Posts Tagged ‘LPG’

Is there a tipping point price for low income customer behavioural change?

lpg

Nairobi, Kenya Photo Credit: Niti Bhan

When the price of the LPG cylinders dropped significantly earlier this year, it was noticed that increasing numbers of urban lower income customers were purchasing the entry level size of 6kg – seen displayed along the top of the display unit above.

“A good number of my customers come from the slum,” said Kinuthia on Saturday. They are using cooking gas, but mainly the 6kg, which is why over 90 percent of what I am selling is the small cylinders.”

Kinuthia is among the cooking gas dealers in various suburbs in Nairobi who are experiencing booming business as demand for the commodity grows.

The trader noted that the slum residents started using cooking gas as the cost dropped following decline in fuel prices. Consumption of the clean energy in the East African nation is currently at a three-year high.

Previously, I’d written about the consumer decision making regarding choice of cooking fuel, driven as it was by cash flow and payment flexibility. That was based on household energy consumption behaviour, a study conducted in rural and peri-urban Kenya a couple of years ago. Along with the pricing, the choice of cooking fuel was also influenced by the household’s location – peri-urban (town) dwellers were required by landlords to forgo firewood and use only charcoal and kerosene, while those who lived on their homesteads tended to use firewood, and charcoal. These two choices are based on the relative time it took for each fuel to cook i.e. kerosene stoves are ready to use much faster than charcoal, and a charcoal stove is in turn faster than an open wood hearth.

Here, however, we’re seeing evidence of the aspirational leap (the brass ring syndrome) made by the lower income urban consumer as well as indication that some critical price barrier seems to have been breached for the entry level LPG cylinder. Cooks who would have used kerosene in the urban slums were shifting over to cleaner, safer LPG as soon as it became affordable, even in with the lumpsum required for the purchase. This is what makes me wonder if there’s some magic price point for sales to take off, and if so, is it a value processing based on the product category or a cash amount that is the trigger.

Based on all the prior work in this space, I’d hazard a guess that its very much the product itself, its status as a signifier of upward mobility, its value proposition and benefits, that work together to make it one of those things that are reached for when the price lowers enough to look accessible. I’ll keep an eye on what other products or services fall into this category but I’m doubtful that there’s any formulaic success model that just any old product aiming at the base of the pyramid could follow.

Upward Mobility is Changing Base of the Pyramid Consumer Aspirations

I’d observed earlier that upward mobility wasn’t simply about increasing incomes, but also a change in mindset, world view and values. Aspirational consumer behaviour trickles downward faster, as strivers seek to emulate the status signals sent by those they perceive as “arrived”.

The emerging middle class numbers may indeed be uncertain, as statisticians debate over the inclusion of the ‘floating class’ but regardless of their actual income (which in any case may be volatile, particularly if they’re part of the informal sector of the economy) people’s habits are certainly shifting towards more ‘middle class’ choices.

Kenyan news reveals some interesting trends. More people are using clean energy such as LPG for cooking, in the ‘slums’, than before.

In Mathare slum a few kilometers away, that residents are warming up to cooking gas is evident in the number of shops selling the commodity on the periphery of the informal settlement.

Prices for cooking gas are the lowest they’ve been since 2012, putting the smallest available size – 6kg- within reach of far more than before. LPG is an aspiration for both urban and rural cooks. A farmer’s wife in rural Makueni in eastern Kenya told me about her ambitions to cook with gas even though she was making do with firewood from the farm.

Even more interesting is this report on what the author calls the “reject economy” – the sale of seconds and damaged products. Its not so much that there’s an after market for these seconds, but the reasons for their brisk sale. Here are some selected insights from that fascinating article.

Well, the economy in Kenya’s informal sector has its own rules and the about 22 million people straddling the poverty line are masters at navigating it.

For instance, Ogola buys eggs with cracks or other tiny imperfections — known colloquially as vunjika — at Sh5 each; whole eggs retail at between Sh12 and Sh15 in middle-income neighbourhoods.

Korogocho, like many other slums in Nairobi, is also awash with charred or misshapen loaves of bread, which retail at Sh30 instead of the market price of Sh50.
[…]

“The people in the village buy these products because they are cheaper and they cannot afford mainstream prices. They buy them because, just like other people, they would like to watch the news and have the family gather around the TV,” says Ngala.

The article goes on to quote some salaried professionals offering expert advice to the poor to be cautious about these rejected or secondhand products but I suspect that those with less income have no false impressions about their challenges in life.

