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Innovative marketing & business models for rapid development of off-grid lighting markets in Africa
Over the past decade, technological breakthroughs have enabled the rapid development of new consumer product markets, making advanced technologies such as mobile phone devices and off-grid lighting available to millions of low-income earners around the world. The size of the business opportunity for off-grid lighting promises to be substantial. The target: 1.6 billion off-grid consumers worldwide (IEA 2002) are characterised as low-income earners that presently rely on substandard, unsustainable and dangerous forms of lighting such as kerosene and candles to satisfy their basic lighting needs (Mills & Jacobson 2008). By tailoring business models, marketing strategies and product development to meet the needs of the average low-income consumer, the off-grid lighting sector, a subset of the broader energy sector, appears to be following on the successes of the mobile phone industry boom. This article highlights some of the key underlying market barriers and trends, outlines the World Bank Group’s Lighting Africa response to overcome these market impediments, and highlights some of the innovative marketing and business models paving the way for the successful uptake of emerging off-grid lighting markets in Africa and beyond. [top] [end]Transforming markets for off-grid lighting: The Lighting Africa Programme[top] [end]Improving lives through lighting and improved energy accessLighting Africa, a joint World Bank-International Finance Corporation (IFC) programme, is supporting the private sector to build and grow new markets for off-grid lighting in Sub-Saharan Africa. It is based on the hypothesis that a commercial consumer products market can be developed for superior modern lighting products, with the potential to displace the kerosene market. The kerosene market is a widespread and formal commercial market that poses significant environmental, social, and economic burdens. Through the provision of targeted activities designed to overcome market barriers and facilitate market entry on behalf of industry interest, Lighting Africa is addressing the gaps across the supply chain. With the ultimate programme objective: to facilitate access to modern off-grid lighting options which offer superior quality and safety, at affordable prices, for Base of the Pyramid (BOP) consumers across the continent. It is encouraging movement away from traditional fossil fuel-based lighting towards sustainable innovations which enable poor consumers to leap into the modern world. Lighting Africa aims to connect consumers to the wealth of opportunity and savings provided by improved lighting and increased energy access, while growing the commercial lighting industry.
[top] [end]Providing the lighting industry with new growth opportunity in the emerging off-grid lighting sectorAcross Africa, the kerosene industry has acquired a lion’s share of the market - valued at nearly US$17b (Lighting Africa 2010) - largely without much competition from other industry sectors. It is reaping the benefit of an established consumer base willing to dish out hard-earned income for a steady supply of lighting to meet their household needs and keep their business afloat. Lighting Africa’s market transformation approach is built on an understanding that substantial industry interest and consumer willingness to pay for lighting are not enough to stimulate market development for off-grid lighting. Significant market barriers prevent the lighting industry from being able to develop this market. Among them is lack of access to information about the size of the market opportunity and consumer characteristics, resulting in high first mover costs, an inability to access needed finance for upstream development and downstream consumer purchase, policy and regulatory impediments preventing off-grid lighting from achieving an equal footing with kerosene and other traditional lighting options, and an inability to distinguish quality on the part of buyers and manufacturers to design products to meet market need.Working to overcome these barriers through a variety of interventions (i.e. product quality assurance, market intelligence, consumer education, access to finance and targeted business support and policy and public sector operations), Lighting Africa’s activities target market barriers undermining the commercial uptake of advanced off-grid lighting technologies. In turn, this serves to reduce transaction costs and mitigate market risk, support commercial discipline, build capacity, and fill gaps across the value chain, establishing a neutral platform for opening markets to innovation and efficient product deployment. The programme is supported by an interactive web portal, home to approximately 2500 members who share market information and business leads.
