How much should I charge Nigerians for my product
Pricing products for the mass market
There’s a limit to how much consumer products can charge users and remain widely available. Many technology companies charge the user nothing, or pass on the costs to the seller or interested third parties. Amazon offers users free shipping and charges sellers to reach customers. Google charges nothing to store your photos but they charge businesses who want to reach you. These models work because the customer has spending power independent of the service they are currently using. Also, businesses know they can meet their business outcomes if they can reach the company’s consumers. Taken to the extreme, WeChat and Alibaba, the biggest Chinese tech firms, own the user, and support a network of services to make money from the businesses who want to reach their users. The business model varies from advertising to transaction fees, but the principle is the same: I have the users, and you must pay me to reach them.
These models hit a wall in Nigeria and many other African countries.
Why this doesn’t work in Nigeria
Most people in Nigeria have too little spending power, and it is difficult to meet a price point that creates big and build a profitable business. Take Facebook for example. In the “Rest of World” which is mostly African countries, Facebook made Average Revenue Per User (ARPU) per quarter of $2.77 in Q4 ’20 vs $53.56 in the US and Canada. The low ARPU is not due to a small number of users. Given Facebook’s revenue is from advertising, lower ARPU means fewer businesses are willing to pay to reach customers in these “rest of world” markets.
Africa’s telcos are similar. MTN, Nigeria’s largest telco, has an ARPU of N1,467.02 ($3.5) per month as at Q3 2020. In contrasts, telcos in the US hover around the $30 — $50 range. In many African countries, telcos are the definition of mass-market and have tens of millions of customers. Yet, the most successful of them have lower ARPUs, in part due to the lower spending power of the population.
In addition, the African middle class is not as big as many $JMIA bulls think. In Nigeria, half of the population lives in extreme poverty, in absolute number more than any other country in the world. Also, those who can are [emigrating in droves], further hollowing out the middle class.
What does this mean for my business?
For Nigerian businesses, there is a trade-off between being big and profitable. Few businesses can be both. One isn’t better than the other, but it is important to make that choice early and with intention. Those who choose to be profitable must raise prices, as Netflix continues to do. Africa’s operational complexity means that it is difficult to reduce costs. For example, uLesson recently raised prices 40% after lowering them [a year ago].
For business owners, how lucky do you feel? How much real or perceived value does your business provide to users? Your revenue is competing with your customer’s food, housing and mobile phone budget. Are you providing commensurate perceived value compared to those things? This is hard to do for any business.
Because the middle class is so small, the businesses that do well will focus on non-consumption. As a businessperson, how do I provide my product in a way that brings customers who did not use this service before?
Choosing to be big is fun. It also supports a strong narrative which makes it easier to raise money. However, there are no benefits of scale that can solve structurally bad unit economics.
Many emerging markets founders have to make a choice between big and profitable. Most choose to be big. The next time you look at a business or startup idea, ask the founder how she will choose between being big and being profitable.