We have great fintech (financial technology) entrepreneurs in Nigeria. The problem is that our fintech focuses on banking only. We have forgotten the insurance part of financial services. You may not blame the entrepreneurs as offering insurance services may be hard in Nigeria, some say. The argument is that trust is low and Nigerians have not opened up to insurance yet.  For the entrepreneurs, I do think the challenge is lack of quick wins in insurance, for anyone that wants to go beyond offering brokerage services to underwriting of risks. You do not make immediate commission which is typical in the fintech world. Rather, for insurance, you take a premium and find ways to invest it, hoping that the value created will be more to settle damages, should bad things happen. So, the business of insurance is not structured for startups.

Unfortunately, I will disagree. If Nigerian fintech entrepreneurs think they are risk takers, insurance is a good sector for them to show that in Nigeria. We need to develop that sector because the market is still at infancy. It is one of the most untapped industries in Nigeria and has promises ahead of it. It simply needs someone with vision and capability to unlock the opportunities.

The Nigerian insurance market is a paltry $1 billion (by premium sold) and that is for a country with more than 180 million people. (By comparison, the global market size is $4.55 trillion.)  Over the years, Nigerian insurers have been unable to expand this market owing to lack of innovation.

South Africa accounts for almost 80 per cent of all premiums in sub-Saharan Africa and the country has an insurance penetration rate — the total value of insurance premiums as a proportion of GDP — of about 13 per cent, well above the developed world average. Of the rest, Kenya is among the most advanced, with a penetration rate of 3 per cent. Nigeria’s, in comparison, is about 0.4 per cent, even though it is Africa’s most populous.

The Nigerian Insurance Industry includes the following sub-sectors: Composite, Non-life, Life and Reinsurance operators. Over the last five years, the Nigerian Insurance Industry has grown at a compound annual growth rate (CAGR) of 11%, buoyed by increased capitalization as well as the introduction of policies aimed at promoting the local market.

A Global Leader

What we are doing in fintech (yes, banktech) needs to be deployed in the insurance industry. We have brought speed, efficiency and innovation in the financial services with focus on remittance, payment, saving and lending. One company we can mimic is the Chinese ZhongAn, an online-only insurance provider, as we plot strategies to redesign the Nigerian insurance industry

Zhong An Online is a Chinese property insurance company that sells all its products online along with handling claims. The company offers e-commerce, mobile payment, and financing guarantee for internet businesses and users. Founded in 2013, Zhong An Online offers business opportunities covering various areas, including the internet-based business and household property insurance, cargo insurance, liability insurance, and credit insurance.

The company has sold 5.8 billion policies to 460 million customers since it was started in 2013. It is the industry leading player in the insuretech (insurance technology) sector where players like Lemonade, Oscar, Clover and Ladder also operate. It is part of the fabric of modern ecommerce in China and has found a way to extract value from digital transactions which it insures.

For example, its top-selling product, a shipping return policy, is sold directly on Alibaba’s shopping platform Taobao and allows shoppers to insure the cost of returning products to vendors. Ctrip, China’s largest online travel group, has helped ZhongAn market “flight delay” insurance, which allows customers to insure against late flights. Customers can buy “cracked screen” insurance when they buy a phone from the website of Xiaomi, a Chinese phonemaker

In Nigeria, we need a fintech company that can emulate what ZhangAn is doing. We have gotten online lender like Paylater.ng and Piggybank.ng. We already have payment processing startups like Paystack and VoguePay. But there is nothing in the insurance sector. Now is the time to find the insurance equivalents. ZhangAn is winning. Investors seem to have agreed that online insurance has value.

The online insurer’s stock surged as much as 18.1 percent in Hong Kong Thursday after an IPO that was more than 100 times oversubscribed. Initial share sales in the city that have raised at least $500 million have risen an average 4.2 percent on their first day of trade, data compiled by Bloomberg show.

A Model

Any company going to do this should better focus on the technology insurance element and leave the traditional one at the moment. It may not be smart to go into the extremely complicated insurance markets in Nigeria. Our attitude will not help. What ZhongAn did is a good idea and that can be replicated to seed solid partnerships with jumia, Konga, Yudala and other ecommerce companies.

With the backing of founding partners Ping An, Tencent, and Alibaba, Zhong An Onlinelaunched as China’s first online-only insurer in 2013. Last week, Zhong An filed to raise $1.5B on the Hong Kong Stock Exchange on the back of some big numbers: 7.2B insurance policies sold, 492M customers served, and close to $500M in gross written premium in 2016.

By working with these players, the business will focus on the lower level risks. Konga is already doing a small version of that with Cornerstone Insurance Plc. However, the cost model of a traditional insurance will surely make the premium expensive. The beauty of ZhongAn is the ability to price low because its expenses are low. Someone in Nigeria must find a way to unlock that value in our insurance industry.

The Cornerstone Insurance Plc is focused on the customers while the major product from ZhangAn focuses on “reimbursing merchants for the shipping costs on returned products purchased on Alibaba’s Taobao marketplace and Tmall (it also offers a shipping return policy for consumers)”. The merchants are the main customers and not just the buyers in the ecommerce ecosystems. That is an interesting business model that can work in Nigerian marketplaces giving merchants confidence to sell while also offering customers the trust to buy.

All Together

Insurance works when the buyer has confidence he/she can be protected when things go bad, and the seller knows it can make money doing so. By using technology, costs can be significantly reduced making premium affordable even when providing high value. Nigerian entrepreneurs in the fintech sector must look beyond banking to insurance. The latter has promising opportunities which we have left on the table at the moment. That must change.

