Rob Katz

3 Reasons Why Telcos Shouldn’t Abandon the BoP Just Yet

Are there really enough profits to make telcos want to focus on the bottom of the pyramid? A new report, released last Monday by the technology market research firm BDA, suggests the answer is no.

Before we consider the case closed, let’s take a closer look. After all, telecommunications companies have been some of the more successful firms when it comes to focusing on the base of the pyramid. Again and again, we read about big players like Vodafone, Motorola, Hutchinson-Essar, Bharti, MTN, Celtel, Telmex, etc. and their down-market profit strategies. Smaller domestic companies, like Smart and Globe in the Philippines or Grameen Telecom in Bangladesh, also owe much (if not all) of their growth to bottom of the pyramid strategies.

BDA’s report, 3G and BWA: The Next Frontier, however, argues that low-income customers account for a fraction of telcos’ revenue share and profit margin when compared with high-income clients. This chart provides excellent illustration:

subscriber share to subscriber revenue share

According to these data, the poor account for 71% of customers but only 15% of profits. Meanwhile, those high-end customers – 1 out of every 10 total clients – account for 45% of profits. Focus on the high-end, argues BDA – and with numbers like that, it’s hard to argue!

But look closer, and you’ll see there are shades of grey in this yellow chart. Here are 3 reasons why telcos should heed BDA’s advice with a grain of salt and not abandon their (profitable) bottom of the pyramid strategies just yet:

  1. Don’t forget customer acquisition costs. The BDA report defines high income clients as those spending Rs 945 (USD $21) per month on communications – or more than $250 per year. How many rich people – and I don’t think it’s a stretch to define that kind of spending as a luxury of the rich – are phone-less or looking to switch? Not many. To acquire these customers, telcos have to spend significant amounts on customer acquisition. Yes, once those high-end clients are in the fold, they are quite profitable, but the BDA report does not account for the high cost of acquisition.
  2. Poor customers today are rich customers tomorrow. Those poor customers, spending Rs 112.50 (USD $2.50) per month now, are the aspiring middle class. As they move up the income pyramid, so will their monthly communications bill. A strategy to bring customers into the fold now – with incentives to upgrade their plans along the way – makes more sense than ignoring these clients altogether.
  3. Be more than a phone company. Be a bank. Be a TV station. Be a pharmacist. But don’t just be a phone company. Clients know you and trust you – and you have them already, even at USD $2.50 a month. Offer them something extra, like Smart and Globe did (banking services) based on what you know about your clients. If average revenue per user (ARPU) is down, think about what services you could offer on top of text messaging and voice.

The debate is ongoing, and there’s no clear winner. What is clear, however, is that this is not a simple analysis.