Posts Tagged ‘market creation’

But why aren’t they buying my fantastic life saving product?

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An all too common a question blurted out in frustration by well intentioned social enterprises attempting to crack the code of the informal economy at the base of the pyramid, usually ending with the rejoinder “when they can spend double the amount on a phone!”

So why aren’t people sensibly rushing out with their hard earned shillings or kwacha or rupee to bring home that life saving potable water gadget or heart warming bit of solar sunshine to add to their clean and efficient cookstove in their kitchens?

There are two separate questions being conflated in that exasperation.  One of the fundamental errors in evaluating this dilemma lies in assuming the mobile phone as an object of ownership equals any one of these artifacts i.e. you’re comparing apples to oranges. You may as well ask why someone could spend money on medication for a sick child instead of on your [insert BoP product here].

What seems like a very long time ago, back  in 2006 when I first started pondering the BoP and their consumer habits more closely, an online colleague who blogs as niblettes put forth an answer. I’m yet to find a better explanation than his  – from a December 2006 post titled “Wealth flow key to BoP product success“:

For instance, cell phones are an incredibly popular product in developing countries, despite the fact that their cost relative to income makes them very expensive. Certainly part of the reason is a lacking wireline communication infrastructure. But this is only helps explain demand, not their capacity to pay for a cell phone nor the high priority placed on cell phone ownership.

What allows people in developing countries to afford the high relative cost of a cell phone is the fact that these devices provide an actual return on investment–they make money. Cell phones do this by accelerating the flow of existing wealth within an economy.

If you have $1 it takes a year from the day you spend it for it to come back to you (you buy a loaf of bread from a baker who buys some wheat form from a farmer who buys the charcoal from you), you will not be in a hurry to spend that $1. However if it takes only a day for the $1 to come back, you won’t think twice about spending it.

Now, what makes cell phone ownership a high priority for people of limited capacity? Cell phones accelerate the flow of wealth which grows purchasing power without having to first increase the total money supply in the economy. This gets into all sorts of arcane macro economics, so lets keep this practical. Imagine you live in a part of the world where it can take weeks just to negotiate a replacement part for your broken tractor. It costs you the same price for the part, but getting it this part tomorrow means harveting your crops on time, while getting it in three weeks means getting a lower price for over ripe produce.

Accelerating the flow of wealth like this is almost like getting something for nothing: increased purchasing power with no foreign direct investment, no charity and no bloating work hours.

Toothpaste, dvd players, and even dishwashers will not have this same kind of direct and immediate effect on an economy. So while folks in bottom of the pyramid market may want such things, they can neither pay for nor will they prioritize such purchases because these kinds of products don’t repay their investment price the way a cell phone does.

Distinguishing products this way (those that accelerate the flow of wealth vs. those that don’t) seems to provide a lot of insight into what kinds of new products will and won’t succeed in bottom of the pyramid markets. However, like i warned, this theory is still pretty fresh (it may even have to go back in the oven for a while).

Well, I think its time to bring this idea out of the oven now – I can attest to this finding after having looked at how those at the BoP managed their household incomes on uncertain income streams – their cellphones did indeed help them accelerate their decision making and the responses i.e. accelerate the cash flow, primarily because they increased their span of control over time – periodicity and frequency or money – in cash or kind.

There are of course numerous other nuances at play in choice of purchases including social status, but sadly, in the case of social enterprises, the majority of their offerings tend not fall under the category of “bling”. But at the very least, we would be doing ourselves a disservice if we consider a mobile phone just another consumer product, at least on this side of the planet.

The other issue, or question, is then “Why aren’t they buying X or Y, when X will save more money for them in the long run and emit less smoke/more light/clean the windows/prevent diarrhea?”

Embedded in this question are frames of reference and as yet undiscovered value judgments – from our perspective, it seems like it should be common sense to make this sensible purchase – I hesitate to call them subtle patronization even though in some cases that may also be a factor.

One of the elements that had emerged from the Prepaid Economy work was the concept of “willingness to pay” vs. “ability to pay” – that is, we should not assume that the ability to pay for a product implies a willingness to pay for it. Conventional frameworks such as disposable income and whatnot operate on this implicit assumption, but once we tease out the underlying influence of mainstream consumer culture, so carefully cultivated over three or more generations, we can take a clearer look across the ‘values gap’ into the BoP consumer’s mindset and values, as a discerning and demanding customer in his or her own right who is making ends meet and a better life for their children in very challenging environments.

