Posts Tagged ‘operating environment’

Detailed breakdown of Uber’s business model in Kenya puts spotlight on weaknesses

Latiff Cherono has just published an indepth analysis of what exactly it takes for an Uber driver in Nairobi to cover the cost of doing business. Here’s a snippet,

In this post, I try to understand the root cause of the disconnect between how the customer (who defines the value), Uber (the service that controls the experience) and the driver (the one who provides the service).

He accompanies his analysis with a detailed breakdown of costs and revenues, such as the table below, and others in his post.

new-picture-2And concludes:

The incentive for any person who starts a business is to maximize their profits. As such, we should expect that Uber drivers will approach their business in the same vein. However, the data provide by Uber to the driver is limited and prevents them from making informed decisions about generating revenue. For example, drivers do not know the estimate distance of a new trip when they accept it via the app. They are also penalized for not accepting rides (even if that trip may not make financial sense to the driver). All this is by design as Uber wants to maintain a steady supply of “online” vehicles on their network. One may argue that Uber is not being transparent enough with its independent contractors.

My thoughts:

Nairobi, Kenya isn’t the only ‘developing’ country context where Uber is creating unhappy drivers (and customers, one assumes) due to the design of their system. While most of the first world challenges to the company have come from the perspective of the formal economy and its regulations and laws regarding revenue, tax, employment status et al, the same cannot hold for the entirely different operating environment where the informal sector holds sway. And taxi driving is one such service.

Kampala, Uganda has it’s own challenges for Uber, including:

  • Uber drivers are reportedly leaving the service, switching off the Uber apps or not picking calls from corporate clients and those paying with a credit card. For the first four months after its launch, Uber was offering drivers incentives that saw them earn between Ush200,000 ($57.1) and Ush350,000 ($100) a week.
  • With increasing competition, drivers say that Uber’s incentive structure has been changing. In the first four months, Uber drivers were getting Ush15,000 (about $4) per hour, but this has since been scaled down to Ush10,000 ($2.9) and to Ush4,000 ($1.1) in incentives.

There is so much to be unpacked here, including the entire section on Uber’s own perception of how the market works, upto and including how to introduce time limited incentives, that I’ll follow up on it subsequently.

In this post, I wanted to highlight Latiff’s analysis and hard work pulling together the operating costs data, even as I leave you with this snippet from the article:

Uber’s commission in Nariobi was reduced from 25 to 20 per cent following protests by drivers in August, accusing the taxi hailing service of working them like slaves.

As I wrote earlier in the year, Uber could have done so much more in these markets, particularly on the path to formalization. Instead, they’re continuing on their journey as yet another smartphone app making life even easier while squandering the potential for real world change for the less privileged members of our societies.

 

 

The customer is the king; the beneficiary will remain a pauper


We weren’t beholden to our customers until we starting thinking like a business.

We didn’t hold ourselves accountable until we started treating our ‘beneficiaries’ as customers.

No investor took us seriously until we dropped the ‘social enterprise’ label.

~ Ben Lyon, Founder, KopoKopo, Nairobi, Kenya

When I wrote “Why so much ‘BoP’ marketing fails in the developing world” recently, I had sensed that there was a more fundamental problem – either one of implicit assumptions or basic premises – than those which I’d identified through observations in the marketplace. It took these three powerful statements from Ben Lyon, founder of Kenyan startup KopoKopo, to throw light on the issue.

Were these social enterprises treating their customers like kings or were they dealing with them like the beneficiaries of development aid?

Identifying this distinction, we believe, is critical and can make the difference between success and failure. In fact, taking the thought a step further, I now wonder whether this underlying premise might not be the reason why so many social entreprenuers are unable to scale.

The lens through which you percieve your intended customer base and thus, evaluate their needs, purchasing power, wants and wishes becomes the focal point around which your product or service, its business model and distribution strategy as well marketing communications will revolve.

When we seek to serve a very demanding customer who just happens to manage within an extremely challenging environment, we raise the bar on our own performance and metrics of success. For no one will spend good money on something that offers little value or return on investment.

But as long as social enterprises continue to perceive the target audience for their goods or services as ‘beneficiaries’, with all the attendant baggage of assumptions and perceptions, they will never quite be able to address the challenges of creating a market for a profitable and thus sustainable, enterprise.

Maximizing profits alone may not always be the right answer, but even the triple bottom line approach embraced by European businesses can offer a more valuable orientation than simply “doing good”, which may overwhelm critical considerations of “does this actually make sense and does the market actually want it”. I’d written this snippet earlier, before I’d identified where the seed of the confusion seemed to lie.

Because the demand being addressed by these messages is not that of the target audience, who are ultimately the ones for whom these products are made.

Everyday, research shows that the barriers to adoption include:

Improved cookstoves rank poorly on all three dimensions: their benefits are rarely valued highly by customers at the outset, they are expensive, and they require a significant change in lifestyle to be put into use.

