Posts Tagged ‘informal markets’

Estimating price in unexplored and untapped markets

In addition to estimating the size and value of the Kenyan cyber cafe industry for our client, Village Telco of Cape Town, South Africa, we were tasked with finding out what would people pay for their product, the Mesh Potato. This challenge was the equivalent of walking up to someone and asking:

How much would you pay for this thing you’ve never heard of and you’re not sure what it does?

We discovered it was through the long rambling conversations we were having with our selected cyber cafe owner operators that we were able to get to this point of being able ask such a question. The conversations allowed us a peek into the way they thought about investing in new technology, and in many ways, reflected back to us the basics of the “BoP” consumer mindset that had already been identified previously.  For example:

Maximizing ROI (return on investment)

When asked what he’d pay for a Mesh Potato, our friend Moses responded with a question, “It depends,  how much money will it make for me?”

That is, as a business owner, his evaluation of the product’s price was intrinsically linked to its ability to generate an income stream. Maximizing the return on the investment is his primary criteria – whether it will save him money or a significant amount of time, and how soon will that possible are all the factors that go into the decision to purchase. His question also implicitly holds the corollary premise of Minimizing Risk.

So rarely was the price seen in isolation but instead it was considered in context of a variety of other factors.  For business owners, their primary value driver was “Is this a source of increased income for me?”

Another factor was that of the need to question assumptions underlying traditional models for assessing pricing – from wikipedia’s entry on the underlying assumptions used in Van Westendorp’s model:

The assumption underlying the Price Sensitivity Meter (PSM) is that respondents are capable of envisioning a pricing landscape and that price is an intrinsic measure of value or utility. Participants in a PSM exercise are asked to identify price points at which they can infer a particular value to the product or service under study. PSM claims to capture the extent to which a product has an inherent value denoted by price.

What if price is not the intrinsic measure of value or utility but long term revenue generation potential is?

Until we are able to gather enough insights over the course of a number of such studies and come up with frameworks customized for a very different operating environment, it will only be through the willingness to question all our assumptions and adjusting our approach that we will be able to make reasonably accurate assessments for these untapped markets.

Exploring the market forces acting on the cyber cafe industry in Kenya

This post continues on the challenges of estimating size and value of an untapped market in the developing world – in our current case, it is the cyber cafe industry in Kenya.  A critical aspect of this exercise will include assessing the impact of a variety of market forces acting on the industry in the present day as well as exploring the impact of trends on the near future.
Its only too easy to say that mobile phones will threaten the future of this industry as this June 2011 article does, but how valid is this assertion, really? Complicating the situation is the extremely rapid pace of change – for example the number of internet users in Kenya more than doubled in less than a year, from the end of 2009 to the third quarter of 2010, most via their mobile phones.
Yet, the results of a recent survey found on this Afrinnovator post by Mark Kaigwa in May 2011, contradict the dramatic headline of the June 2011 article:

via Afrinnovator

Kaigwa says: To unpack that a little further, the emerging trend is that the first experience of the internet has become mobile. This still doesn’t rule out the cyber cafe as the mobile experience on feature phones still cannot replace the “full-qwerty-keyboard-got-my-flashdisk-upload-that-document-and-email” use of cyber cafes but as far as social networking and general browsing, the mobile is the device of choice.

And previously in May 2010,  Oluniyi Ajao asked from Accra, Ghana “Are mobile phones pushing cyber cafes out of business?“, where he ends confidently with:

It is clear that mobile phones, are pushing cyber cafes out, the same way public phone booths and “communication centres” have become endangered species. What waits to be seen is how long the few cyber cafes that remain would last. Would they close shop or evolve their business model? Time would tell.

but just a few months before in Sept 2009, Wayan Vota wrote  Cybercafes: Still a vibrant and viable business model with some thoughtful reasons supporting his argument:

Growing, not shrinking, need for public access
Miguel’s point I most disagree with is the suggestion that there is a decreasing need for cybercafes in Africa because of 4P Computing:

Outside of tourists locations, they seem to be drying up everywhere to some degree as more and more of us travel with laptops or at the very least, wifi/highspeed data enabled phones that can do simple browsing anywhere we go.