I believe framing it this way would then allow for an indepth look at  the area of “Demand” – not demand creation, which implies an artificial stimulus of ‘want’ rather than ‘need’ but instead the existing patterns of behaviour, tradeoffs made, the Why behind the decisions to continue to use something instead of replacing it with the socially beneficial solution. One can then see why there is no demand, or if the demand exists, what are the barriers to purchase.  In plain English, what’s really going on if we are not to simply assume entire populations lack the common sense of the product’s creators.

Leveraging ignorance vs enabling knowledge

If someone were to purchase a mobile broadband modem but was unaware of data bundles, how quickly would 500 shillings worth of airtime disappear into cyberspace? I’ve been there – not knowing what ‘converting to data’ meant – and going through euros worth of airtime while surfing in Helsinki until the shop assistant gave me a printout of texts to send after uploading in order to enable the unlimited monthly deal for just e 20.

Customers who’d done the same in their ignorance came back to the cyber to surf and I had to bite my tongue not to ask the owner why he hadn’t informed them about data bundles? Why should he lose his captive audience and his regular income stream? Whose responsibility was it to educate new customers of broadband modems about the best way to access the internet or to help set up their phones for browsing?

Was it any surprise that cyber operators were beginning to charge customers for helping them open an email account or set up their Facebook page, since this initialization still required a computer and could not be done through the mobile phone. One such enterprising individual charges 300 shillings to help you browse using your phone if its not genuine.  Even the IDEOS – which apparently sold like hotcakes in Nakuru when it was first launched quickly gained a reputation for gobbling airtime and battery power with its always on services coupled with the lack of awareness among owners on the difference between voice and data airtime rates.

So while awareness of the internet and the knowledge it is able to bring to your fingertips is increasing exponentially  particularly where educational facilities are sprouting and the student population grows, the so called mobile phone internet revolution is stumbling around in ignorance while the cyber cafe industry enjoys the boom.

In the meantime, I wonder if this might have anything to do with the fact that as operators see their data sales increase, their ARPUs are still dropping?

Barriers to business with the ‘Bottom of the Pyramid’ : what can we learn from Mama Boi?

Jakarta, Indonesia March 2010

The Monitor Group has made available the complete HBR article “Is the Bottom of the Pyramid Really for you?” (PDF) where the authors frame the debate for multinationals questioning whether to consider entering this challenging though untapped segment of the global marketplace.  They list some of the common barriers faced by executives during their attempts to serve this demographic, the majority of whom live in the developing world:

  1. Uncertain cash flow.
  2. Gauging demand.
  3. Sales and distribution challenges.
  4. Disaggregated providers.
  5. Undeveloped Ecosystems.

Issues of demand and distribution as barriers are part of the undeveloped ecosystem – or rather, to reframe these barriers in the context of the local operating environment, all the points are elements of the informal markets that currently serve their customers needs.  They become barriers to entry for organizations accustomed to sophisticated information and delivery systems, that is, from their perspective, there is no pre-existing consumer market and one must then create entire value chains from scratch.

And yet, another way of looking at this would be to embrace rather than attempt to replace the elements of the informal ecosystems that exist. How can you leverage the characteristics of what makes them suit the needs of customers who live in conditions of uncertainty?  Flexibility, adaptability, improvization – all of these have been mentioned numerous times in as many reports and articles.  This PDF recommends in conclusion that the most successful companies have been those that have created new kinds of businesses:

The most encouraging business-model innovations at the bottom of the pyramid manage to surmount multiple barriers at the same time. They represent not incremental adaptations but new, groundbreaking, end-to-end strategies.

Leapfrogging conventional wisdom just the way technology has been leapfrogging the inadequate infrastructure in most these locales. But where can we seek the ways in which to inspire such innovation? Imho the challenge that also exists for all these multinationals and their esteemed consultants is that their frame of reference and understanding is so well grounded in the frameworks and structures of the formal economy in which they’ve trained and learnt to operate.

