Sloppy Numbers About Poor Households
Affordability matters, yet it gets insufficient attention
They say eyes glaze over when there are multiple zeros on a number. Mine do.
I argue that we are at risk of doing the same on low numbers – eyes glazing over when we talk about $1 a day, $2 a day, $4 a day per person, or 5 cents per litre, per toilet visit, per mobile top-up. How many of us assume that anyone living on mere dollars a day is dirt poor, and anything costing a few cents is dirt cheap? I do. But to understand affordability, the analysis has to go deeper.
Three things are clear:
- For around $6-$10 per month, a growing number of households can now acquire a solar home system, access to serviced toilets or low-cost private education for one child.
- Price is certainly not the only driver of demand. Reliability, value for money and ability to pay in small installments have been shown to be critical factors for a range of products and services targeted at the base of the pyramid.
- Few of these social enterprises claim to reach the extreme poor, living on under $1 a day per person (equivalent to $150 per month for a family of five).
So far so good. So what’s the problem?
I still think affordability – or, more precisely, the ratio between price and household income – matters and gets insufficient attention. There has been a huge effort to sell quality goods and services at a low price point, particularly harnessing information and communications technology (ICT), mobile payments and lean design to trim costs. I have not seen the same effort to understand household incomes and spending patterns.
I lay this charge because several times in recent months I’ve been taken aback at how entrepreneurs, donors, researchers, investors and others sloppily throw around figures concerning incomes at the base of the pyramid. Here are some of the most common mistakes I hear:
- Someone might say, “Target households live on $60 a month,” without specifying whether that is per household or per person. (This figure is so low, it is invariably per person, meaning that family members live on $2 per day.) Figures per person are useful if you want to know whether they fit under a given poverty line, and figures per household are useful for comparing household outlay of, say, $10 a month. But they are no use at all if the two are confused.
- Or “Typical customers rely on farming/casual work and typically earn around $200 a month.” That may be correct, but interpret the data carefully. Earnings of breadwinners, average household income and income per person are very different things. If two breadwinners earn $200 per month each, household income is $400, and average per person (family of five) is $80, or about $2.60 per day.
- Or “Our product is affordable even to the lowest income groups. … Our product costs only 10 U.S. cents per day.” Maybe. But that’s $3 a month, which is 2 percent of household income for family of five living on $1 per person per day. There is not much that I would commit 2 percent of my household income to without very careful thought.
If entrepreneurs and investors muddled up turnover, Earnings Before Interest and Tax (EBIT) or Earnings Before Interest, Taxes, Depreciation and Amortization (EBITDA), they would not get far. But it somehow seems totally normal to muddle up earnings per worker per month, household income and per capita consumption. As for the difference between figures in market prices and figures in Purchasing Power Parity (PPP) from the World Bank, IFC or Progress out of Poverty Index, I won’t start that here. Suffice to say you have to convert between dollars in PPP and dollars in market prices, and very few people do.
Let’s put a few figures into perspective.
IFC calls the bottom half of the global population the “lowest income” segment. They live on less than $3 per person per day (2005 PPP). That means maximum household income for a family of five is $450 (PPP), so probably $300-$400 per month in current U.S. dollars in many developing countries (because for the majority of countries, $1 PPP is worth more than $1 in market prices). The 3 billion people or so in this group – in the first to 50th percentiles of the global income distribution – are clearly highly varied. Development agencies distinguish them further with $1 and $2 poverty lines.
According to IFC’s Global Consumption Database (see my introduction to the database here), the lowest income segment in Africa spends an average of 60 percent of their income on food. In addition, 9 percent is spent on housing, 5 percent on energy, 4 percent on health, 4 percent on transport, 2 percent on mobiles/ICT. With so much spent on food, it’s clear how little truly “disposable” income there is.
Say one family of five in this segment has the chance to take advantage of a host of inclusive business offerings: If they use a serviced toilet (say $8 per month), put two children into low-cost private schooling (say $8 a month each), pay for an 80-kilowatt solar home system over 36 months (say $12 a month) and buy locally treated water (say $3 a month), they’d be spending almost $40 per month for their lighting, water, sanitation and two kids in school. For those at the top of this “lowest income” segment – $2 per day – that’s around 10 percent of monthly household income. But for those at the $1 a day line, it’s more like 30 percent. I’m in no position to judge what the poor will spend on, but clearly it’s more likely they will spend 10 percent than 30 percent of their household income.
Why does this matter, I hear you ask? After all, inclusive business at the BoP is doing pretty well. It’s not claiming to reach the poorest. Most investors are not too bothered which income segments are reached; it’s the price and quality of the product vs. its competitors and substitutes, rather than its share of household income, that really determines sales.
It matters to me for three reasons.
First, if I was an accountant, I wouldn’t like sloppy financial accounts. Likewise, I don’t like sloppy use of numbers about poor households, as if the difference between one low number and another doesn’t matter.
Second, the BoP market is progressing but not yet proven. We certainly don’t know yet the scale and reliability of the market at the “bottom” of the pyramid – within the lowest segment (half the world’s population), rather than the $3-$10 per day market. We need to better understand the shape and evolution of this market.
Third, over time, the melee of investors, donors, philanthropists and others will become less entangled, with each finding their role. There will be a role for donors who want to harness social enterprise for the lowest income segments that clearly differs from the market-minded investors driven to achieve scalable returns. I am hearing the conversations about mission drift as businesses scale or exits are found. This will become a bigger issue in years ahead. It will be more important for each actor to define and find their role. But if each is to find their own niche, clearer segmentation of the market, and understanding of the customers, is needed.
- Author’s note: This blog was written before the World Bank completed updating of poverty lines (from $1.25 at 2005 PPP to $1.90 at 2011 PPP) and related data sets.
Photo: A solar energy project in Tanzania, courtesy of the International Finance Corporation via Facebook.