Should African Entrepreneurs Target the Few Affluent or the Many Low-Income Consumers?

In 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 the Africa of today:

• 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 Western investors in African emerging/frontier 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.

In previous articles published on Afridigest, one of the themes that has emerged is the latent opportunity awaiting entrepreneurs who can discover ways to profitably serve Africans at the base of the pyramid.

For example, in African Businesses Win by Understanding Base of Pyramid Consumers, 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. And in How Nigeria’s Iroko Increasingly Embraces African Customers, Emeka Ajene explores how & why Iroko, a leading African subscription-video-on-demand (SVOD) platform, is pivoting to target lower income consumers at the base of the pyramid.

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.

Klingebiel and Stadler note that “an unfortunate reality of many African economies is that only a tiny fraction of the population participates in the formal economy.“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 is not likely to experience growth in the near future.

Targeting Africa’s low-income consumers is the larger overall opportunity. Although it involves several challenges (for example, requiring the development of innovative inroads into the informal economy in some cases), entrepreneurs and investors who are able to successfully navigate these roadblocks will be richly rewarded.