Lets start with benefits alone – which is where the topic of identifying the correct value propositions for the target audience comes in. If your messaging and marketing is all about the best selling drill addressing an audience of home improvement contractors but what your actual customers need is a hole in the wall, how will you manage to bridge this gap in communication when you face your customers directly?
By focusing on the value propositions – be they environmental, healthcare related or otherwise – meant for every other stakeholder but the end users aka the customers of the product themselves – organizations may never quite identify nor refine the benefits as they relate to the poor customer, in the context of their lives, and their decision to purchase and use the said products.

And this conflation – of marketing messages meant for shareholders (in formal business terms) being sent to the end customers – will continue to create a barrier to sales and demand creation unless we start taking this demographic seriously as a paying customer. The roots of this challenge are also embedded in the way the concept of “the BoP” has evolved away from Prahalad’s original vision of a vast new market and opportunity into a catchall label for the poor, the downtrodden and the precepts of poverty alleviation.

Scarcity as a driver for innovation

Frugality and affordability are very much in the news of late, what with the most recent essay on Change Observer and this post on Paul Polak’s new blog both highlighting similar concepts but from the point of view of very different markets. It seems to imply the trend towards frugal design or extremely affordable yet relevant and useful products is emerging to the forefront of the mainstream, regardless of whether its the sophisticated mainstream consumer culture or the challenging markets of the lower income demographic. In which case, this is a timely moment in which to give a brief introduction to the conditions of scarcity within which we looked at informal manufacture, fabrication and innovation during our recent trip to Kenya and how these conditions drive innovation. Necessity, after all, has always been the mother of invention.

Infrastructure

Infrastructure availability or systems that we take for granted such as running water, stable electricity supply without voltage fluctuation or blackouts is an ongoing challenge in this operating environment (the majority of the unevenly developed world). This need not necessarily imply “poverty” so much as scarcity or uncertainty – for example, the latest Economist has a great article that underlines this point with regard to India’s chaos having little to do with its economic growth potential and ability. The variability of infrastructure not only influences product development for these markets but as we recently noticed, drives innovation in sometimes surprising directions that we may not always perceive of as an “unmet need” immediately.

Tap (Faucet) lock, Nakuru, Kenya 30th August 2010

These are locks for your water tap, available in the jua kali market in Nakuru, Kenya. They not only prevent the unauthorized use of your water (particularly if its from a tank of finite capacity that you may have paid good money to get filled) but also protects your tap itself from theft (the metal can be sold as scrap to be melted down and reused).

Fuel and energy

While much of the drivers for renewable energy solutions in the developed world are concerned with environmental and energy security issues, (valid in themselves yet still considered a luxury, imho, in the mindset of the customer due to premiums), product development and invention in the emerging markets is based more fundamentally on scarcity and need for affordable reliable power and fuel supply. Does this change the way the problem is framed for the inventors/makers and how does this shift in perspective influence the solution development? As Paul Polak points out:

If you don’t design to realistic customer-derived price points from the very beginning, any tool you design for a poor customer will never be adopted at scale.

Aluminium smelter’s workshop, Nairobi, Kenya September 2010

And it doesn’t necessarily have to be a solar lantern for a poor customer per se – it can be the micro-entrepreneur who wants to lower his costs to the minimum in order to maximize his daily profits. Here is an aluminium smelter’s workshop, the can on the left contains used motor oil which he burns to melt the scrap metal down into ingots for reuse. On the other hand, he is dependent on electricity supply to power his air blower that vaporizes the heavy oil enough for it to burn and loses income if the power is out.

Transportation and distribution

If you’re in the informal economy, you don’t have access to the far flung top of the line logistics and distribution networks that other businesses do, or at least not at scope and scale available. Furthermore, due to the variance in infrastructure and operating environment, this is a challenge even for the biggest companies if you’re in a market like India’s much less the less developed nations. I’ve touched upon this further in this article but here I’m bringing this forth as one more element of scarcity that acts upon the operating environment, and so can lead to some ingenious and/or innovative solutions. Developed in context, they are often very affordable and relevant as they seek to solve locally observed problems.

Modified boda boda bicycle, Maker Faire, Nairobi Kenya 27th August 2010

Boda bodas are bicycle taxis popular in Africa, particularly East Africa, originating in Kenya. Here, these two makers from a smaller town outside of Kisumu came to display their specially modified boda boda. The back carrier has not only been elongated to increase the carrying capacity of the vehicle (which is what this is) but the gentlemen had also figured out that 250 kgs was the average load therefore they had calculated the necessary size of the modification accordingly. In addition, since their local area was both hilly and had uneven paths, they added shock absorbers to help the driver and improved the braking mechanism. Of course, they’d also added the facility to both charge your mobile front at the front of the bike while charging a car battery at the back from the dynamo. There is fodder for an entire article on the bicycle as the platform for innovation in emerging markets but that’s for another day.

