Purchasing Patterns in Cash Based Markets and Informal Economy

When cash flow is irregular and not always unpredictable, both in amount and frequency, such as it is for the majority earning a living in the informal economy, buyer behavior is not quite the same as for mainstream consumers with access to credit cards and regular paychecks.

I’ve quite often made reference to how operating primarily in cash money influences purchasing patterns. Here, I cluster the patterns observed into 4 categories, based on a combination of need and money available.

prepaid-electricity-units-in-ho-ghana-1

Source: http://www.hobotraveler.com/electricity/prepaid-electricity-units-in-ho-ghana.php

1. Paid for in advance – Usually a service that can be utilized or consumed over time can be purchased in advance when funds are available and then made to last as long as possible. The best known example of course is prepaid airtime – voice, text and data for mobile phones. Consumers on limited budgets then seek coping mechanisms to extend the “life” of the service purchased.

FOURfridge

Source: Niti Bhan, South Africa January 2008

An example is this refrigerator powered by LPG available in rural South Africa. It helps conserve the electricity consumption (South Africa was the first to install prepaid electricity meters) and is a parallel investment in ‘prepaid’ energy – the LPG cylinder.

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Source: Niti Bhan, South Africa, January 2008

2. Bought in bulk – Usually food staples or something you cannot live without would be purchased in this manner, either when there is a sudden influx of cash or a payment at the end of manual labour, or, if managing on a fixed amount each month such as remittances from abroad. This ensures that there is something to eat even if money runs out before the next payment might be due. If it’s a sudden influx of cash for someone not on a pension or remittance, then this lumpsum is also the source of funds that may go towards a consumer durable purchase or big ticket item of some kind. In rural economies, the harvest season is major shopping time and boost to local commerce.

Freshly shredded cabbage (Photo Credit: Niti Bhan)

Source: Niti Bhan, rural Kenya, February 2012

 3. On demand or daily purchase – mostly perishables like bread, eggs, fresh vegetables purchased for the day’s needs. Partly cultural but also influenced by availability of cash in hand. Cigarettes sold loose or two slices of bread and an egg are some examples we’ve seen. Indian vegetable vendors are also willing to sell you a small portion of a larger vegetable either by weight or by price. You can buy 50p worth of cabbage for a single meal. Mama Mboga in Kenya will even shred it for you. Minimizes wastage whether you’re cooking for one or have no fridge.

This is also the most common pattern if you earn small amounts daily, like the vegetable vendor, shelling out what you have for what you need and then if there’s some change, debating what do with it.

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Source: Niti Bhan, The Philippines, January 2009

4. Single use portions – A form of on demand purchase. Interestingly, I came across this working paper by Anand Kumar Jaiswal at IIM, saying that sales results in rural India seemed to imply that only shampoos and razor blades were more successful in sachet form, whereas things like milkpowder, jam etc sold more in the larger size.

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Source: Niti Bhan South Africa January 2008

The author cautions against assuming all sachets will sell. I believe it could be based on the usage pattern of the product in question or its nature – what if you packaged a perishable item in single servings that didn’t need refrigeration until opened? Formal packaging in sachets – the kadogo economy – emerged from existing behaviour in informal retail. Breaking bulk down into smaller portions is popular across the developing world’s informal markets.

Single meal portions of vegetables, Cabatuan market, Iloilo February 2009

Single meal portions of vegetables, Cabatuan market, Iloilo February 2009 Photo: Niti Bhan

This shopkeeper in The Philippines has gone a step further to offer you the convenience of purchasing all the vegetables you need for stew – carrots, beans, cabbage – without the financial burden of having to purchase the entire cabbage or carrot. Its a combination of the single use packaging (not quite a sachet) and the on demand purchase of what’s immediately required or affordable. The Philippines has some of the most creative variations of the kadogo or sachet economy that I’ve seen in informal retail.

Business Models for the Informal Economy

You can see the roots of the many variations on business models in these purchasing patterns. As people told me over and over during a project on household solar in East Africa, it wasn’t the price of the product that was the problem but the payment plan which didn’t fit with their existing behaviour. Both must be designed to meet the needs of your intended target audience.

Contact me if you need insights on consumer behaviour, household energy consumption behaviour and financial management behaviour in the rural and informal markets of the developing world. Note, this is not a free offer.

 

Source: These insights are drawn from patterns of behaviour observed among consumers in cash based and informal markets in South Africa, The Philippines, India, Kenya, Rwanda and Malawi. Primary research led and conducted by Niti Bhan. Citation.

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