This slide presentation by Gerry van Dyck (source) offers some fascinating insights on informal markets from the perspective of global FMCG brands. Mr van Dyck’s key point being:

if the market woman can succeed in the fierce competitive environment in the unbranded produce sector to create loyal customers then it is possible to use them as a reliable ally in driving change among consumers

Why stop at simply using them as an ally – lets take the thought a step further and see if we can learn from this study on buyer behaviour in the informal sector. Here’s a snapshot of a slide from Mr van Dyck’s presentation:

In a crowded market with numerous shops all selling the same unlabeled, unbranded produce how does a customer differentiate and choose to purchase? Through relationships – personal interactions over time build a rapport between customer and shopkeeper and ultimately it is this bond that drives the purchasing decisions.  In other words, it is the people and the personalities that ultimately matter, not anonymous communications from faceless entities.

And that’s something I see very little mention of in all the fancy documents and presentations being made on how to address the undeniable opportunities available in this space – where are the people? And why aren’t they the starting point for innovation?

A vacuum of information: why is there still a lack of understanding?

It is a familiar problem. A well-meaning donor gives a shiny new piece of equipment to a poor country only for it to gather dust. Parts that are expensive and difficult to replace, the need for a constant electricity supply, a lack of trained operators, unsuitability to rough terrain are all factors preventing the use of these devices in the developing world.

The scale of the problem is considerable. The World Health Organisation (WHO) estimates that as much as three-quarters of all medical devices in the developing world do not function.

“Factors contributing to this are: lack of needs assessment, appropriate design, robust infrastructure, spare parts when devices break down, consumables and a lack of information for procurement and maintenance, as well as trained healthcare staff,” says the WHO.

The Guardian’s recent article highlights the lack of understanding of the local operating environment and challenges among those who select and install medical equipment in the developing world. Perhaps in this regard there are other, more political and social factors that influence the choice of product and its destination. But nonetheless the question remains, why after so many years of the design industry’s talk of  ‘design for the 90%’ and ‘frugal innovation’ from emerging markets, is there still such a vacuum of information and subsequent failures?

Here’s another snippet talking about a service rather than a product, saying more or less the same thing:

“To do this, companies have to realise that insurance policies cannot simply be a low-value replica of what they provide for the higher-income market. They need to be able to address the needs of the low-income market in a unique way. A good understanding is needed of the economic circumstances of the low-income market, the way finances are managed and their overall financial needs. Serious consideration should also be given to the best way to communicate with the targeted market. Marketing and education should go hand in hand,” Smith said.

For companies to extend their reach in the micro-insurance market, they require the development of alternative distribution channels that reach beyond the broker, agent and employment networks, the development of products that fit the profiles and needs of the low-income clients, successful navigation of increasingly complex and uncertain regulatory environments and a fundamental reinvention of the delivery of insurance.

As I increasingly see these stories and statements about the ‘need to develop appropriate solutions from scratch’, I think back to the pondering I’ve done on whether these opportunities are better suited for a startup / social enterprise or a multinational? One would have the ability to focus entirely on solving the challenges of serving this demanding customer demographic in the context of their environment but the other would have the financial wherewithal to scale rapidly and extend their reach. On the other hand, that ability implies the barriers against too much customization.

Can there be an optimum solution or middle ground between these competing factors? And is that a role that local or regional companies or those of a medium size can play? Call it a Goldilocks Solution.

The Telco and the BoP (January 2009)

Taken in Raawal village, Rajasthan by Goverdhan Meena, Dec 31st 2008

NextBillion.net’s Rob Katz recently posted an Indian news snippet based on research that led the writer to argue that telco’s should focus on their most profitable customers, those at the top of the pyramid. The BoP (Bottom of the Pyramid), as the numbers demonstrate, are simply not worth it. Following some commentary, Rob added his thoughts on why telco’s should overlook these facts and in fact, find ways to emphasize their services for those at the bottom of the social and economic pyramid.

Now, its my turn to add my 5 rupees worth to this debate, luckily, at this point of time, I’m not on a project for any telco as used to be the case in 2008. First, lets put the visual of the data results here, then I’ll proceed with thoughts that have simmered and have been bitten back for quite some time now.* I’ve also had the pleasurable interlude of chatting about mobile phones with numerous people in rural and urban India, particularly those who would be considered BoP, returning just a couple of weeks ago.

