The upcoming London Business School Africa Business Summit, which holds on Saturday, May 12th, is focused on the theme of "Scaling for Impact". In partnership with the London Business School, Derin Adebayo looks at the challenges of scaling a business in countries with a fragile middle class.
The African middle class is an almost mythical figure. There are rumours about its size. Mckinsey thinks it was 128 million in 2008 while the African Development Bank says it was 350 million strong in 2011. In reality, the African middle class is an amorphous beast, vulnerable to shocks and prone to shifting in and out of the category as incomes change. A high dependency ratio, lack of social safety nets and poor infrastructure means that the middle class needs to spend more money than elsewhere and therefore have less disposable income.
Without a strong middle class, businesses have struggled to scale. The poor have limited purchasing power, and the rich are a minority, leaving the middle class as the surest path to reaching a large market. Developed economies tend to be built on a strong middle class that drives consumption.
But this does not mean that entrepreneurs have to down their tools and go home because they have no hopes of scaling. Instead, it means that we need a more nuanced understanding of how to scale in a market without a strong middle class. We present two ways of thinking about how to build products that scale.
The poor have lower incomes, so they spend less, but that doesn’t mean they do not have needs. However, they often have many unmet needs, a situation known as non-consumption, where no solution in the market serves that need at an appropriate price point. Innovations that target non-consumption expand the market for a particular product by bringing new users into the market.
A few years ago, it became clear that programming skills were very valuable. The only problem was where to gain the skills. Schools and Universities had not yet figured out how to teach programming skills and self-learning required a laptop, internet connection and lots of free time – luxuries that not everyone could afford. Andela was formed against this backdrop, offering potential learners access to laptops, internet, a place to learn and programming instructors. They even paid students a decent salary while on the program.
Andela is a technology outsourcing company, and the students are their employees. It is not a charity. Its innovative business model is what empowered it to bring in many non-consumers of “programming training” and serve their needs at an affordable price point.
Mobile money is another example of a product that targets non-consumption. Millions of lower-income people who needed to access banking services – save, transfer funds, etc. – often had to make expensive trips to the bank. Mobile money brought those “non-consumers” into the market for banking services.
Targeting non-consumption is tricky as the absence of a market is a lot more difficult to notice than the presence of a large market. It's also counter-intuitive: to target non-consumers, you do not go where there is a large market, you go where there is no market. You look for places where consumers are using workarounds to tackle basic problems.
Again, looking at mobile money. Before the existence of mobile banking products, people used workarounds to transfer money. Some people put money in envelopes and physically sent them to people in other cities via taxi drivers, while some people acted as money agents making transactions on behalf of people who didn't have access to banking services. Wherever you see a workaround being used to tackle a basic problem, that's usually a sign of the presence of non-consumption.
Painkillers vs Vitamins
In a Facebook white paper, a user described his daily choice between buying credit and taking the bus to work. If he buys data, he walks to the office. If he doesn’t buy data, then he can afford to take the bus. The African middle class and poor need to make hard choices when considering what to purchase, so are more desperate for high value-adding products. In a rich country, you can carve out a market niche by making a slightly better version of the available product. But when new products have to compete for share-of-wallet with essentials like transportation, these products have to make user's lives materially better to stand a chance.
There is a product development saying that is especially important in a low consumption environment: make painkillers and not vitamins. Vitamins are “wants”, they are nice to have, but you can do without them. Painkillers are needs, things that scratch a real itch. In Nigeria, only 2.5% of Nigerian households have an air conditioner. That’s a vitamin. Meanwhile, people spend 56% of their income on food. That’s a painkiller. Now we see why Indomie can build a $1 billion business in Nigeria.
Victor Asemota, a frequent commenter on entrepreneurship in Nigeria, penned an interesting piece on the requirement to fill a deep need in order to scale in Nigeria. He proposes a "Jollof test" – your product has to be ten times better than jollof rice to scale in Nigeria. Although the test is slightly tongue-in-cheek (and highly unlikely given the popularity of jollof rice), it addresses the issue that when consumers have low disposable income, a product needs to scratch a real itch in other to capture part of their disposable income.
Scaling for impact
These ideas are neither necessary nor sufficient to scale. Not every product that targets non-consumption and tries to fill a deep need will scale. However, we can use these frameworks as guideposts when thinking about the types of products that can scale in a country with a fragile middle class.