compete.

Yet, Mr Wu says they average a 100,000 pairs a day in his Tanzanian factory:

“If we wanted to grow this business, building a factory in Africa seemed to be the only solution, and it was certainly ideal for us. After thinking carefully about the possibilities, we decided to build the factory in Tanzania, given that Rwanda is landlocked and the Ugandan market was limited.”

00221917e13e164b82aa1fIt made me wonder whether he’d purchased the struggling factory mentioned in the older BBC article and how he turned it around? Even if he didn’t purchase that factory, his business was apparently booming as the interview quotes him on his plans to invest in local manufacture of the materials required for making flip flops.

The key seems to be consistency – of quality, of supply, a matter of reputation. As Mr Wu says:

“Another thing that prompted us to open a factory here was the significance of brand in the market. African customers are very keen on well-established brands, but previously our products in this market were very random, with various brands from China, so we need our own brand and reputation.”

One valuable lesson Wu learned in Uganda came directly from the customers. Wu says they complained every time they were given products that they were unfamiliar with, and it was decided that if the business was to be sustainable, it needed to sell a well-known brand.

There are a couple of insights here that are interesting. The first is the importance of a brand, or rather, a reliable way to identify a consistent product that had been “tried and trusted” i.e. the familiar and known.

This also makes me wonder why the original local factory was unable to compete and was struggling. Was it that they were accustomed to pricing high in a seller’s market and then unable to offer a wider range of patterns when the market first flooded with Chinese imports? Or was it that they had not invested in building an established brand? We may never find out but the snippet leaves me with the feeling there’s a story behind it.

The other interesting insight from this interview is the fact that customers “complained every time they were given products that they were unfamiliar with” … there is nuance in here whose further exploration will be critical for consumer product companies accustomed to pushing “New and Improved” every so often to increase their market share.

If this reluctance to embrace the unfamiliar and/or unknown is simply a matter of unreliable product quality – a common factor of bulk Chinese imports sourced primarily on price – then global brands can rest assured their systems are in place to meet the expectation of this emerging consumer market.

But if this preference is for the tried and trusted, the familiar and known, and may possibly imply that the consumers are not enamoured of the “new and improved” then this characteristic is worth noting for those seeking to enter these markets successfully.

 

Segmenting the African Middle Class without dollar figures

Continuing the thinking from my previous post on the various attempts to size and value the potential of the emerging African middle classes based primarily in dollar figures, I thought to take a step back from income data to see if I could approach the challenge of segmentation in a different way. Below is the chart estimating the size of the original emerging African middle classes as posited by the African Development Bank back in 2011.

That is, rather than simply segmenting by range of daily expenditure i.e. $2 to $4 or $10 to $20 a day, what if we took a closer look at the reasons behind the spending and segmented by consumer mindset and buyer behaviour. After all, given the size of the informal sector in the majority of African countries and the percentage of population relying on irregular income streams from a variety of sources, few can confidently expect to spend exactly $4 each day. There might be times of abundance when hundreds of dollars may be available, and big ticket items purchased like colour television sets, offset by times of scarcity when one might just be making ends meet. Variability in cash flow is an inherent characteristic of entrepreneurship, regardless of income bracket or revenue sources. Furthermore, we can add geography as a factor, since urban expenditure is of a highly different nature than that in rural regions. Taking all of this (and more, based on years of observations in the field among consumers) here is my version of consumer segmentation of the same demographic as covered in the chart above.

Descriptive segmentation of consumer behaviour

The Middle class – traditional definition, white collar jobs, steady paycheck, education/professional qualifications, closely aligned with “upper middle class” in the AfDB chart.

Emerging “middle” or rather the increasingly visible African consumers – non traditional (OECD cite), rapid upward mobility, primarily based in informal sector trades and services, newly successful entrepreneurs, small businessmen, extremely ambitious

Floating class 1 (“Brass Ring Syndrome“) – seeking status signifiers that are the ‘brass ring’, that is, they are ready to leap upwards, are almost there, focused on investing in future revenue generation opportunities, aspirational, may tend to be seen more in rural areas than urban.