While he and I may travel with netbooks and iPhones, the majority of Africans do not have such electronica, nor are they buying the expensive data plans that allow for mobile web access. They closely monitor their communication expenses, budgeting for Internet access out of meager daily wages.

Yet more and more business and government services, and professional social capital is moving online. Stores like Rachels’ Bargain Corner and Kenya’s eGovernment initiatives require full-screen Internet access. And with Facebook driving ICT use in Africa, the next professional networks will be virtual, not in person.

So as high-speed Internet and cool new gadgets increase usage by elites, there will be even more need for average Africans to get online, economically, through public access cyber cafes offering Internet access in multiple formats.

More than decline, this is the time to invest in African cybercafes!

So, the question remains unanswered, will the industry shrink or grow in Kenya? (Sept 18th, 2011)

Like any industry, cyber cafes are not all the same. Location matters as does size, speed and the variety of services on offer.  This background work  helps us to frame the broad questions we need to uncover answers to, so as to find the patterns that will help us evaluate the influence and impact of these market forces.

What does that mean? In this specific case, where if we are faced with conflicting information, then one of the key issues to find out will be the cost and ease of access to substitutes i.e. internet enabled mobile phones, cost of data and the patterns of usage behaviour, prevalent in the locale serviced by that cafe.

We’ll also need to dig up the CCK’s research results and then evaluate whether these substitutes are having a greater impact on the highly visible urban locations or is this threat a longer term trend and one that will affect a cybercafe regardless of whether its rural or urban.  And finally, we’ll have to actually get out there and take a closer look  in order to understand what is really happening.

The challenge of assessing the size of an emerging market opportunity

Kagio fresh produce market, Kenya, April 2013

Untapped opportunities in the developing world bring with them their own challenges for businesses seeking to invest in them.  An interesting one is that of assessing the market size and value, particularly for the lower income demographic that operates primarily in the informal economy (often called the BoP or bottom of the pyramid).  This snippet frames it well:

To begin, it is critical to understand why traditional market sizing methodologies are ill-equipped to size emerging markets. To illustrate, if a firm were to use traditional methods to size a mature market such as the coffee market in the United States, it would consider demographic trends (e.g., aging baby boomers), psychographic trends (e.g., increased health consciousness), past sales trends and consumption rates, price movements, competitor brand shares and new product development, and channels/retailers among others. However, conducting such an analysis for emerging markets presents a challenge as several of these factors (e.g., past sales, demographics of the customer when there are no current customers) don’t exist because the markets are presently untapped.

The situation is exacerbated  by lack of easily available demographic data, few formal retail channels, little consumer knowledge, and if the majority of the target audience happens to be outside the urban population centers, even lack of basic infrastructure like roads. One must begin from scratch. Can any rules of thumb be developed as we increase our understanding of the next few billion customers?
This conversation will continue.

The prepaid economy of Africa

As the chart shows, Africa’s mobile subscriptions are 96% prepaid or pay as you go. That is, they are not bound by contract to any mobile services provider. A reasonable number have more than one SIM, to take advantage of different operator offers.

This demographic cuts across all income, education and professional barriers, its literally the Prepaid Economy of Sub Sahara, when only 4% of the phone users sign up for an unknown monthly bill. Many of them are in South Africa, where having a monthly subscription to mobile services is an immense jump in status signalling.

When such a significant majority of the phone users in Africa choose to pay as they use voice and data, on demand and usually on a preset budget, it is a strong signal of the characteristics we would look for in order to understand the local cash economy. This could be primarily from the informal sector, if only because of the irregular and unpredictable income streams from a variety of sources over the course of the natural year are what everyone has in common.