[top] [end]Business innovation: A driving market forceRecognising the unparallel market opportunity at hand, the local and international off-grid lighting industry are applying forces of market competition with hopes of dethroning the kerosene industry’s long reign over the off-grid lighting market. By diversifying the market with an array of superior, safe, and affordable lighting alternatives designed to meet consumer needs, and utilising innovative business models for rapid dissemination to targeted population segments, the game is now in play. The future market segmentation between traditional fuel-based lighting and new modern lighting remains to be seen, as emergent technologies compete for market share.In order to take hold of this ripe opportunity and tap into this new market area, a growing number of international and Africa-based off-grid lighting companies are using a mix of technological and marketing innovations to customise products to meet end-user demand. As a result of the low power requirements of new lighting technologies integrating Lighting Emitting Diodes (LEDs), and applying BOP business models pioneered by the consumer goods industry, the off-grid lighting market is now beginning to market smaller and simpler lighting systems, adapted to the purchasing power and preferences of low-income consumers. [top] [end]Innovative financing and business models for market development[top] [end]The role of Microfinance InstitutionsMost low-income consumers are able to pay approximately US$10-30 per unit (even though there are significant market niches for higher priced products) and consumers appear to increase their willingness to pay once they become more familiar with modern products (Lighting Africa 2010). Most consumers spend the equivalent amount or more on kerosene for wick lamps over a period of one or two months (users of off-grid lighting can pay 150 times more per unit of useful lighting service than grid-connected people (Mills & Jacobson 2008)). This is because consumers are very often reluctant or unable to make such a one-time investment up front, due both to the nature of their available cash flows as well as to the real and perceived risks of investing in a potentially sub-standard product. In fact, the primary drivers for the high market penetration of kerosene are: (i) the ability to buy small portions of kerosene over time, as permitted by the availability of cash, and (ii) the relatively low risks involved with buying small portions of a well known commodity.Microfinance provides a means to overcome these limitations – provided that the high transaction costs for loans of this small size can be remedied. A range of relevant consumer finance models through Microfinance Institutions (MFIs) as well as less formal savings and credit unions and similar institutions are under development – for example by organisations like Arc Finance in Ghana and Microenergy International in Tanzania. Of particular interest as the market unfolds will be the evolution of the roles of both formal and informal MFIs in unlocking sizable market demand by overcoming considerable transaction costs associated with microloans. Numerous MFIs in Africa hold the capacity to mobilise considerable finances, should the opportunity arrive. The lighting and other relevant industries such as the mobile phone industry are also helping MFIs manage the risks of non-payment, for example, by pushing consumers to pay by locking lighting systems until fees are paid (as the Solar Energy Foundation is doing in Ethiopia) or by pioneering pay-as-you-go schemes using mobile banking. Lighting Africa is exploring complementary innovative microfinance options as well, for instance, via its collaboration with Unilever Tea in Kenya Ltd, by supporting the company's Savings and Credit Cooperatives (SACCOs) to sell quality lighting products to their workers (who live without electricity) with loan repayments deducted from salaries. Lighting Africa will explore similar partnerships with other companies such as plantations and mining companies that can act as off-grid lighting product aggregators, reaching large numbers of people with improved energy access through company communities and their family and friend networks (e.g. mining companies, agribusiness etc). [top] [end]Direct marketing modelsInnovative marketing strategies are also unfolding across Africa. For example, direct marketing models are becoming increasingly popular, demonstrating promise to gain substantial consumer confidence while, at the same time, evading high distribution costs incurred while trying to establish complex networks to channel products to often remote locations. One model taking root is that of using the community hierarchy to establish consumer confidence in the community by enlisting community leaders as direct sales agents, who sell products directly in the community making a commission on each sale. By targeting marketing at respected members of the community who exhibit authority, the likelihood is high that they can substantially influence the community to purchase off-grid lighting products, while also serving as a return channel for warranties and complaints – thereby reducing the risk perception of buying a new and unproven product for consumers. For example, this model is presently being rolled out by the company Greenlight Planet in India. SolarAid in Kenya is using a similar marketing approach, whereby a community roadshow party is sponsored by the lighting company, in which it is announced that a competition will take place for community members to see who can get the most endorsement as the ‘community vendor’. The one with the most signatures receives the opportunity to supply the off-grid lighting products to the community members, under the assumption that this ‘competition’ will select a particularly credible, sociable and persuasive community member.[top] [end]Modular pay-as-you-go finance structuresAnother promising alternative to consumer finance is that companies are starting to allow consumers to purchase single product components over time, until the full system or desired number of products is achieved (as funds become available for the end-user). This model enables consumers a modular approach to pay for each component or product within their budgetary limits, and slowly build and expand their lighting system when they can afford to, following a kind of Lego building approach. Companies like Sun Transfer, a German company, and Zara Solar in Tanzania, are employing this model, allowing consumers to purchase a broad offering of add-ons to their lanterns and solar home systems, gradually building larger lighting systems as well as adding mobile phone chargers, TVs, fans, and other prized household items.[top] [end]Fee-for-charge modelsMost products currently on the market are integrated systems that combine a light source (usually LEDs or Compact Fluorescents (CFLs), a battery, and a power source (often small photovoltaic modules) sold either in one housing or as separate components. The distributor markets the product and receives payments up-front or in instalments, when consumer financing is offered. However, some companies are testing other kinds of charging models, offering consumers who purchase a light without its own charging mechanism to pay a fee each time a charge is needed, thus saving on upfront costs of purchasing a solar panel or other off-grid charging device. The German lighting giant OSRAM, for example, through its O-HUB model is investing in central charging stations, employing the model whereby lights are sold separately from the power source and recharged against a fee in central charging stations. This model not only allows them to reduce the cost of the lamps, exploit economies of scale, and create a continuous revenue stream by charging fees but, additionally, to be able to offer other kinds of services which leverage the charging infrastructure, such as water filtration or mobile phone charging. A similar model is also being pursued by Thrive of India. This model also makes it easier for them to provide after-sales services and support. The downside to this model is the high initial investment to support development of the charging station infrastructure in addition to potentially resistant consumers who may be unwilling to take the lamps to the nearest charging station, especially if there isn’t one within easy proximity to their home or workplace.[top] [end]Innovative distribution modelsOff-grid lighting markets have yet to mature to the point of developing established distribution networks for product diffusion, particularly in reaching remote regions. However, the success of both formal and informal distribution networks at supplying a range of commodity goods to consumer populations suggests the potential for analogous delivery models for off-grid lighting. The distribution models for Omo detergent soap and kerosene (two popular consumer goods that are found even in the most remote African villages) demonstrate that functional commercial distribution channels are filling consumer need (IFC Lighting Africa 2009). Interest exists on the part of many of these distribution channels to also stock off-grid lighting products in addition to their other goods and receive the benefit of expanding production by actually using some of the products to illuminate their vending kiosks. Informal distribution channels are also demonstrating the potential to play a significant role in off-grid lighting delivery, with increasing interest on the part of trading networks, kerosene suppliers, company employee living communities (such as the Unilever Tea Company example), Non-Governmental Organisations (NGOs), farmers’ associations, microfinance institutions, and other informal distribution aggregators which can make earnings from off-grid lighting retail while improving their bottom line by using the lighting products themselves and improving their businesses by providing access to electricity to their employees, community members, or the disadvantaged groups they support.