Floating class 2 (“Fragile” or “Newborn”) – seeking footholds to gain enough stability to balance upon so as to make the leap for the brass ring, saving to invest in future revenue generation, hungry for more (not food but a mindset, as in hungrily seeking upward mobility), they may include the youth startups, tech entrepreneurs and all looking for the “something”, maybe more urban, and in the African contextual usage of the word “hustling” for the opportunity.

“Bottom of the Pyramid” –  The $2/day demographic made famous by CK Prahalad,  they are the pool from which the above three segments are emerging and are critically important in Africa in a way that they aren’t in opposed to India for instance because they don’t think of themselves as permanently poor, just temporarily cash crunched, especially migrant workers. Very, very different consumption behaviour between urban  and rural in this segment. They may indeed form the rural version of Floating Class 2.  I include them here because AfDB segmentation starts at $2.

Concluding thoughts

Once one’s mindset has evolved into considering oneself as part of a certain lifestyle, even if one’s income is “floating”, there are changes in buying habits that remain as part of this upward mobility. An example is that of the milk ATMs in Kenya. That is why I believe that taking a closer look at shifts in household consumption patterns as indicators of emerging into the so called “middle class” may offer more valuable insights for consumer market analysis than attempting to segment by dollar figures alone.

My 2 shillings worth on the size or value of the emerging African middle classes

There’s been a lot in the news of late about the size and worth of the emerging African middle class subsequent to the release of an as yet unseen report by an economist, Simon Freemantle, at Standard Bank, South Africa. The various headlines conflict each other, some say the middle class isn’t as large as earlier reported, others say its growing at a rapid clip. Their tone seems to depend on which aspect of this alleged report they support.

Instead of simply defining the middle classes by available daily spending power, as the African Development Bank did back in 2011, when they first announced the emergence of these new consumers, the Standard Bank report goes on to assess households by using the South African Living Standards Measure (LSM) as a means to segment them. But because we have yet to find a copy of the actual report itself, only articles referencing it (via a press release, to hazard a guess), there is no clarity on whether the South African LSM segmentation was directly applied to the households under consideration or whether the LSM was adapted for regional, social and cultural differences.

Even the SAARF, the South African body responsible for this evaluation tool has been questioning the validity of the LSM as it is structured at the moment. There are a few different approaches under development, from what I can tell based on a quick search online, including one which seeks to regionalize the LSM so that it can be far more accurately applied across the continent rather than for South African conditions alone. Again, we are not sure which version has been used in this new Standard Bank report.

The bottom line is that the emerging African middle class may indeed be smaller than imagined, though growing rapidly, or, that its as large as the AfDB originally estimated. That is, we still don’t know the size and worth of this consumer market. I suspect the reason for this that we’re trying to measure volatility, the underlying characteristic of the informal sector’s income streams, and that is why the goal posts seem to keep shifting.

The OECD had once said that the global emerging middle classes of today are not the same as those that emerged after the industrial revolution and established the foundations of the highly industrialized nations of the so called ‘first world’. That these new upwardly mobile and aspirational consumers were in fact emerging from the population segment originally designated as the ‘base of the pyramid’ and were less likely to have university degrees or salaried jobs.

This was also the point that Bright Simons made in his HBR article, that while it was undeniable that there was an increasingly visible pattern of conspicuous consumption happening across sub Saharan Africa, it should not be conflated with the concurrent rise of a “middle class” as the term is commonly understood.

I would first ask why are we trying to put numbers on the size of the middle class?

Are we conflating the concept of an educated white collar bourgeoisie with the corporate need for market analysis required to estimate the size and value of a market opportunity before making the decision to invest or enter a new market?

And, if so, then are the two necessarily the same thing?

The African Consumer Market: Where the Informal meets the Formal

Informal Business: Township Hair Salon, South Africa, January 2008 Photo Credit: Niti Bhan

 

Formal retail:Haircare products, South Africa, January 2008 Photo Credit: Niti Bhan

While still largely based in the informal economy, the African haircare business has become a multi-billion dollar industry that stretches to China and India and has drawn global giants such as L’Oreal and Unilever. ~ Reuters, 6 Aug 2014

This snippet captures what I’d said in my HBR article on the challenge to marketing posed by the African consumer market. The size and value of the opportunities are undeniable as are the impact and influence of the informal sector.