This is reflected in the prevalence of a flexibile system that offers the end user the maximum control over how much (time – duration, periodicity, frequency) and how much money (airtime – money, voice, text, data) they allocate among their resource base, in order to minimize the variance between income flow and outgoing expenses, thus decreasing the volatility of their irregular incomes. Nobody was paying them a regular monthly salary, on which basis they could budget and plan with some accuracy of estimated amounts.

A sample of the rural population demographic was set 4 questions in rural India, rural Philippines and semi-rural Malawi.

Risk is dynamic, not static

Exhibition Panel – Samsui Woman, National Museum of Singapore, March 2013

And investor, bankers and venture capitalists imagine they are taking risks that deem high interest rates when operating in Sub Saharan Africa.

Come now, you do not gamble with your next meal, your risk is static.

What every micro entrepreneur, in the informal economy they’re still trying to grasp,* knows is that risk and rewards are dynamic over time. The best one can do is negotiate on time and money and the degree of wriggle room one allows, in order to minimize the volatility of the spikes. Its rarely the amounts that are the problem in cash flow management but the whole pipeline.

This is why ambitious craftsmen across Kenya prefer to save cash money (Savings of anywhere between 18 to 24% interest rates by formal banking industry) to fund their expansion plans, as they’ve noticed the uber frugal Asian traders do across the railway lines.

Would you be paying those rates for your home improvement loan?

* (92% of employment in India is from the informal sector including agriculture)

Published! Pathways Out of Poverty by iBoPAsia Project

Innovating with the BoP in Southeast Asia.

The iBoP Asia Project has published the complete set of small grants funding innovation projects for those at the Bottom of the Pyramid in the ASEAN region. One of the first projects to win the Small Grants competition in 2008 was The Prepaid Economy Project: Understanding BoP household financial management.

The continued curse of Cargo Cult marketing in emerging markets

The concept of Cargo Cult marketing is not unknown yet its impact and influence in the emerging markets in which I operate, can be and is, much worse. The so called “Bottom of the Pyramid” (AKA the BoP) markets have conditions that are even more likely to give rise to this blind adherence to conventional wisdom, particularly since they are still the frontier lands, untapped and not fully established or formed, unlike the sophisticated mainstream consumer culture in which the rest of us are immersed. Additionally, they lack the supporting information mechanisms for effective and accurate feedback from the market on the effect of any monies invested in activities.

What is Cargo Cult thinking?

The best known derivation of the basic concept of a Cargo Cult is Richard Feynman’s speech on Cargo Cult Science, from which all other applications have flowed. In a nutshell, unquestioningly recreating the look and feel of an action in order to cause an equivalent result, without comprehending the ‘why’ behind the ‘what’ is what this is about. That is, the underlying principles are not understood and the form overshadows the substance. From the Wikipedia entry:

An example of cargo cult science is an experiment that uses another researcher’s results in lieu of an experimental control. Since the other researcher’s conditions might differ from those of the present experiment in unknown ways, differences in the outcome might have no relation to the independent variable under consideration.

Similarly, in situations which I will describe in greater detail below, a standard set of marketing actions are applied, regardless of whether the conditions may be the same or very significantly different. Conditions, in this case, include not only the very different operating environments between developed nations where most of these techniques and strategies were evolved, but also such elements as product categories, consumer demographics, media reach and consumption behaviour, not to mention cash flow, purchasing patterns and access to consumer credit.

Cargo Cult marketing in the informal economy

While the sachetization of everything is a great example of Cargo Cult marketing in the informal economy, the problem is deeper than simply a cosmetic change to the packaging or size of an SKU. Its the unquestioned application of a preconfigured set of activities that form the part of a marketing plan or strategy in a context and situation wholly different from the original.

Take Coca Cola for example. It is a fast moving consumer good (FMCG), an impulse buy or luxury, not a critical need for human survival, it is a ubiquitious global brand with the marketing firepower to pay for advertising on every single media available in every single country they are in and yes, in the commodity category that is sugar water, it is a brand that must be continuously hammered home and built.