[top] [end]Effective marketing: Tapping the aspiration value of lighting through innovative design and brandingLifestyle and entertainment are key drivers of market growth. Both are as important for low-income populations as they are for those living in more affluent neighbourhoods – a fact attested by the significant number of TVs, radios and bars in semi-urban and rural Africa. Similarly, as the amazing success of mobile phone technologies in Africa demonstrates, being able to live in the ‘modern’ world, with all the technologies and amenities, is also a huge market driver. We expect that off-grid lighting companies will seek to emulate the successful business models of mobile phones in Africa, for example by marketing their products as lifestyle accessories which harbour considerable aspirational value for consumers. This can be achieved in a number of ways, including stylish product designs such as Greenlight Planet’s sleek solar LED task lamp and SolarAid’s LED-lighting product that imitates the look of a grid-connected incandescent light bulb, innovative product integration (e.g. lights which also have radio and mobile phone charging options), or through aggressive marketing approaches and unique branding strategies around them.
[top] [end]The emerging market for off-grid lighting in AfricaAs a result of Lighting Africa’s unique hand in market development, through its unique programme interventions in finance and business facilitation, policy, market intelligence, quality assurance and consumer education, entrepreneurs are increasingly turning to Lighting Africa for collaboration and guidance to accelerate their market penetration. International manufacturers of off-grid lighting are using the programme’s market intelligence and business support materials and online social networking opportunities to identify business partners, determine avenues to access needed finance, and to solicit advice to develop and roll out their business plans. Manufacturers and distributors are collaborating with Lighting Africa to strengthen their business activities, secure business partners, and expand their market reach. Lighting Africa’s product quality assurance programme is supporting buyers and end-users in making informed purchasing decisions and supporting companies in product development, mitigating risk of market spoilage. Potential investors and financiers are realising the sizable market opportunity and looking for early investment opportunities. Consumers are starting to gain confidence in the power of modern lighting to improve opportunities and their quality of life. And the market is delivering, with the number of products specifically tailored to this market growing from about 8 in 2008 to 71 today – manufactured by 49 companies. Out of these, Lighting Africa has established close relationships with 40 companies, which are receiving ongoing market development services and supporting programme implementation. Working in unison to remove barriers and support market acceleration for sustainable modern off-grid lighting technologies means that costly, dangerous, polluting, and inefficient technologies will soon become a relic of the past, and a continent once looming in seemingly impenetrable darkness may just see the light for the first time, and with it unleashing opportunity, improving lives, and supporting the betterment of the planet.
[top] [end]ReferencesIEA. (2002). World Energy Outlook. International Energy Agency. Mills, E., & Jacobson, A. (2008). The Need for Independent Quality and Performance Testing of Emerging Off-Grid White-LED Illumination Systems for Developing Countries. Light and Engineering , 5-24.IFC, Lighting Africa (2009) Value Chain and Distribution Channel Report- Kenya & Ghana. Lighting Africa (2010). The Off-Grid Lighting Market in Sub-Saharan Africa. Market Research Synthesis Report, The World Bank Group (WBG) (forthcoming at http://www.lightingafrica.org) [top] [end]Download the original articleComing soon...[top] [end]@HEDON
[v][e][top] [end]Contents: Boiling Point 58 - Marketing
Categories: Boiling Point 58| Marketing| Microfinance| Distribution models| Lighting Africa| Light emitting diodes| Enterprise| Business models | ||||||||||||||||||||||
Page created:
20 May 2010; Last edited:
26 August 2010; Version: 2 | ||||||||||||||||||||||
Pagename: BP58:MarketingAndBusinessModelsForRapidDevelopmentOff-gridLightingMarketsAfrica @HEDON: TMUA | ||||||||||||||||||||||
