NextBillion - An Initiative of the William Davidson Institute at the University of Michigan

Tuesday, October 18, 2011

My colleague expressed shock at the price of packaged mushrooms in supermarkets in Eastlands compared to those in Westlands in Nairobi.

The price for the same product was almost double in Eastlands compared to Westlands.

She was surprised at the pricing logic, but this is just a poverty penalty. I explained that the rich always pay less than the poor in many circumstances.

Micro finance institutions charge higher interest rates for loans than mainstream banks while shylocks charge the highest.

The premium charged for access to quality goods and services to the bottom of the pyramid market is termed as the poverty penalty. So why are the poor paying more than the rich?

This is because of local monopolies, inadequate access, inadequate distribution and strong traditional intermediaries and these can push the price to as high as 25 times more than what the rich pay.

Many business people profiteering from this segment deny the fact that the poor are paying the poverty penalty as this will make them feel less socially responsible. However, it is just a reward for higher risks and involvement in the business while serving this low-end market.

Economic times are becoming harsher by day as the shilling weakens further against the major currencies.

One of the ways the consumers are coping in this harsh economy is by buying in small quantities. This denies them the opportunity to buy in bulk which is more economical and cheaper in the long-term.

Market analysts view this as an opportunity for investors to make profits.