Demand creation, market creation, distribution channels and consumer awareness are long established even in the untapped or underserved markets of the lower income demographic or the BoP or the rural customer in Africa or Asia. Directly or indirectly, the world has heard of Coca Cola.

“Build brand”, “Push a single message”, “Radio spots”, “Banners, stands and marketing collateral” are the elements of the Cargo Cult that are then replicated for any other product regardless of category – is it an FMCG or consumable like a soft drink? or existing demand – is it a brand new product category or do people even know this product exists and how it might benefit them?

These questions and others like them are overlooked in the belief that if we follow a Coca Cola’s steps exactly, we too will have a brand just like them (in far less than a 100 years) and consumers will come ask for our new product introduction by name (for far less than the billions of marketing dollars spent annually).

But wait, we developed this strategy following the textbook exactly

Kotler’s operating environment is Chicago. I have met with and spoken to him at NorthWestern. The decades of consumer insights leading the development of marketing principles and approaches were not developed in isolation from the information flows and experience that the context of a generations old and extremely sophisticated consumer culture provides.

Price, Product, Promotion and Place are the 4Ps that may not change as elements to be considered when looking at the marketing strategy for a new product introduction in the informal economy, but if we overlook the vast difference in context and thus leave questions of whether what we are blindly replicating is relevant, appropriate or even, affordable, unanswered, we are doing no better than the original South Sea islanders whose Cargo Cult religion led them to build a facsimile of an aeroplane landing strip in the hopes that flights bearing valuable cargo will arrive.

You can build a brand all you like, throwing thousands of dollars in plastering your name across the village or town but if its relevance to your customer’s lifestyle is unknown, will they ever even notice it or care?

You can play around with price and the psychology of price, but if all the principles you learn about and apply emerged from studying behaviour in a consumer market where disposable income and consumer credit cards are implicitly assumed, what difference will it make to subsistence farmer Joe whose cow will be kept unsold until its time to pay school fees for his children?

You can place yourself in hundreds of supermarkets across the country but your if intended target audience shops in their own informal and traditional markets, your efforts will only lead to a very expensive last mile problem.

You can continue to throw more and more money at the problem but without understanding who your customer is, how they shop and the decisions they make, in the context of their daily lives and environment, you will still feel the gap of an overwhelming lack of response. At that point, remind yourself of what Einstein once said,

“The definition of insanity is doing the same thing over and over and expecting different results.”

Marketing without understanding the basic principles of what and why and thus, how best to reach one’s customers, is Cargo Cult marketing.

If you must copy Coca Cola slavishly, then copy their willingness to be inspired by what their customers were actually doing, not what they thought the customer should be doing or imagined they were doing.

New Product Introductions in Informal Markets

“What’s new?” I asked Peter who runs this mari mari shop in a makeshift market just yards from Nairobi’s famous Kibera, and he proudly showed off the various features of this television set cum DVD player that can run on a small battery if need be. Yours for just $100. Don’t miss the bright pink amplifier on display or the rest of the ‘shiny shiny’ that Peter brings from the wholesalers in the Central Business District.

China made goods flood the informal markets across rural Africa while mainstream media turns itself inside out wondering how they’re doing it, so easily, so cheaply and so well, even as global brands and well meaning social enterprises struggle to get their life changing products to market.

For a sure signal of the emerging global ‘middle class’ and their aspirations, just take a careful look at what entrepreneurs like Peter are stocking for sale. Unsold inventory is a luxury he cannot afford and will work to minimize risk when it comes to new products and innovation. The Chinese manufacturers know this so they offer good on commission to the wholesale shops, leaving stock on display and returning to visit weekly to collect cash and check up on what’s moving fast and what isn’t of interest to customers like Peter.

Warranties? Return policy? Customer service? That’s the tradeoff the informal economy makes in return for affordable luxuries.