Should African entrepreneurs target the few affluent or the many low-income consumers?

A Harvard Business Review article suggests the road to entrepreneurial success in Africa goes through affluent consumers, but it's not particularly convincing.

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In the 2017 Harvard Business Review article ‘3 Things Driving Entrepreneurial Growth in Africa,’ Ronald Klingebiel, professor of strategy at the Frankfurt School of Finance and Management, and Christian Stadler, professor of strategic management at Warwick Business School, identify (from an interview of 100 entrepreneurs) three routes to investment & entrepreneurial success in today’s Africa:

  • A focus on affluent customers at the top of the pyramid,

  • Control over land, industrial equipment, and other factors of production, and

  • Innovation in distribution to reach a widely dispersed customer base

The authors conclude:

“…It is paramount to bear in mind that most money is made [in Africa today] in ways so conventional that Western investors might need to take off their augmented reality goggles to spot them.”

While the authors are correct that today large-scale economic success in Africa comes predominantly from more traditional models & industries and that Western investors in African markets need to adjust their thinking to match on-the-ground realities, their premise that targeting customers at the ‘top of the pyramid’ in Africa will lead to long-term success is controversial.

One recurring theme that has emerged from experienced on-the-ground operators in African markets is the latent opportunity awaiting entrepreneurs who can discover ways to profitably serve Africans at the base of the pyramid.

For example, in a 2017 World Economic Forum article on doing business in Africa, Tanzanian businessman Mohammed Dewji writes that the rise of bottom-of-the-pyramid African consumers and companies profitably serving them is one of several key trends driving large-scale private sector growth on the continent.

“When CK Prahalad's published ‘The Fortune at the Bottom of the Pyramid,’ he was speaking directly to the many African entrepreneurs that understood the world’s poor and their untapped buying power. Companies on the continent are learning how to serve these consumers while making money in the process.” — Mohammed Dewji

And in ‘How Iroko went from pioneer to powerhouse,’ I explore how & why IROKO, a leading African subscription-video-on-demand (SVOD) platform, pivoted to target lower-income African consumers in 2014.

Given raw demographic patterns and purchasing power trends, it’s clear that the BOP represents a strategic market for companies doing business in Africa. For example, according to seminal but now-dated research from the IFC (The Next 4 Billion: Market Size and Business Strategy at the Base of the Pyramid – PDF), Africa’s BOP “is by far the region’s dominant consumer market”, with 71% of the continent’s aggregate purchasing power.

More recent analysis from Euromonitor International finds that in South Africa, one of the continent’s most developed countries, a full third of the adult population live at the base of the pyramid, while in Nigeria, the continent’s most populous country, close to half of the adult population do so. And data from EIU Canback, a sister-company of The Economist, shows that just 10% of Africans earn above the threshold of $10 a day.

While Klingebiel and Stadler write that investors should want African entrepreneurs to focus on the top of the pyramid, the truth is that risk capital tends to be drawn to larger market sizes and growth rates. In Africa today, affluent customers at the top of the pyramid make up only a sliver of the population and purchasing power, and this segment of the population isn’t likely to experience significant growth in the near future.

Targeting Africa’s low-income consumers is the larger overall B2C opportunity and telcos, CPG/FMCG companies, and some banks operating in the region have increasingly shaped their organizations around this reality. Although it involves several challenges (for example, requiring the development of innovative inroads into the informal economy in some cases or re-thinking pricing strategies), entrepreneurs and investors who are able to successfully navigate these roadblocks will be richly rewarded.

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