Materials and Tools

Far more than in India but I can’t recall the situation in the Philippines at this moment, was the obvious scarcity of appropriate and affordable hand tools, small machine tools and raw material in Kenya.And certainly, there’s no Home Depot or some such there. And Kenya is supposed to be the most advanced in this sphere in the East African region. I would really like more information in this area so please write in or comment if you have knowledge.

Scrap from aluminium casting ready for re melting into ingots

Hammerheads made from old car axles

This earlier post compares two simple manual machines, the local variant of which uses far less energy and material to effect the same purpose and this one takes a look at the prototype of an affordable coffee grinding machine.

Working capital, cash flow and insurance (Risk and uncertainty)

A natural but challenging side effect of operating in the informal economy is access to financial tools and support systems available to small businessmen everywhere else. Bank rates are very very high (the risk of Africa!) and so access to capital for investing in new machines or growth is hobbled by the owner/entreprenuers insistence and preference on saving up and using cash instead. This takes time, slowing down economic development at the grassroots. Microfinance tends to favour consumer behaviour rather than investments or micro-enterprises and regardless, does not tend to take irregular income streams into account.Interestingly enough, mPesa is making a difference in this sphere but again, as a workaround rather than a product targeted at this need. This aspect of products designed to support micro-entreprise was the biggest challenge in the Philippines as well as my colleagues at the Philippine Business for Social Progress have informed me. These very same lacks, one could call it a systemic mistrust, drive creative solutions of a sort perhaps that may not always be preferred as much as the more positive ones mentioned above.

Backpanel of inverter, Nakuru, Kenya 30 August 2010

For example, the gentleman who makes these inverters is forced to put Japan components on his products so that customers will take the risk to purchase his product. He also offers a 1 year warranty and installs what would be an off the shelf, plug and play comp0nent anywhere else himself on the premises. The display and control shown here has inspired a lot of insight on contextual knowledge of technology – “Up for on”, issues of trust and commitment as well as the risk aversion already seen among BoP consumers.

While this has been wholly focused on Kenya, the conditions of scarcity are only variations on the themes that can be seen around the world. In the meantime, they offer much food for thought on the operating environment.

First published October 7th 2010 at Aalto Design Factory, Finland

Observed market forces acting on the changing mobile landscape in East Africa

About two years ago I remember making an observation that I couldn’t seem to see any coherent patterns anymore the way I’d been able to by surfing the net for information. Flux I called it. Everything felt like it was in transition and nothing seemed to stay steady enough to grasp, much less describe. This was particularly apparent in the broad space around mobile phones, the BoP, emerging markets, Africa, and all the things that emerging futures used to write about so passionately. When the patterns stopped is when I think the writing petered away.

Reflecting on this now, particularly right after the intense experience of the Pivot25 conference in Nairobi, I wonder how much of that sense of ‘things are moving too fast to make any sense of so lets step back and away from it for a while’ was but one manifestation of the extremely wide ranging and rapid changes taking place here in Africa. Just over three years ago, when I first went into the field looking at mobile phones among the mass majority of Sub Saharan Africa, the landscape was reasonably clear. Certainly value added services were teh future but what form they would take was still unknown. Voice and text were expensive relative to average cash flow and the majority of mobile phone users were on prepaid or pay as you plans. The great majority, over 90% across the continent – the prepaid plans being the model that facilitated the uptake of subscriber growth at the rates that were already visible as significant in late 2007. The internet was an expensive luxury no matter how you accessed it and available airtime was hoarded like wealth.

Today, if asked, I would say that the landscape is still in flux and still evolving but now we are able to see some of the market forces acting on this rapidly changing environment. Here are some of them, with a particular focus on East Africa, led by Kenya:

  • Undersea cables connecting Africa to the global information network leading to lower cost of bandwidth and data
  • Spread of mobile money transfer and payment systems by operators across the continent
  • There’s been a disappearance of shops buying and selling used phones, you also don’t see as many signs offering phone repair. This needs to be explored further
  • Sub $100 Android smartphones launched in Kenya and Uganda, with other locations to follow
  • Significantly lower costs of voice and SMS
  • MPesa’s ubiquitiousness is now leading to the next level of innovation building on the layer of financial transactions
  • Mobile web uptake increasing daily with phone often only or default device for browsing

There’s more I’m sure but these seem to be the most visible influences, at this point of time and as far as I am able to tell without a focused study. Just yesterday I said that these are dynamic factors so its no more a case of so “what does it all mean?” when you connect these dots, it is more of a situation where we take these environmental conditions and attempt to explore a few scenarios of future evolution and paths of “what might it mean” – both from the point of view of the mobile phone industry as well as otherwise.

Does this environmental shift imply changes for consumer products? Retail? Pricing and business models? I think so but what it is and how it will influence change is yet to be determined.