Chaos, uncertainty, word of mouth, personal relationships and far too much flexibility is how those accustomed to the muted muzak of their local supermarket would describe an open air bazaar bustling with matrons ready to haggle with their favourite merchants over the price of onions while tramping through the narrow muddy paths in between the umbrellas and the rickety wooden structures.

This stymies the multinationals accustomed to ever increasing efficiencies in supply chains and distribution. L’Oreal’s website goes as far as to explicate all the challenges faced in distribution. The demand is there, how do we satisfice it in a profitable manner? seems to be the message.

Fragmentation of the retail space, prevalence of informal markets, a preference for ‘break bulk’ shopping daily in small quantities, all add up to a distinctly different consumer culture – an African one – that has been evolving quietly under the radar. It is only now that Africans are being perceived as consumers in their own right and the emerging middle classes capturing the attention of global giants. The hair care industry’s size and value, is not so much an overnight development as it being taken seriously as a viable opportunity.

If we go by the plethora of management consulting reports highlighting the African consumer market’s opportunities,  there’s an underlying assumption common to all that existing systems can simply be put into place, if only there wasn’t so much informality. Is that a realistic wish in the near term given the vacuum of infrastructure?

Simply building a supermarket in suitable locations will not work, as Shoprite discovered in Arusha, Tanzania, people’s purchasing patterns were influenced by so many more factors than just a lack of modern retail. It makes sense, then, to look at the consumer culture that exists, than to bemoan the fact that its completely unlike what ‘global giants’ are accustomed to dealing with, or to attempt to introduce solutions without taking the entire ecosystem into account.

If we are indeed to begin to address the challenge of satisfying the demands of Africa’s emerging markets, then we need to step back and look at it from an entirely different perspective. CK Prahalad once described what he called the tyranny of dominant logic and offered an alternate way to look at the challenge of dealing with the fragmentation, informality and inadequate infrastructure of the developing world. He proposed turning the problem on its head and looking at it from the lens of the constraints and conditions that are existing, then innovating to meet the criteria rather than attempting to force fit success metrics from one operating environment into the context of a wholly different one.

What if we were to do the same for the African consumer market? To begin from the point of view of understanding entire ecosystem of trade and how it works, mapping the existing landscape, and then seeking to develop solutions that would fit contextually.

This conversation will be continued. 

Part 3: Synthesis and Insights from original research on rural economic behaviour

broad_prepaid
One can conclude from synthesizing the data collected across the geographies and the range of “BoP” income levels that rural households demonstrated similar patterns of behaviour in their management of household expenses on irregular income streams. These are:

  • the rapid conversion of cash into tangible assets such as goods or livestock,
  • the  subsequent storage of wealth in this form,
  • the ability to conduct cashless transactions by mechanisms both simple and sophisticated
  • shared or cooperative financial tools such as investments, loans, purchases and savings
  • the use of multiple resources allocated by cost and usage
  • knowledge and experience of seasonal ebb and flow influencing cash flow management

The irregularity of cash flow or income over time in the households studied can be said to be a combination of the known – such as the ebb and flow of income over the course of the year, either directly due to the natural seasons or due to other unnatural but predictable factors such as Christmas or vacations; and the unknown –  either the truly unpredictable such as a natural disaster or the simply random, such as not knowing how many customers will make a purchase on any given day.

The known component or the “reasonably predictable through experience”, is less a matter of the actual amount of income earned and more about knowing when to expect peaks and lows in cash flow. This element of seasonality would be a critical component of knowledge pertaining to a particular region or market for BoP ventures seeking to create value through successful introductions of products or services.

For example, in the rural region of The Philippines, January to approximately April or May (or until the rains begin) is considered the annual “summer” or “dry” season – unless a farm is very lucky to have access to sufficient water for rice growing regardless of rain, the farmers can only start planting when the rains arrive and are dependent on it for their second harvest as well. So overall, whether its tiny sari-sari1 stores supplying everyday essentials, snacks and cold drinks or some other business – even those selling necessities like food, all consider this a lean period.

