Reminiscing of Dr. Ola Brown’s article on Nigeria market size in Nigeria for all who cares to know, and the recent comment of Tosin Olaseinde about “massive market for affordable, simple, ready furniture and home décor” in Nigeria, it appears to me that there seems to be a lag in articulating what market size in Nigeria.
Tosin compared 5 million customers to be somewhat about one-third of the population of Zimbabwe’s market in reply to Dr. Brown. While that might sound juicy on a face level a further breakdown of the distribution of 5 million market size from a population of about 200 million will reveal a thing relative to a market size of 5 million with a population of 15 million.
Let’s think about it this way, what is the addressable market per land mile in Zimbabwe relative to Nigeria?
*NB: this is assuming 5m as the Total Addressable Market of Zimbabwe.
As our data reveals, per km square travel in Nigeria, you will meet approximately 6 of your customers, while the same distance travelled in Zimbabwe will bring you close to 13 of your addressable market. This is highly important especially when you factor in the concept of distribution cost. What will it cost you to reach your last mile customer? This dilemma of what to characterize as one’s customer plagues the e-commerce ecosystem in Nigeria and it simple anchored on a broken distribution system.
Moving on to distribution cost with from a perspective of last-mile delivery. Think about what distribution option is available to cater for our addressable market. The last-mile delivery cost in Nigeria is greater than 3,000 naira (about $10 – by extrapolation). While it will cost much less in Zimbabwe – I can simply conclude on this based on my calculation on % reach per km square which is higher than that of Nigeria. But a comparison of Zimbabwe with Nigeria is not the focus of this article.
Now note that what the addressable market participants are purchasing here is key and there is a point in which it is not economically viable to make purchases where distribution cost is involved. Take this, for example, let’s say an item cost of production is N3,000 and an e-commerce platform chose not to make a profit on this item if purchases are made on her platform i.e. sale at total full cost if you but on say Jumia. The same vendor chooses to make a 30% margin (N3,900) in retail outlets. Invariably, it means the total cost of making purchases online cannot be more than N3,900 or it will be absolutely off point to make purchases online than the kiosk beside my house.
The truth is what it will cost to reach the last mile customer in my scenario will be way above the price ceiling of N3,900 (it will actually cost + or – N6,000). And in effect, the erstwhile person mapped as part the addressable market will be automatically ousted from the cluster. 5 million minus one already and minus one more and more.
The above analysis begs the question of the addressable market in Nigeria, especially where physical delivery of goods is required (mainly e-commerce). What really can be regarded as Total Addressable Market (TAM) in Nigeria?
Broken Logistics, Nigeria Business Bane
In my time of working with Opeoluwa Shea Butter, one of the major issues we have to constantly battle is logistics; balancing cost with value. The selling price of the product cannot allow us to utilize formal logistics outlets like GIG Logistics (even though they were ready for concessions). Hence, we had to constantly innovate around our distribution cost and delivery. In the end, we refuse to take up some order because it is not economically viable to do so. The problem we faced at Opeoluwa is faced by all businesses in Nigeria and we all attend to the challenges differently.
In light of a broken logistics system, the question of TAM becomes more fluid, what will constitute an addressable market to one will be different to another even if they operate in the same industry.
What a lot of e-commerce (and other businesses) has done to mitigate the downside of last-mile delivery is to limit the circumference of operation, in other words, limit their addressable market. Yes, that may look like, why will you limit the number of people you want to potentially sell to. But when you factor in the cost of selling to that person relative to what the person would get it for otherwise, you realize that it is not an adventure worth pursuing. In effect, the addressable market of Nigeria is not as huge as we may think it to be based on distribution cost paralysis.
While thinking about the associated cost of running an e-commerce or any business that requires physical delivery of goods that utilizes technology or otherwise, this video by Ndubuisi Ekekwe detailed out a breakdown of your adventure and needed considerations while providing more perspective into why e-commerce is not yet a viable adventure in Nigeria.