“We also deserve the good life just like other people, or what do you think” Ogola asks with a smile.

As the article ends, just because someone may not have 50 shillings for a loaf of fancy bread doesn’t mean he doesn’t wish to have bread with his tea in the morning.

Without something to aspire towards, we would stagnate in our current circumstances, fatalistically accepting our status in life.

“Kadogo” kerosene vs “Lumpsum” LPG: Trade-offs and cost/benefit analysis

Following a fascinating conversation with @bankelele and @majiwater on Twitter regarding the cost of kerosene, pay as you go models and relative benefits of each, I’ve been inspired to write this post exploring the topic further.

Before I proceed, I’d like to take a moment to clarify what the “Prepaid” in the title of this blog means: it is not so much the literal meaning of the word, as in you have paid in advance, although that is a part of the business model, but refers to the inherent flexibility built into the “pay as you go” business models. That is, the end user has a significant degree of control over the timing of a payment, the amount paid, the periodicity and frequency of such payments and that each time payments can be of different amounts. This underlying element of flexibility over time and money is what has made the prepaid business model so attractive and thus successful, among the majority of the world’s population on who manage on irregular income streams from a variety of sources.  For those interested in diving into this finding further, you can read posts tracking the original field research in 2009 by using the category of “user research” on this blog.

The conversation this morning however was on the patterns of purchase observed in household energy consumption – kerosene and liquid petroleum gas (LPG) as well as which offered a better ROI, intermingled with class/status associated with choice of fuel and its availability in urban vs. rural areas. The following discussion is based on the Kenyan context but the exploration of cost/benefit and the flexibility inherent in business models for each, are of relevance to the larger discussion on payment plans for the informal economy.

Lumpsum LPG versus “Kadogo” Kerosene

One of the reasons that kerosene is so hard to dislodge as the fuel of choice among lower income populations (or, as may be the case, based on further research, “lower middle class” behaviour rather than income per se) is that it can be purchased on demand, on a pay as you go basis. That is, it can be purchased by quantity (as little as 1/4 litre) or cash amount (give me 50 Ksh worth of kerosene) as and when required. There is no imposition on the customer to purchase any fixed minimum quantity or cash amount.

LPG comes in cylinders of fixed sizes, that is the quantity and its cost is already preset, although one can see a wider range of smaller sizes across the developing world, offering a greater amount of flexibility than the single size/cost of the standard LPG cylinder more popular elsewhere.  Thus, it requires a “lumpsum” to be available – either for first purchase or for a refill, although, over the duration of use, it provides a better return.

There is a discussion here that can happen on the “poverty premium” imposed by the lack of such lumpsums of cash available to those who manage on more irregular incomes, thus forcing them to use a more expensive fuel only due to the flexibility of its business model.

This morning we looked at actual numbers, from Nairobi where kerosene retails at 100 Kenyan shilling per litre while the average LPG cylinder purchase is around 4000 Ksh.  Those who use kerosene as their “fast cooking” fuel, as opposed to slower charcoal for their primary cooking, still end up requiring a litre a day – that’s 3000 shillings a month, while the cylinder costing 4000 Ksh can be made to last for 3 months before requiring a refill. Refills cost 2000 Ksh.

This seems to imply that choosing LPG over kerosene is a no-brainer, and in fact, this cost benefit comparison was shared with me by Felix, who has often worked for me in the capacity of local guide and driver. He’s a taxi driver by trade, however, and its more likely that he will have available the lumpsum cash required for LPG purchase. For someone whose income sources do not offer the same quantity of lumpsums (smaller daily cash flow and transactions), this may not be a viable, though cheaper, option, forcing them to purchase more expensive kerosene simply due to the cash in hand constraints.

Another factor that plays here is urban fuel use patterns as opposed to rural. While the daily juggling between “fast cooking” and “slow cooking” items is the same, i.e. use cheaper fuel for things that take longer to cook and expensive fuel for speed or convenience (morning tea before rushing to work), those in small market towns and rural areas tend towards a combination of firewood and charcoal, while the housing layouts and structures force urban dwellers to use charcoal and kerosene.  Firewood is forbidden and/or simply not available as it is on the shamba.

Again, as we know, long standing habits and behaviour migrate along with people, however, there may be interesting findings in taking a closer look at why existing behaviour is so hard to change and the correlating influence of business models.

One has heard this morning, however, that there is a pilot program in Nairobi which is testing the pay as you go / on demand purchase model even for LPG refills. This will be an interesting program to observe and I hope to be able to do so in the coming weeks.