Those who earn daily wages  helping farmers plant the rice have little work, farmers live on their stockpiled rice, everyone tends to spend less but along with the rains all of this changes and the pattern of spending increases until the annual Christmas peak. For some, wholly dependent on what they can earn locally (receiving no remittances from relatives abroad) this can mean a difference of 100% in their weekly earnings between the “wet” and the “dry” season.

The Indians and the Malawians were influenced in similar ways, only the actual timings varied due to geography. Whatever the reasons in any particular region, when evaluating the purchasing power of those who manage with irregular and unpredictable income, the first question to ask is if there are any known patterns of ebb and flow in their cash flow.

It is the unknown component that creates the unpredictable volatility that those on irregular income streams must deal with in order to manage their household expenses with any degree of control. The behaviours observed listed above, taken together, can be summarized to state that each household managed what could be called a “portfolio of investments” that acted as deposits maturing over time.

They either maintained multiple sources of income simultaneously since available cash was often converted into these investments, spreading the risk of any one source failing when needed or stored their wealth accordingly.  Maximizing available resources based on their cost and intended usage along with the tendency towards minimizing the need for cash based transactions all worked together  to smoothen the volatility of the household‘s income.

For example, one family in Malawi reared pigs for sales (or food in emergencies), grew vegetables and maize for their own needs, distilled wine from sugar cane for cash sales and also kept bees with a cooperative for annual harvest of honey. Cash was thus available in varying amounts from a variety of sources at different points of time.

In the Philippines, an extended household living together in one compound pooled their resources from a kitchen garden, stored fuel in the form of bamboo and dried coconut husk, kept chickens and occasionally a pig, as well managed on the small amounts of cash earned daily through running at small sari-sari store on the premises.

While in the Indian village, even the silversmith who made ornaments only during the harvest peak, used his metalworking skills and workshop the rest of the year to make doors, windows and grillwork.

This portfolio management approach to household expenses* implies the manipulation of their span of control over elements of time such as periodicity and frequency as well as currency, i.e. cash or goods, in order to decrease the volatility of their cash flow, improve their ability to plan and while decreasing the variance between expenses and income.

Across the board, the particular characteristic that most stood out during conversations with the rural populace in India and The Philippines, echoing  prior experience in the field elsewhere, was their undeniable pride in their degree of self reliance, and thus, their level of independence from the formal or cash based economy.

Over and over, people would proudly point to assets like firewood, livestock, kitchen gardens etc and emphasize that these resources were ‘free’ and didn’t need to be purchased for cash, often in the same breath pointing out how everything needed to be bought if you lived in the city. Whether it was a nanny goat kept just to provide the daily cup of milk for morning tea or an extra sack of rice held back from the harvest sales, there was a distinct sense of achievement for every penny that didn’t have to be spent.

This trait of minimizing the need for actual cash money also cropped up in other patterns of behaviour including the storage of wealth in the form of ‘kind’ or ‘goods’ (that could be liquidated when and if required); cashless transactions within the community, from the simple to the sophisticated; and the rapid conversion of surplus cash into goods or ‘kind’ (livestock, for example, as investment or planned savings in the form of silver or bricks for a future house).

Expensive resources that required cash outlays such as fuel – diesel for irrigation pumps; liquid petroleum gas cylinders for cooking; or airtime minutes purchased on prepaid plans for the ubiquitous mobile phone, would be stretched out for as long as possible before the need for replenishment. For example, a common behaviour was the choice of cheaper or ’free’ fuel such as firewood or dried cow dung for cooking food which took a long time to cook such as beans or stews, saving the use of the more expensive gas stove for fast cooking items.

All of these behaviours, taken together, imply a challenge for businesses seeking to serve rural populations effectively since their relative lack of liquidity places them in a challenging position as future customers. Conventional business development methods include the use of market research to evaluate the disposable income or purchasing power of the target audience. When considering rural BoP households, these tools may not supply any meaningful data, skewing the perceived income levels or earnings of those studied.

