Business poor

Targeting the Wallet of Africa’s Poor – Doing Business with the Bottom of Pyramid (BOP) Segment

There is no fixed definition of the Bottom of the Pyramid (BOP), as it contains a mix of incomes, living standards, rural-urban locations, and varying levels of access to goods and services, including education, healthcare and organised financial services. But broadly speaking, the BOP refers to the socioeconomic group in a country or society with low income.

In the context of Africa, the BOP can be defined as comprising of households with an annual disposable income of US$2,500 or less. The income threshold of US$2,500 is in constant terms in order to take the impact of inflation into account and so make forecasts of their future purchasing power more accurate. (EuroMonitor, 2017).

According to EuroMonitor report, the three largest BOP markets in Africa, in terms of total expenditure by BOP households are Nigeria, Kenya, and South Africa. These three countries are home to over 16 million households with an annual disposable income below US$2,500, having a combined total spending of US$41.4 billion in 2016. By 2030, the number of BOP households in these three countries is expected to reach 20.4 million, with a total spending of US$52.0 billion (constant terms).

Everyone knows that a $41.4 billion growing market in just three countries in Sub-Saharan Africa isn’t one to ignore. But despite the vastness of this market, it remains largely untapped.

The reluctance to invest is easy to understand. Companies assume that people with such low incomes have little to spend on goods and services and that what they do spend goes to basic needs like food, transportation and shelter. They also assume that various barriers to commerce—corruption, illiteracy, inadequate infrastructure, currency fluctuations, bureaucratic red tape—make it impossible to do business profitably in this segment.

But such assumptions reflect a narrow and largely outdated view of the BOP market. Take the assumption that the poor have no money. It sounds obvious on the surface, but it is wrong. While individual incomes may be low, the aggregate buying power of poor communities is actually quite large. In Nigeria, BOP households accounted for 9.0 percent of Nigeria’s overall alcoholic beverages and tobacco market in 2016. BOP was responsible for 24.7 percent of Kenya’s spending on alcoholic beverages and tobacco and 24.3 percent of the country’s spending on food and non-alcoholic beverages in the same year. In South Africa, discretionary expenditure as a share of South Africa’s BOP household spending stood at 44.6 percent in 2016. This is set to rise to 46.1 percent of BOP spending in 2030.

It is also incorrect to assume that the poor are too concerned with fulfilling their basic needs to “waste” money on nonessential goods. In fact, the poor often do buy “luxury” items. In Lagos, a densely populated city in Nigeria, a large majority of BOP households own a television set, an electric generator, a gas stove and have internet enabled mobile phones. That is partly because buying a house in Lagos and most African cities, for most people at the bottom of the pyramid is not a realistic option. They accept that reality, and rather than save for a rainy day, they spend their income on things they can get now that improve the quality of their lives. This factor and belief contribute to drive a strong demand for nonessential goods among BOP households in the three largest BOP markets in Africa.

The challenge for businesses targeting Africa’s BOP market segment is how to produce goods and services at lower cost, distributed at greater efficiency and delivered at the right price. This is an innovation challenge and businesses that succeed at BOP markets are businesses that evolve an innovative business model and understand three key things about Africa’s BOP market.

Understand the needs, demands and constraints of the target market

Africa’s BOP customers can no longer just be described by their low buying power. That is lazy and the market will punish such laziness. Just like other market segments, BOP customers have specific needs and demands. Understanding what BOP customers need and want requires a significant time investment, working closely with communities, adjusting the business model to the local context and understanding the financial needs of customers.

Introducing the idea of paying for a product that prospective BOP customer may not be familiar with means a lot of work on tailoring a companies’ marketing, distribution and financial approaches. Havard’s Jane Nelson agreed that companies trying to serve the BOP market must take a comprehensive approach to understanding the range of constraints that low-income producers or consumers face. Companies should also think about partnering with others to strengthen their understanding of systems within which low-income producers and consumers are operating.

A company’s clear and deep understanding of the unique and changing needs of BOP customers is the fundamental requirement for success in the BOP market.

Understand the need for continuous innovation to evolve a business model that delivers sustainable value to BOP Customers

To reach low income buyers, business models need to be evolved and value chains may need to be reconfigured.

Customers may require lower price points than the company can meet. They may not have access to the retail outlets where the company sells its products. They may not respond to traditional marketing strategies or they may live in rural areas or slums, where business units may be unable to operate at large scale because of poor infrastructure. The more far-reaching the needed changes are, the more complex, time-consuming, and costly they are to manage.

Businesses that will succeed in Africa’s BOP market understand that they may need to redesign their products, extend distribution, create new channels, invest in market and product development as well as streamline operations to reach low income buyers.

Understand the importance of finding the most appropriate pricing model

Pricing a product or service in a traditional market is complex enough but in a BOP market, it is a different kettle of fish. Different factors beyond income levels such as resistance to change, cost of substitute, cost of customer adoption, and supply chain constraint all combine to increase the complexity of pricing products and services delivered to BOP markets.

The high cost of doing business among the very poor demand a high contribution per transaction. Companies must embrace pricing models that deliver high contribution per transaction without charging above the affordability level of BOP customers. Pricing models such as bundling and subscription based pricing are proven pricing models in BOP markets that deliver high contribution per transaction and can be adapted to fit specific businesses and local BOP customers

To operate successfully in BOP markets, managers must also rethink their business metrics—specifically, the traditional focus on high gross margins. In BOP markets, the profit margin on individual units will always be low. What really counts is capital efficiency – getting the highest possible returns on capital employed (ROCE). The key is constant efforts to reduce capital investments by extensively adopting lean manufacturing, streamlining supply chains, actively managing receivables, and paying close attention to distributors’ performance. Very low capital needs, focused distribution and technology investments, and very large volumes at low margins lead to very high ROCE businesses, creating great economic value for shareholders. Companies that can find ways to dramatically lower costs, therefore, will have a very strong market position.

In conclusion, businesses that will thrive in BOP markets are the ones with clear understanding of the unique and changing needs of BOP customers, possess an innovative approach to addressing the several market constraints, leverage economies of scale and efficient supply chains to capture market share by offering higher quality goods at lower prices while maintaining attractive margins.

Beyond the number of households at the BOP and their total spending, companies need to also take into account factors such as household size, number of children and households’ access to key facilities such as water and electricity. These are important determinants of consumption habits and spending patterns and can help businesses gauge consumer demand at the BOP in Africa’s key markets.

Credit

Aibiz Solutions Limited has specialist business advisors available to help investors and business managers identify needs and opportunities to grow their business and support market research activities. We provide advice, information, referrals and connections to any business seeking support on their growth journey.

 

If you are a business or investor seeking advice and support to help you enter or expand in the African Market, Aibiz Solutions combines her local experience of the African business environment, access to relationships and partnerships as well as global business knowledge to ease the launch of your venture. Our professional service covers end-to-end business solutions for best results as well as setup of Legal entity and securing Government approvals.

 

Reach us on +234(0)8034672744; info@aibizsolutionsng.com or visit www.aibizsolutionsng.com to get started

Leave a Reply

Your email address will not be published. Required fields are marked *