Affordability is not the same as a lower price point

By | August 4, 2013

Third party informal kerosene sales point deep interior of rural Eastern Kenya. Photo credit: Niti Bhan

Absolute price of a product has always been assumed to be the means to successfully reach the BoP customer and the concept of affordable is often a synonym for cheaper. While price bands do matter when targeting this market, price/performance ratios tend to be more important to those who seek the best value for their hard earned and limited cash and affordability is proportional to the flexibility of the payment plan than the lumpsum amount. This is evidenced by the findings from the household energy consumption behaviour research conducted among representatives of the claimed target audience (the Base of the Pyramid living without electricity) which captured fuel usage and purchasing patterns based on income and cash flow.

The vast majority of the rural BoP who tend to be subsistence farmers managing on irregular income streams from a variety of sources have seasonal peaks and lows in their cash flow. Only on occasion during the course of the natural year are lumpsums of cash available for direct purchase. Documented behaviour includes storing household ‘wealth’ in the form of livestock, to be sold on demand for emergencies or at predetermined times of need such as for school fees at the beginning of the year.

Harvests are a seasonal time of plenty and shopkeepers in each region are aware of the major buying season for consumer durables and other high ticket items. At other times, purchases are made by the way of a variety of ‘informal microfinance’ tools such as shopkeepers offering layaway plans within their local community, permitting customers to pay off the price of the desired product over time and offering flexibility of duration, periodicity, frequency and amount of each payment per the customer’s convenience.  The risks are only when the customer is a relative stranger to the area.

This purchasing pattern, based as it is on an irregular cash flow of varying but small amounts, is why kerosene as a choice of fuel for lighting is so embedded in rural BoP markets. One can purchase it on demand, by cash amount (as little as 5 eurocents) or quantity (250 ml or even less) thus its purchase and use can be determined by the cash available on hand to the customer. It is the requirement of a lumpsum amount of cash that more often acts as a barrier to purchase than the absolute price of the product.

Thus, affordability of a product or service, in the mind of the BoP customer, has more to do with the flexibility of the payment plans than the price range. An example of this is the widespread prevalence of prepaid or pay as you go payment plans for mobile phone airtime that has made mobile phone usage affordable in the informal economy where few have the regular paychecks or consumer credit facilities to consider post paid subscriptions that deliver a monthly bill for an unknown amount.

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