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:

1. 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.

2. 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.

3. 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.

Conclusion

Broadly speaking, there was evidence of far more sophisticated cash flow management than has either been expected or assumed among the rural BoP households in the sample pool. In fact, one future task would be to parse out whether the terms ‘irregular’ or ‘unpredictable’ can be be applied. Certainly, income was not as predictable and regular as a salary, but on the other hand, neither were they totally random and unknown. At this point, it seems far more accurate to say that the rural BoP households do not manage their expenses on a “fixed amount arriving on a known day or date”.

Also to be reconsidered is whether those in the rural communities in developing countries should simply be lumped together with their urban brethren as an undifferentiated mass called “the BoP” or “the poor” – for one, living on $2 a day has an entirely different meaning where much of the hyper local economy may not even be based on cash transactions, or else, few daily requirements need to be purchased.

If we’re to seriously evaluate business development for BoP ventures, then a far more nuanced understanding of local culture, buyer behaviour and segmentation of these emerging consumer markets is required.

* Given the similiarities in findings, it should be noted that these insights emerged from a workshop conducted in Helsinki, Finland in April 2009, prior to the release of the now famous book, Portfolios of the Poor.

“Life is Hard” – Original slides with written speech, BxD 2008

This is more or less the written version of my Life is Hard presentation (slides,video, reference) as first given in October 2008 in Providence, Rhode Island at the Better World by Design conference held at Brown University. Some of the details have become more nuanced since then, some parts have spun off into blogs, projects, grant funded research and more. But the fundamentals remain. Of that I’m glad, as it implies that the basic principles are sound while additional observations in numerous countries since then have only fleshed out the details even more. This is original work and the slides have never been shared previously outside of a presentation environment. Note: This talk has primarily addressed audiences living and working in the first world’s mainstream consumer culture and is given  from that frame of reference.

Life is Hard. 

Without systems that work, inadequate infrastructure, little or no social security or welfare, and general chaos, life is hard at the bottom of the social and economic pyramid in developing countries. If you have survived to functional adulthood while growing up in the slums and shanties of Africa or South Asia, you’ve come of age experiencing life as adversity and challenge.

The only certainty is uncertainty.

Natural disasters or random riots, anything can happen at any time. Planning for the future, much less tomorrow, can be challenging and a sudden shock can spiral the whole family into destitution.

Uncertainty of time and uncertainty of money. 

Uncertain Incomes

Not knowing how many shoes you will shine today or whether you’ll have a call for daily wage labour means you have no way to predict or plan based on your cash flow. You rarely know how much you make each month, and are more likely to be living hand to mouth, getting by with the cash you earned that day.

Inadequate Infrastructure

When systems are lacking or insufficient, they add to inability to plan. You’re waiting for water, or a shared toilet, you’re walking two hours to catch a bus, there’s not enough light or the power is out – it all adds up to uncertainty of time. And is out of your control.

A different worldview

So this life of adversity and uncertainty, surviving (and thriving) in challenging conditions of scarcity, leads to a different worldview than what we’re familiar with. Buyer behaviour and purchasing patterns on irregular incomes are very different, as is the mindset and what is value.

There is daily juggling of income versus expenses, a complex processing of whom to pay for what, and when and for how much. People are familiar with all the financial tools of loans, barter, credit, debit, trade and interest rates, though they may not always call it the same names or be aware of sophisticated financial terminology or use tools like ATMs, credit cards and banks.

The BoP as Customers are strategic money managers

Every decision to spend money – with the exception of an impulse buy of sweets or a newspaper when there is some change available – made by those who manage on uncertain incomes at the base of the pyramid could be said to be analogous to making an investment. Usually in their future, in some way or the other. Whether the decision is a tradeoff between purchasing shoes for a school going child and meat for a meal or choosing to buy some airtime instead of a meal, each of these is an investment – in the child’s future, in future income if work is dependent on being accessible by phone or simply, the next meal.

 How best do we optimize the return on our investment in this single shopping basket with this amount of money available today?

Trade offs are a fact of life.

