How to segment the informal sector

This is a research interest that I’ve been pursuing ever since the very first fieldwork for the prepaid economy project that was prototyped in rural Rajasthan state in India back in December 2008.

The challenge of discovering, then testing and refining the framework for segmenting the informal sector of the economy – particularly by purchasing power.

Incomes tend to be irregular, and cash flows are far more volatile with unpredictability to the nth degree enjoyed by the white collar formal sector workers with their salary slips and paychecks.

The goal is to stabilize some cash flow sources as a base on which to build upon. Then, at least, there’s a known estimating ability in the revenue stream, which offers greater control over planning of expenditure – the amounts, the timing – frequency and/or periodicity, and the savings strategies.

Different levels need different financial tools and services. Thus, segmentation helps better define the target audiences for new products and services catering to this so called prepaid economy.

Just like the true value of a customer to a telco isn’t the amount of the voucher she may purchase but the frequency with which she purchases over different periods of duration. Traders in Nigeria were found to purchase in small increments but multiple times as often as in one day.

Similarly, the businessman cannot afford to sink cash into inventory where its trapped until a random day when and if it will be released. Thus, one can safely assume that the purchasing power of those buying inventory for their various trading operations can be correlated to their turnover.

So, a trader who may spend only 10,000 shillings with one source in one week, is actually purchasing 40 to 50 thousand shillings worth every week from multiple sources. That is easily over a 1000 USD a month. This is a stable business for the informal trader.

The next stage is a bit harder to climb and it means crossing USD 3000 a month in inventory purchases, including the individual’s risk assessment of themselves.

Once there, these businesses are a mere technicality away from formal SME status. What these details are must be the next steps for local policymakers to figure out. All we saw were incomprehensible barriers to entry that don’t make sense in a more streamlined and connected world.

The role of the formal structure has changed and thus its design must evolve to reflect that change since the first principles were laid down about one hundred or so years ago.

Once it is attractive as a proposed next step up the value chain ladder to globalized commerce, then there is an entire new segment as a solid middle class tax base. Right now the middle class has no business people and entrepreneurs counted at all, why?

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