What inspired this ramble were Rob’s closing lines,

The debate is ongoing, and there’s no clear winner.  What is clear, however, is that this is not a simple analysis.

Imho, the basic issue is not even a matter of analysis, simple or not, but instead, that of perspective.

The analysis itself is simple, follow the rules of the book, look at the colourful numbers above and simply apply the fundamental principle of Pareto – focus on the 9% that bring you 45% of your profits. No brainer, right?  Then why are we even having this argument? Forget serving the next billion, or 4 billion or even every human being on this planet who isn’t profitable, including your three year old.

But telcos everywhere still persevere. The roads to Ranthambhore are papered over with bright red Vodafone signage. Ironically there’s no coverage outside the district capital and only BSNL or Airtel seem to work depending on the village. So why are the telcos all looking at this market? And not just telcos, why are Google and Microsoft in addition to Vodafone and Nokia, all turning to look at the BoP, unprofitable though it maybe?

Its because somebody somewhere, in fact, a lot of somebodies in a lot of somewheres, all have that niggly little feeling in their gut that if only they could crack the code, there’s gold in them thar hills. Or at least, profits. Lets start with some challenges telcos face when addressing the problem of the “unprofitable” BoP subscriber:

Internal mindset – business school programming

The Institute of Design taught me one of the most powerful lessons in design – aka problem solving – if you can frame the problem correctly, then half the solution is right there. The uppermost problem on every telco employee’s agenda is that of dropping ARPU rates. As in, “OMG, we’re adding the population of Sweden every month to our mobile subscriber base but our Average Revenue Per User continues to drop.”  Duh, yeah.

Of course ARPU will drop. You’re expanding your subscriber base lower and lower down the income stream who will be, most logically, spending less and less on your services. Growth, in this case, is simply adding to the denominator in your own mathematical formula. Perhaps the metric of success when expanding into BoP markets cannot be the same as that held for your ‘richer’ markets?

The BoP are a funny thing. In one sense, they are a numbers game – there’s billions of them – but in another, they aren’t. They will NOT spend in the same way that your wealthier, professionally employed, high tech gadgeteering, mobile data surfing geeky segments are likely to do. Case in point, those 9% up there who are oh so profitable to their respective service providers.

However, the BoP will spend – but only, and this is crucial, only if they perceive the value of what they are spending for, more so when it starts to go beyond the essentials (in the case of the mobile, that’s basic maintenance of their SIM card validity and enough for an emergency call or two). Services and applications for the BoP need to demonstrate simply and clearly the answer to the question “Why should I spend good money on this?”

But before we go into what the BoP needs and why and how they make the decision to spend their hard earned cash, lets take a look at why the telcos haven’t been able to crack this problem with that holy grail, the “BoP killer app” ? (except mPesa, so perhaps that’s a lesson there in itself, eh?)

Big companies like telcos are staffed with MBAs and every decision to spend money on developing a new product (service, application, you name it) must be justified up chains of command and control with shiny numbers, excel spreadsheets, estimates of target audience, demographics and one of the biggest killers for the development of valid BoP services – the concept of “disposable” income. Those at the BoP will find the money for some expense or purchase if its deemed necessary to their wellbeing, survival or future but no penny they have is disposable.

And if you begin the design process by starting with the segment of the BoP who have the disposable income for your product rather than starting with a clear value proposition and an understanding of your target market’s mindset, what are the chances you are going to end up with a dud product that nobody wants to buy?

Pareto’s killer principle

Pareto’s principle applies globally as well and for those telcos whose footprints span the globe, its not just the top and bottom of the same pyramid, but the difference between what’s being spent by their wealthier subscribers in hard currency zones versus their returns from the developing world. Because of those numbers, in that chart, the ones that clearly demonstrate its not worth the effort to invest in developing relevant, affordable or appropriate services for the BoP on the mobile platform, you know, the stuff they’d actually want to shell out good money for, the BoP usually end up with crap that’s irrelevant and useless. For the logic goes, lets develop something for our subscribers in X, Y, or Z OECD nation and simply adapt it for our emerging markets, yeah?