Purchasing patterns on irregular and unpredictable incomes

When income is irregular and unpredictable, both in amount and frequency, such as it is for the majority at the bottom of the pyramid, buying behavior is not quite the same as for mainstream consumers. At least four patterns emerge based on a combination of need and money available.

  1. 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 its a sudden influx of cash for someone not on a pension or remittance then these are the funds that often go towards a consumer durable purchase or big ticket item of some kind.
  2. Paid for in advance – Usually a service which can be used 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.
  3. Sachets or single 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. 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?
  4. 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. 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.

What is the buyer behaviour observed among BoP “consumers”? 

  1. Maximizing the return on their investment – When you have a limited amount to spend, usually at the end of each day, you’re seeking to minimize risk and maximize the value of your investment. From our observations in the field, we have seen some core values emerge in the pattern of buyer behaviour at the BoP in the way they think about and use their possessions or the products and brands they choose to buy.
  2. Repair and renew – Limited incomes mean there is no wriggle room for the easy convenience so beloved of consumer product manufacturers of ‘just throwaway and replace’. Products must be durable and are treated as such – whether its renewing the old mobile phone with a new keyboard after the numbers fade from prolonged use or continued repair of 20 year old cars using spare parts that may not be new themselves.
  3. Maintain and extend – How long will this bar of soap last me? I’m willing to pay a little more if this bar will wash more clothes for my family than that cheaper bar that quickly dissolves into a puddle of soapy goo. Let me tape some plastic sheeting over the television that occupies the pride of place in our one room shack, it will last much longer and still look shiny and new. Cobblers repair sandals with bits of tires and small nails while someone will offer to make like new the grinding stone worn too smooth from constant use.
  4. Recycle and reuse – Nothing ever goes to waste, not even old plastic bottles dug up from rubbish heaps. But even those who are not rag pickers think twice about throwing away something that could be used elsewhere or put to another purpose.

A different mindset, a different worldview

All of these qualities are part of the BoP consumer’s mindset, although many seem obvious or familiar to us. The critical difference, imho, is that while we have the wriggle room for experimenting with the ‘new and improved’ or rather then untried and unproven, those at the BoP cannot take the risk. Proof of performance over time is what establishes the brand’s reputation and trustworthiness. And this influences the messaging that resonates with their values when responding to information about products and services. This is where the ‘sensitive bullshit meter’; the skepticism about marketer’s claims comes into play. The ‘tried and true’ carries weight as Coca Cola, Toyota or Tata can tell you.

We may find that a soap lasts a long time after we’ve purchased it and its advertising message maybe based on nuanced lifestyle messaging, usually a beauty queen lathering up in the shower and then shown on the arm of a rockstar or some such. But when targeting the market at the BoP, these qualities must become easy to confirm and identify, they form the core values which are at the foundation of every purchase decision. What’s on sale must be not only be easy to use but also easy to choose.

(smile at draft)

Minimizing risk: buyer behaviour among the BoP confirmed by Nielson

The South African Shopper Trends report by Nielson highlights some aspects of the township customer’s mindset and buyer behaviour, as demonstrated by the following snippet from this analysis:

How we make purchasing decisions
We make decisions based on what other people say, as well as how we experience a product. There is a major fear amongst consumers (especially in the township) of wasting money on a product that may fail on delivering – hence why 92% of consumers cite word of mouth as the best source for new product ideas. This results in very little initial experimentation, with consumers rather sticking to what they know and trust. For example, many people would rather walk for 20 minutes to buy airtime from Pep than buy immediately from a trader on the roadside. If there is a problem with the airtime, they know Pep will solve it, but the trader won’t – so there’s effectively too much of a risk to not buy from Pep.

Lack of willingness to take a risk on an unknown brand or service, minimizing the risk by the tried and true over something ostensibly ‘new and improved’. Proof of performance is critical as is getting the maximum value for their money i.e. the return on their investment. Reading these two articles linked reminds me so strongly of the purchasing patterns and buyer behaviour observed among BoP customers – the very first time in the townships of South Africa back in January of 2008, that I think I’m going to finally get around to sharing my Life is Hard presentation, and my accompanying talk to go along with the slideset.