The airline industry invented a great pricing model many decades ago. That model changed the sector and cushioned airlines on the path of creating value for their stakeholders. Simply, owing to information asymmetry due to lack of knowledge on what any specific customer could afford for tickets, the only way to get the highest possible aggregated revenue was to price the seats at different levels. Just like that you have the Economy Class, Business Class and the First Class. The same plane, but different seat prices, and everyone feels fine. You do not have the money for First Class but you are happy that the amount you have can get you into Economy. The woman that can afford her First Class is happy she has her own world. Largely, it works.  With that strategy, a new dawn for the airline industry was born many decades ago.

Today, I think African ecommerce companies must revisit the model in their businesses. No pricing strategy is perfect but classifying all customers as the same is not necessarily smart. What we are doing across African cities may not be optimal: I continue to see prices which are static despite changing many parameters on the ecommerce websites.

We are making progress, of course.  Most are adopting value-based pricing over just cost-based pricing, focusing on the value the customer expects to derive, to open their wallets. Nevertheless, I expect us to go further with dynamic pricing engineering in our markets. Dynamic pricing requires the deployment of artificial intelligence and analytics to help ascertain market pricing inefficiencies. What it does is two-fold: firms make more money even as customers feel better.

The pros discuss the constructs of cost-based pricing and value-based pricing: “Value-based pricing is the setting of a product or service’s price based on the benefits it provides to consumers. By contrast, cost-plus pricing is based on the amount of money it takes to produce the product”. Deciding the model to adopt for the optimal value creation, in your startup, is the next level as you fix the launch date.

iROKOtv, the video on demand startup, certainly leaves money on the table when it does not take into considerations if the subscriber in Cape Town can pay more compared to one in Freetown (Sierra Leone). But doing that will also put iROKOtv in trouble. Customers will think of discrimination based on locations. Though using locations to price products is common, but it is not usually done for most consumer products which are sold on subscriptions as the pricing visibility could alienate some customers.

However, for ecommerce firms, there is an opportunity for dynamic pricing since they run a market with many items which cannot easily be associated across board. The pricing of items is not that transparent when compared to a subscription-based business like iROKOtv’s. The ecommerce firms can deploy dynamic pricing that will capture different ranges of prices which their customers can pay. And they can do it at scale.

I have some ideas on how this can be implemented. Yes, you can do it without antagonizing extremely price-sensitive customers. Make prices in the customer shopping cart to change as they make decisions in real-time while on the site. Besides the typical product cost, you can tie the price change based on the following:

• Location: do they live close to your warehouse?
• Payment method: are they paying online or are they doing Pay-on-Delivery?
• Waiving Return: are they waiving the option of ever returning?
• Bundling: are they buying many different items at the same time?
• Total Purchase: have they crossed a purchase range to activate across the board 2% discount?
• Pick-up: is customer picking up himself or herself?

There are many ways a company can model these factors to help buyers make decisions and see price changes in real time. Today, if someone buys an item in Lagos, it is not clear if Konga, Jumia, and Yudala take into considerations the specific address of the customer to the location of their warehouses. My point is that you can use dynamic pricing to influence the behavior of customers. If a buyer knows that purchases above $100 with self-pick can attract across the board 2% discount, he can be influenced. That buyer can plan his/her day to do the pickup.  If a customer knows that by bundling items that more discounts will come, it can decide to buy all family items from that ecommerce ecosystem. Delivering all these pricing elements dynamically and in real-time will stimulate the customer to open his or her wallet.

African ecommerce companies will need deep machine learning in pricing. That will help them get better value from customers by using dynamic changes in price to redesign how customers shop on their sites. The static pricing mechanism we have today must evolve. Mathematics will help accelerate the progress we are making in the industry. The pricing psychology is now delivered in real time and personalized. We need that adoption at scale.

If I know that you are living at the back of my warehouse, using either your GPS data in my shopping app or the address you provided, we can waive 0.5% of your shopping cart because we can easily deliver. But when we see that you are living far away, but in a military location reserved for families, with potentially many members, we can structure our model for you to save by bundling. That knowledge and capability must be part of the game. The customers are hooked in real time to see value by buying from you.

An ecommerce firm must have the capacity to predict how customers are responding to a product, at personalized level, and deliver price changes in real time. This can happen many times even when the customer is shopping. Airlines do that all the time and we need that engineering to create more value.

Static pricing is broken. The startup leaves money on the table. The rich is happy but the poor may not easily get on board because the balance tends towards high price. Dynamic pricing for ecommerce firms can help them manage that scenario and become like airlines where everyone can be addressed at different entry points for the same item.

All Together

Every ecommerce company operating in Africa must create models that it can offer everyday “dynamic low-prices” to all classes of its customers. The low does not mean absolute low amount. Rather, it must be based on factors driven by its perception of the customers. You can offer a Victoria Island buyer a product at N2,000 because you have predicted that the office is on the way of your distribution path, while another person in Marina gets same for N2, 100 because the delivery man has to spend 40 minutes to deliver to him. But to the Ikeja buyer at N1,900 as that customer has never returned any item she bought over the last two years.

You must have the capability to engineer new pricing models to win. That ability to have First Class and Economy Class in the same air-tube must be replicated in the ecommerce ecosystem. Yes, the bank manager can buy his detergent at N1,000 while the market woman gets the same product at N800. And both buyers must feel like they got real bargains from your portal. Nothing can do that today than deploying dynamic pricing.

Companies must develop and accumulate capabilities in order to compete in the marketplace. In this video, I explain how any firm can do that and why accumulating capability is very strategic. From Google to Dangote Group, when companies accumulate capabilities, they see themselves operating in the segments of markets with higher value (usually upstream) compared with where their competitors operate (usually downstream). Dangote Group can deploy massive assets and technical know-how in cement production, making it harder for new entrants and rivals.