Doing business profitably with low-income earners

BY OLUFEMI ADEDAMOLA OYEDELE     

Olufemi Adedamola Oyedele, MPhil. in Construction Management, managing director/CEO, Fame Oyster & Co. Nigeria, is an expert in real estate investment, a registered estate surveyor and valuer, and an experienced construction project manager. He can be reached on +2348137564200 (text only) or femoyede@gmail.com  

Low-income earners are ubiquitous in Africa, as all over the world. Serving their needs will generate high sales volume because of their great number. Sales volume is an essential indicator of business health. It allows you to track the performance of marketing campaigns, determine customers’ needs, evaluate the efforts of sales representatives/consultants or sales strategies, and choose the best places for location of physical stores. There is a saying in retail business circles that ‘a moving penny is better than stagnant ten pounds sterling’. The world has more poor people than the rich and it is touted that by 2050, more than 40 percent of the extremely poor people in the world will live in Democratic Republic of Congo and Nigeria. Most companies trying to do business with the more than four billion people who make up the world’s poor population should follow a formula long touted by “bottom-of-the-pyramid” experts: offer products at extremely low prices and margins, and hope to generate decent profits by selling enormous quantities of them, according to Erik Simanis, a consultant and authority on innovation and strategies for creating and shaping new mass markets.

This “low price, low margin, high volume” model has been in practice for more than two decades, largely on the basis of Hindustan Unilever Limited’s success in selling Wheel detergent brand to low-income consumers in India. Fast fashion brands, such as Zara and H&M, are able to produce low-cost imitations of high-end fashion. By producing imitations, they are able to satisfy a lot of buyers who cannot afford luxurious fashion, but who are large in number that their needs and or taste should not be neglected. Sales model with the poor is built on the target of meeting about one-third penetration rate of the target market — about 30 percent or more of all consumers in an area. Any business that starts off needing a minimum of 30 percent or higher penetration rate is built on an unsteady foundation. Instead, companies seeking to improve the lives of the world’s poor should focus on a more realistic route to profitability: they need to elevate gross margins far above the company average by pushing down variable costs and boosting the price consumers are willing to pay for a unit of product. They also need to drive up the price point for a single transaction. IKEA low-priced furniture range is a good example.

This combination of higher margins and higher price points boosts the contribution — the amount of money that goes to covering fixed and operating costs — generated from every transaction. Generating a high profit from every sales transaction to the low-income earners requires a three-legged margin-boosting approach: locally-produced products sold as a bundle, an enabling service, and customer peer groups. A locally-produced base product is an offering whose final processing prior to sale — such as dilution or combination with other components or ingredients — is done in close proximity to the target market. The company saves on labour costs because local wage rates are low. Transportation cost is also minimal. Milo chocolate malt beverage produced by Nestle has a refillable pack. When you buy a tin container of Milo product, you can subsequently buy the refillable pack at reduced price for the same content. Milo also has 20 gram sachets that can be used, one at a time, by those that cannot afford to buy the big pack.

When you sell in a bundle (as a package), you are saving consumers’ time and money in gaining access to needed products and creating a richer consumer experience which total value is greater than buying in units. At the same time, bundles allow companies to sell more per transaction. For example, tower aluminium cookware (pots and pans) are in different sizes. It is cheaper to buy these products in sets than to buy in units. Aluminium roofing sheets are also in different gauge (thickness). Poor buyers will prefer to buy more of 0.35mm gauge than the 0.45mm and 0.55mm gauges. Providing after sales and guarantee for the lower gauge range will improve sales. Poor consumers do not usually need the luxurious branding and packaging done to most products by many organisations. They usually buy basic things like food and clothes. What businessmen need is to research the needs of the low-income buyers and try to meet them. If naked bar soaps will be cheaper than packaged ones, why not sell the naked soaps to low-income buyers?

Businessmen must offer an enabling service. To sustain high margins, it is necessary to offer a service that engages customers and gives them the knowledge and skills needed to maximise products’ functionality. A close relationship between consumers and service providers also adds intangible value to the consumer experience, allowing companies to charge a premium. For example, Jumia – an online store in Nigeria, will offer to bring the products home at no extra cost and with after sales services. LagosRide or LagRide is a mobility solution that allows users to book and share the cost of a ride with similar transit patterns in Lagos State, Nigeria. Travellers transiting the same or similar journey can decide to ride in the same car and share the cost of the ride. BuyMeat is a cow and goat sharing or online abattoir service in Nigeria. Between six to ten people can decide to share a whole cow or goat at a cheaper price than buying smaller parts of processed cow.

Customer peer groups or cooperatives should be cultivated. Just like an investment club, a customer peer group is a close-knit association of people with common goals and shared identity. Peer groups can be built around a product. Such groups extend the high-touch benefits of an enabling service, as members help one another adopt new behaviours and mind-sets that make the product more beneficial. Peer groups also drive up the size of sales transactions. All customers stand for the liability of a member. Grameen Bank, the pioneer microcredit organisation in the world was started in Bangladesh by Mahammad Yunus. It is well known for its use of peer groups – self-formed clubs of five to ten people in similar business, usually women – share responsibility for microloans. A group will typically give itself a name and meet regularly to check on members’ businesses and welfare. Grameen boosts the loan amounts given out per transaction by interacting with the lending circle, not individual borrowers. It attributes its 99 percent repayment rate majorly to the self-imposed discipline and mutual learning induced by the peer-group approach. MediCoop CFI in South Africa also anchors its successful operations on the binding chain of co-operators.

If companies wish to launch flourishing ventures capable of transforming the lives of millions of low-income people across the developing world, they must get back to the basic business tenets. LAPO Microfinance Bank Nigeria is a premium microfinance institution which is studying the viability of low-balance savings accounts and the extent to which savings allow vulnerable people to boost their financial resilience and wellbeing. Doing business with low-income earners can actually be profitable. What the businessmen need is to realise that low-income earners are also human beings and have aspirations (cultural identification). Poor people have their own needs and are ready to meet these needs. If they cannot afford to meet their basic needs, it is not because they are poor and have-nots but because they have a careless government which cannot provide them the wherewithal to be human.

• business a.m. commits to publishing a diversity of views, opinions and comments. It, therefore, welcomes your reaction to this and any of our articles via email: comment@businessamlive.com