Lesson Tried: Low Price

In teaching our business plan course, one of the lessons we try to instill over and over is: what is the uniqueness of the product or service you will offer? Inevitably, the answer is "low price." Though we try to explain over and over that low price in the Kenyan environment (particularly in the slums) is not an effective strategy, the lesson falls on deaf ears. Somehow it’s hard to convince our students that a “low price” strategy is most likely to lead to price wars, as everyone will follow suit.

A story in last week's Daily Standard (a local Kenyan newspaper) reminded me of the futility of continuously focusing on being the lowest price provider. Cellphone penetration in Kenya is currently at 63%, and it’s estimated by Business Monitor International that penetration will be at 100% by 2013. There are four major cell providers in Kenya: Safaricom has 70% of the market share; Airtel has 15.2%; Telkom Kenya (also known as Orange) has 8.5% and Yu has 6.4% (all of these numbers were as of end of December 2010).

Text messaging is big in Kenya--it's rare to find someone, even from the slums, who does not have a cellphone. Most cell services are “prepay” where the customer buys an amount of credit (generally between 100 KES (Kenyan Shillings) and 500 KES at a time), and then draws down that credit with usage. In order to compete and grow their customer bases, some cell companies in 2009 and 2010 introduced an even smaller "prepay" credit in the amount of 20 KES. This made cell usage affordable for people who had very little money, allowing credit for a couple of text messages and/or brief phone calls to be purchased at a time. This was a way of increasing the customer base for cell providers by tapping into a whole new category of users (those who are very poor).


The cellphone companies moved to a new strategy in mid-2010: a price-cutting war. Our team has used Safaricom as its provider since 2008, so I’ll illustrate this company’s low-price strategy. Last year a single text message cost 10 KES to send. This year, the rate has been reduced to 1 KES. It’s a little difficult to make comparisons in Canadian dollars—last year $1 bought about 77 KES. This year it buys 95 KES. (1 US$ only buys 93 KES—a reflection of the weaker US economy.) So it’s easier to do all the comparisons in KES.

Despite the fact that a single text message costs 1/10 the price it did last year, that’s only the base discount. This year Safaricom is offering two new subscription plans that allow considerable savings on texting: for 5 KES/day, one can send 20 "free" text messages daily (receiving text messages is free). For 10 KES/day, one can send an unlimited number of text messages daily. You can move on and off the subscriptions at will by entering code into your cellphone at no charge (something I did several times last week, until I concluded that the 5 KES/20 messages daily was the most suitable plan for my needs). So this gives you a sense of the dramatic price drop over the year. I'm estimating that my own phone costs will be about 1/3 of last year's (which was about $30 for a month), and will, unlike last year, also include a few calls to Canada (something I've never done before). Calls to Canada from Kenya cost 3 cents a minute. This is less expensive than calling your friends in Vancouver when you're actually in Vancouver. (There is no "plan fee" in Kenya, so you only pay the cost of your calls and texts after buying your phone and paying about $1 for a SIM card.) I'm not sure how this is possible, but I wish these prices would come to Canada. (Canada has some of the highest cellphone rates in the world for calls and texting.)

Back to the results of the low-price strategy. The price wars have done some damage to Safaricom and Yu, who lost 6 and 0.3 percentage points of market share. Respectively. in the final quarter of last year. The “winners” were Telkom Kenya and Airtel, who gained 4.5 and 1.7 percentage points of market share.

Telkom, the biggest “winner” added almost 1 million new customers between October and December of last year. That should have been cause for celebration--think of the revenue from all of those new customers. Instead, Telkom’s revenue declined, because of a significant decline in Average Revenue Per User (ARPU). And that decline came from the strategy Telkom chose: lowest price, which was continually matched, and sometimes bettered, by Safaricom and the others. Safaricom, despite its loss in market share, was the only one of the four to report a profit last year.

While I can't offer much specific advice to the other cell companies, I think it's safe to say that they will not grow (and may not even survive long-term) by having the lowest price be their major business strategy. Safaricom is able to match on price, in part because it differentiates itself in another way: it's created a mobile bank, called M-PESA. This is an idea that will probably come to Canada in the years ahead, but it's already launched in a big way in Kenya. Kenyans, even in the most rural parts of the country, can use their phones to pay bills, give money to friends and relatives, and make cash withdrawals and deposits, without going to a bank.

Now, if we could only teach our young entrepreneurs the importance of being better at something other than price!