Manuel Bueno

Want to Quit Smoking? Try a Mobile Phone

smokersThe base of the pyramid conversation often involves talking about the size and composition of BoP markets (which, in fact, was the topic of my previous post) and how to create business models that sustainably create wealth for the people in those communities and the firms involved.

I recently came across a very interesting paper from the World Bank that sheds light on something we have not touched upon that much (if at all): the changes in expenditure patterns of BoP consumers as new products enter the market. The paper is entitled “So You Want to Quit Smoking: Have You Tried a Mobile Phone?“, and authored by Julien Labonne and Robert S.Chase.The basic idea is very simple: how do the spending patterns of BoP consumers change as they gain access to more products?

At our “The Next 4 Billion” publication, we studied the size of the market at a given point in time and estimated the value of BoP markets depending on different income levels. However, finding good data from the BoP in developing countries is often hard work–sometimes reliant on estimations or extrapolations from outdated statistics.? Explaining changes in consumption from one year to the other is notoriously difficult, since it needs to consider various socio-economic variables that might shape changes in consumption. An additional difficulty in BoP markets is estimating how much access the BoP community had to a product in the first place.

Do people suddenly start spending more money on a product to the detriment of other goods, because they now have better access to it? Or is it because of a change in tastes or educational levels? Or is it thanks to a better price-quality relationship in the two products involved (for example, lower prices, increased reliability, sturdiness or better fit of the product characteristics to the target customers)? This is a difficult question to answer, because it requires very detailed household-level data to take account of all possible interdependent causes.

The study behind the paper hinges on high quality data collected from two surveys in 135 villages in the Philippines. The first round of data collection took place in the fall of 2003 and included 2,400 households of which 2,092 were re-interviewed in the fall of 2006. Over the survey period, the proportion of households owning a mobile phone in 2003 was 8.4%, rising to 35.4% in 2006. At the same time 41.6% of households reported some tobacco consumption in 2003. The average monthly tobacco consumption was about 31.2 Philippine Pesos (PHP) per adult over the age of 15. Overall, tobacco consumption represented 2.01% of the total household budget. In 2006 the average monthly tobacco consumption fell to 30.4 PHP per adult. For households owning a mobile phone, tobacco consumption fell to 23.1 PHP per household, while it rose to 33.9 PHP for households not owning a mobile phone.

After an econometric analysis which I will not go into (enthusiasts are welcome to check the freely available report), the study concludes that mobile ownership indeed led to a sharp decrease in tobacco consumption. The authors estimated that mobile phone ownership led to a 9.5% decline in tobacco consumption. This effect rises to 18.2% once we exclude households that already owned a mobile phone in 2003. Could the observed drop in tobacco expenditure be due to a fall in tobacco prices or switching to cheaper brands, rather than a decrease in their consumption? No. The authors observe that many smokers decided to quit smoking?so they were?able to afford the usage of mobile phones. In fact, between 2003 and 2006, the households that purchased mobile phones increased their probability of quitting by 20.4%.

This means that the size of the BoP market for wealth creating products might actually be bigger than estimated, thanks to the substitution of expenditure on luxuries (such as tobacco or alcohol) to productive assets–mobile phones in this case, but maybe, also education or housing.?

The paper also?points out, once again, to the importance of granting as much power as possible to women in the allocation of household expenditures since men are, by far and away, the biggest spenders in luxury, unproductive items such as tobacco and alcohol.

Finally, the authors also point out to the fact that BoP consumers can adjust their expenditures to more productive assets if the pay-off for owning them is close enough in time. Therefore, arguments supporting a “guided consumption” of BoP communities, such as those by Aneel Karnani and the applicability of his Fair and Lovely case study might be mistaken–at least to a certain extent, because in this case, alcohol consumption didn’t seem to be negatively impacted by mobile phone ownership.