Is $8 a month affordable for the BoP? Or why do our eyes glaze over small numbers?

They say eyes glaze over when there are multiple zeros on a number. Mine do.

I contest that we are at risk of doing the same on low numbers – a risk that eyes glaze over when we talk a dollar a day, two dollars a day, four dollars a day per person, or 5 cents per litre, per toilet visit, per mobile top-up. How many of us assume that anyone living on mere dollars a day is dirt poor, and anything costing a few cents is dirt cheap? I do, but to understand affordability, the analysis has to go deeper.

Three things are clear:

• For around $6-10 per month, a growing number of households can now acquire a solar home system, access to serviced toilets, or low-cost private education for one child.
• Price is certainly not the only driver of demand. Reliability, value for money, and ability to pay in small instalments have been shown to be critical factors for a range of products and services targeted at the BoP.
• Few of these social enterprises claim to reach the extreme poor, living on under a dollar a day per person (equivalent to $150 per month for a family of 5).

So far so good. So what’s the problem?

I still think affordability – or more precisely the ratio between price and household income – matters and gets insufficient attention. There has been a huge effort to sell quality goods and services at a low price point, particularly harnessing ICT, mobile payments and lean design to trim costs. I have not seen the same effort to understand household incomes and spending patterns.

I lay this charge because I’ve been taken aback, several times, in recent months, at how entrepreneurs, donors, researchers, investors… sloppily throw around figures on incomes at the Base of the Pyramid. Here are some of the most common mistakes I hear:

• Target households live on $60 a month – without specifying whether that is per household or per person. (This figure is so low, it is invariably per person, meaning that family members live on $2 per day). Figures per person are useful if you want to know whether they fit under a given poverty line, and figures per household are useful for comparing household outlay of say $10 a month. But they are no use at all if the two are confused.
• Typical customers rely on farming/casual work and typically earn around $200 a month. That may be correct, but interpret the data carefully. Earnings of breadwinners, average household income, and income per person are very different things. If two breadwinners earn $200 per month each, household income is $400, and average per person (family of 5) is $80 pm or $2.6 per day.
• Our product is affordable even to the lowest income groups…. Our product costs only 10 US cents per day. Maybe. But that’s $3 a month, which is 2% of household income for family living on $1 per person per day. There is not much that I would commit 2% of my household income to without very careful thought.

If entrepreneurs and investors muddled up turnover, EBIT and EBITDA, they would not get far. But it seems totally normal to muddle up earnings per worker per month, household income, and per capita consumption. As for the difference between figures in market prices, and figures in Purchasing Power Parity from the World Bank, IFC, or Progress out of Poverty Index, I won’t start that here. Suffice to say you have to convert between $ in PPP and $ in market prices, and very few people do.

Let’s put a few figures into perspective.

IFC calls the bottom half of the global population the ‘lowest income’ segment. They live on less than $3 per person per day (2005 Purchasing Power Parity). That means maximum household income for a family of 5 is $450 (PPP) so probably $300-400 per month in current US $ in many developing countries (because for the majority of countries, $1 PPP is worth more than $1 in market prices). The three billion people or so in this group, in the first to fiftieth centiles of the global income distribution, are clearly highly varied. Development agencies distinguish them further with $1 and $2 poverty lines.

According to IFC’s Global Consumption Database, the lowest income segment in Africa spend an average of 60% of their income on food. In addition, 9% is spent on housing, 5% on energy, 4% on health, 4% on transport, 2% on mobiles/ICT. With so much spent on food, it’s clear how little truly ‘disposable’ income there is.

Say one family of 5 in this segment has the chance to take advantage of a host of inclusive business offferings: if they use a serviced toilet (say $8) per month, put two children into low-cost private schooling (say $8 a month each), pay for an 80Kw solar home system over 36 months (say $12 a month), and buy locally-treated water (say $3 a month), they’d be spending almost $40 per month for their lighting, water, sanitation and 2 kids in school. For those at the top of this ‘lowest income’ segment, that’s around 10% of monthly household income. But for those at the dollar a day line, it’s more like 30%. I’m in no position to judge what the poor will spend on, but clearly spend of 10% is more likely than 30%.

Why does this matter I hear you ask? Inclusive business at the BoP is doing pretty well, it’s not claiming to reach the poorest, most investors are not too bothered which income segments are reached, and it’s the price and quality of the product vs its competitors and substitutes, rather than it’s share of household income, that really determines sales.

It matters to me for three reasons.

Firstly, if I was an accountant, I wouldn’t like sloppy financial accounts. I don’t like sloppy use of numbers about poor households, as if the difference between one low number and another doesn’t matter.

Secondly, the BoP market is progressing but not yet proven. We certainly don’t know yet the scale and reliability of the market at the ‘bottom’ of the pyramid – within the lowest segment (half the world’s population), rather than the $3-10 per day market. We need to understand the shape and evolution of this market better.

Thirdly, over time, the melee of investors, donors, philanthropists and others will become less entangled, with each finding their role. There will be a role for donors that want to harness social enterprise for the lowest income segments, that clearly differs from the market-minded investors driven to achieve scalable returns. I am hearing the conversations about mission drift as businesses scale or exits are found. This will become a bigger issue in years ahead. It will be more important for each actor to define and find their role. But if each is to find their own niche, clearer segmentation of the market, and understanding of the customers, is needed.

Further information

1. The IFC’s Global Consumption Database provides spending data for the BoP. See my introduction to it here.

2. There is no single definition of the BoP or the Poor in terms of income level. A Working Paper by my colleague and I, under the DFID Impact Programme, reviews the various definition in use. See Tracking Reach to the Base of the Pyramid through Impact Investing.

3. Prices of toilets, low-cost schools and solar home systems vary hugely, both by product and by region. The examples used above are illustrative, representing neither the lowest nor highest of a range of prices found across a number of examples across continents.

This blog was included in the August 2015 Inclusive Business Highlights newsletter. Click here to read more news, interviews and opinions.