Friday, January 9, 2015

Is it OK to make a profit serving the extreme poor?

De-regulated Britain has a nasty reputation for taxing poverty - the poor pay much more for electricity, get charged crippling interest rates, and get ripped off when they buy things (*see example below); it's been called a 'poverty premium'. It seems repellent but it makes commercial sense and it's all quite legal. The argument for allowing this predatory behaviour is that this is the only way for companies to serve this demographic profitably; the problems stem from the way companies market to people whose maths isn't good enough to work out they're being fleeced, or who feel they have no choices.

The next generation of Ethiopia's farmers
Those of us working in the mobile for development (M4D) sector in poorer parts of the world realise we have to grapple with the same basic issue: serving poor people is risky and if it doesn't cover its costs it won't happen once donor support is withdrawn. But if companies are allowed to profit unsupervised from providing services to quite naive consumers then you risk questionable business practices. But can the economics ever support such services in the long run?

I'm working on an innovative Ethiopian mobile voucher scheme, and it seems perfectly logical to us to hope that lending money to farmers will allow them to buy fertiliser to grow a bigger crop to sell for more money to reinvest in a better future. This virtuous cycle depends however on a few things working out: it needs to rain, the fertiliser needs to make a bigger harvest, the price of corn needs to stay up despite there being more of it, the money farmers earn needs to support a loan interest rate that is more than the lender's wholesale borrowing rate, and the farmer needs to repay the loan.

New and old ways of distributing agri-inputs
But what if I imagine adding another service on top, that might make the farmer an extra $20 on top of all this - if I charge less than $20 for this imaginary new service but still make a profit, then surely everyone's a winner? This is a poverty premium question: what if I have something that I am pretty sure farmers will benefit financially from, but which I need to provide on a commercial basis - what are the limits to the economics of a service that targets poor farmers in Africa and Asia with a useful value-add which needs to make a profit?

In Ethiopia, where farmers can get agricultural advice for free on their phones, the Agricultural Transformation Agency (ATA) [note: I advise them but not about this agri advice service] has had an amazing take-up, getting over half a million registered users in less than 6 months and over 3.5 million calls. But nobody can run a free service forever unless there's some profitable model underlying it. In this article I'm going to ask when it's fair to make a profit, and see if there are price points at which it's possible to improve lives and make money, and how to charge those prices.

Let's look again at a previous blog post where I compared this successful Ethiopian agri info service with a similar one in Mali. Orange Sènèkèla is a value added mobile telecom agricultural service (agri VAS) priced at a discounted $0.10 a minute whose call centre had reached 'few users' and whose USSD service 'had not acquired any customers at the time' of GSMA's own baseline survey. Yet Sènèkèla provides accurate market pricing data that is known to be a pain point for farmers in Mali, so it seems strange that people aren't calling it. Although 95% of focus group respondents found Sènèkèla to be too expensive, surely a farmer selling $500 of produce should want to spend $0.30 on a three minute call that might make an extra few $; but apparently not.

Cash accounting at the cooperative
Clearly price is part of the problem given that the free service in Ethiopia has a massive call volume. Let's make a very unscientific guess at a fair price: just 5% of the focus group in Mali presumably didn't think Sènèkèla was too expensive, meaning that the price is way out right now; if we flipped these numbers and asked what price you'd have to drop to until just 5% of farmers said it was too expensive, then perhaps $0.03 would work. The interesting thing about the Ethiopian service is that the 500k registered users is about 5% of the total farmers in the target area - having worked in mobile services for over 20 years I regard 5% as being close to saturation of a target mobile consumer base. My gut feel therefore is that a price between zero and $0.03 would probably work for this demographic, whose income let's not forget is typically less than $1 a day if earning an agricultural wage, i.e. employed and paid regularly, rather than the even more precarious income of a small holder farmer who gets nothing if the rains fail. In Ethiopia, there were 1.63 million calls to the service 16 Sep - 2 Dec 2014, an average of 21,158 a day. If ATA had charged $0.03 for this service the income would have been $230,000 annualised.

What does it cost to build one of these services? GSMA granted $400k to each of its four mFarmer Initiative winners to 'develop and scale commercially viable' Agri VAS 'for an implementation period of 2 years', so let's call it $200k a year. Round numbers it seems that the economics might support a profitable Agri VAS so long as farmers call it in huge numbers and it's $0.01 a minute to call and calls last just 3 minutes.

This analysis is very superficial - a much bigger problem about pricing this kind of service is that as a poor consumer you need to try before you buy. If the service I call doesn't tell me anything I don't know, it's a waste of my time and money, but I don't know this before I call. Sènèkèla costs me $0.10 a minute even if I hear exactly what my neighbour told me just the day before. This implies that the Ethiopian service is a success because farmers lose just a few minutes of their time but no money to call it up;  they call it back again because they find it useful. This leads me to the conclusion that offering free services and then adding paid value added services on top is a viable approach.

But how much can I charge for this secondary value-added service? If the farmers trust the service, and know it's valuable, what's the right price point? Can I genuinely make a decent profit out of it, once the farmers trust the service I provide? If so, then we can develop economic models that overcome the 'poverty premium'.

Let's calibrate this by looking at farmer incomes. In Ethiopia, a farmer with 1 hectare of land may spend $100-150 on inputs (seeds, fertiliser and chemicals). This might yield a harvest of 25 quintals of teff which he can sell for 1,600 Birr per quintal, or $2,000 for the whole crop. Sure, some of this crop is for the family's own consumption, but a 1% increase in the yield is "worth" $20. If the farmer was also an economist, he'd be willing to spend $19 on value added services so long as he could be sure it would boost his yield by 1%. Even if we discount this by 90%, he should still be willing to spend $2 for every 1% increase in yield. That's three hours of phone calls to the agricultural advice line (at our presumed $0.03/three minute call rate).

What I learned from this exercise is:
  1. There's a chicken-and-egg problem with value added services: if you don't know it's worth calling, you wont call it. Free services overcome this problem
  2. A free service plus a paid value-added service looks like it ought to be sustainable if together they actually add value to people's lives
  3. Even at this subsistence end of the food chain, you can provide services at a profit to the poorest people. There is a win-win to be found in providing basic mobile phone value added services to the poorest

* Poverty premium example
UK, weekly payment plan for washing machine, Dec 2014

Brightpoint total payable Hoover washing machineBHS Direct prive for Hoover washing machine
Total payable to BrightHouse (image: right) if I pay £11 per week for the Hoover DYN 10166P8 washing machine is £1,716. If I buy today from BHS (image: below) it's £444.

I pay more to BrightHouse in each of three whole years than I pay to BHS just once by buying now.

Malcolm Vernon is a consultant with Social Mobile Ventures Ltd, a company that advises on mobile for development in Asia and Africa. You can contact him at