So users in Berlin get scrutinized for ideas that will conceivably make pots of money in Calcutta and CapeTown. Forget Raawal village or Soweto or the outskirts of Kisumu. Naturally, one assumes, that since a phone is a phone is a phone, what Herr Schmidt likes to download and spend money on is the same as Goverdhan Meena. They just speak a different language and perhaps, Mr Meena earns a lot less. Sigh.

Otoh, if you were to actually look at the culture and context of your emerging markets, or in the case of India, the subject of the original post, the difference in needs and spending habits of the surfing urban 9% and the aspiring rural farmer’s son or migrant worker and then developed some services and solutions that made sense to him, do you think he might not want to buy it?

The irony is that this is not unknown or rare knowledge – that there’s a gulf between the urban and rural, the ToP and the BoP or the West and the East – but it seems to me that when it boils down to it, the telco chappies still seem to think that one size will not only fit all but there’s no cognitive dissonance in the exercise either. Top down concept design and development will only go so far – that is, to the limits of those who are part of mainstream consumer culture, who seek entertainment and iPhones (well described as a phone for those who wish to consume rather than produce). LirneAsia’s research on mobile usage at the BoP had led Dr Rohan Samarajiva to proclaim that for the BoP it would be models based on production – save them time or make them money – that would work, not models based on consumption – no matter how attractive the game, your average member of the BoP would think twice about downloading entertainment.

In fact, let me digress into a story here, when I was talking to Sanjay (a factory worker) about downloading stuff onto mobiles he said that he preferred “nokia dot com” (as he called it)- he said that when wanted to download something – a ringtone, a wallpaper, whatever – he preferred Nokia because before download they told you how much it would cost to do it and then you could take the decision to spend but Airtel and Hutch et al simply download and only later you found out you’d spent Rs 20 on something you didn’t think was worth it. Case in point, your customer feels screwed. Brand loyalty is rarely built by advertising alone and the BoP are far more cynical than your average mainstream consumer. He doesn’t have that spare Rs 20 for experimenting, every penny counts.

Finally, the bottomline

That’s the biggest problem innit? The bottomline aka profits? Although I must admit that because this entire rant was triggered by an Indian analysis, I would like to take this moment to point out that there’s still little or no comprehension in India of the need to do something for the BoP, that business can still be run on the metrics of profitability alone and the next billion will either somehow manage or its the government’s job to provide.Its an attitude problem, not an analytical one.

I came back from India thinking that innovative new services on the mobile platform would not emerge or bubble up indigenously, but ironically were far more likely to diffuse from sub Saharan Africa. There’s simply no focus on the needs of the BoP there, although data now begins to show that states that have significant mobile penetration are doing far better than states where mobiles have yet to reach the lower income strata. Not to mention all the studies done on the impact of mobile phones on the GDP of developing nations. No, your average Indian techie is too busy chasing the iPhone crowd to even imagine that his driver’s mother back home in the village might want a service on her mobile. Let them eat cake.

Global multinationals are certainly focusing on the BoP markets, as Rob has pointed out in his second post, but they too stumble along using outdated methods and assumptions when attempting to design something for this new and critically, unknown, market. If Nokia can launch English language lessons in China – just think of the market for that – why do the rest of the device manufacturers cling tightly to the idea that they’re just device manufacturers? Its ironic to think that the kind of brand power Nokia has among the BoP will allow them to someday overtake the telcos in “ARPU”.

And if mPesa can capture the attention of the world, then what’s stopping the Indians telcos? Will it take their ad agency to inspire them to do something or will continue to rely on outdated lessons of how to address a new market from business school teachings or big name management consultancies who have yet to catch up with today’s global economic reality?

What will happen though if the telcos continue to think this way is that they’ll be simply overtaken by the hackers themselves. The bottom line is about enhancing people’s lives now not profitability alone.No excel spreadsheet will show you that nor Pareto’s principle apply, to be honest, we’re talking about too many billion people who cannot be ignored for emphasis to continue to the 20% who consume the most resources. Refresh your assumptions, open your eyes, look at the big picture. The future is staring right at you, its all about give and take. Help them and they’ll help you. The BoP are people too.

Update May 19th 2010: Has anything changed in the past 16 months? And if so, what and how?