If you’re a startup founder in Nigeria, you have two main objectives; one is how to create value, and two is how to extract value from the people you create value for.
So think about Facebook; they create value by creating a platform where you can meet with people from all over the world, share photos of what’s happening in your life at the moment and apparently spread false news, like how they caught a guy with 4 heads in Jigawa state eating yam while floating in the air and singing joromi by Simi (This didn’t happen, but you get the point). They apparently extract value from their users by selling the data of their users to advertisers to help them create more targeted ads. If you don’t like the fact that Facebook sells your data (not necessarily traceable to you), then you shouldn’t use their platform.
Personally speaking, I think Nigeria is a good place for Facebook, here we don’t care so much about digital privacy. If Facebook announced tomorrow that they would give all Nigerians N10,000 each if they sold their data to them exclusively, the queue at whatever physical venue they intend to use tomorrow would be so intense (it’s unlikely they’ll do this in person and not online), they would probably have to shift the venue to National Stadium Surulere, and it still wouldn’t be enough, people would come from far and near to sell their data, if you were a data privacy expert advising people against it on social media, Facebook won’t even need to bother themselves to take down your post, the way people would attack you would surprise you, people will ask you if you have N10,000 to give them, and if you don’t have, you should be quiet and sit down. Some will threaten you. Some will go as far as cursing you, your children, your children’s children and everybody in your family that can be termed your generation because of N10,000. You will eventually have to take the post down and stay off social media for a while because of your mental health, but I digress.
The point is creating value is the easier part of the equation, extracting value is where the real work comes in. Nigerians are very price sensitive, say you push a brand new 2020 BMW M5 into the market, you let people test drive it, and they’re awed by the driver experience, the comfort of the car, and apparently the perception it creates of them (regardless of how old you are, if you step out of a 2020 BMW M5, the average bystander will refer to you as sir).
The challenging part is when it’s time to extract value. The challenging part is when it’s time to tell them the price.
A brand new 2020 BMW M5 will cost around US$110,000 (N41,900,000), at this point 96% of the people who test drove the car will likely tell one of the most common lies in the sales ecosystem, it’s so common, it doesn’t even feel like a lie anymore.
Customer: I’ll get back to you.
That’s an indirect way of telling you that that transaction will not continue.
Extracting value is where most businesses and startups struggle, creating value isn’t the problem, extracting value is. Let me put it this way, your product may be extremely valuable, as the BMW in the previous example is (I’m a car guy I can’t help it), but your inability to extract value either by creating efficient pricing models that help increase your target market or at least making those who use your product pay indirectly like Facebook and the likes do, is the biggest shortcoming of your business.
Nigeria doesn’t have good niche markets, if you plan on building a billion dollar business in Nigeria, you can’t operate in a niche market, it won’t work, your market has to be big. Think about this;
Nigeria has a population of about 200 million people, out of which 40% according to the World Bank are in poverty (living on less than $1 a day), that means your market size has reduced to 120 million people. That 120 million people still includes people who earn N30,000 a month and paying N4,500 for a Netflix subscription sounds more like madness than privilege to them. That 120 million people still includes the majority of Nigerian households where approximately 60% of household income is spent on food, I read an article by Dr Ola Brown the founder of Flying Doctors Healthcare Investment Company where she said “Anything you are selling to the average Nigerian is competing with food”.
That 120 million people still includes people who have little or no affinity for tech (or anything else really), and only spend money on things that are essential.
When you find the data behind all these contexts, you’ll realize that your total addressable market as a tech startup is way smaller than you think, you have to build for big markets.
From the onset you really have two questions; can I create a product and price it cheap enough or spread out its payment to make a decent profit?, and if that doesn’t work, can I design an innovative pricing model that allows me make money from my users without directly charging them for it? I think when more Nigerian startups begin to find answers to the second question, more value will be extracted from users, and more money will be created.
Think about this; Uber is one of the largest tech companies on the planet, they’re worth around US$60 billion (as at the time of this writing), and they’re still unprofitable (yes they are). If there was enough value in the data Uber generates from the 14 million rides it makes daily, it could actually sell that data to offset the price of the cheap rides it has to subsidize for its users. I really don’t know why they haven’t done this. Must be some boardroom resolution I guess.
I actually consider ride hailing in Nigeria to be a kind of mass market product, not based on pricing per say, but based on appeal. My Grandmother uses Uber (well not Uber specifically, but one of the ride hailing platforms), and I find that impressive. Transportation is an essential industry, because people must eat, and for people to eat, they must go to work, and since practicing magic is not legal in Nigeria (and mysteriously appearing to work on a Monday morning is more likely to get your boss to fire you out of fear than give you a commendation), people must pay for transportation.
So the game is still rigged in favor of essential products designed with innovative business and pricing models.
If you read my articles, or you know me in real life (as if there’s a fake life, I wonder who coined this phrase), you’ll know I talk a lot about three businesses; Apple, Transsion Holdings, and Tesla (partly because of Musk). Well this month, I fell in love with someone new, her name is Dufil group.
For those who don’t know, Dufil group is the parent company of one of the largest FMCG products in Nigeria, Dufil group is the parent company of Indomie Noodles.
So apparently I stumbled upon Dufil group’s 2017 financial report, and according to that report, the Dufil group made N171 billion (US$450 million) in revenue that fiscal year. Indomie contributed 68.3% of that revenue. If you do the math, Indomie brought in around N116 billion (US$304 million).
On a Gross profit basis, If you use the same percentage of revenue, Indomie probably brought in around N35 billion (US$91.5million), that’s N14 billion more than what both Fidelity and Wema bank brought in that same fiscal year. In other words; it is gradually becoming more profitable to sell Indomie than to start a bank.
Behind the scene, Indomie is probably a lowkey billion dollar business. Dufil group doesn’t joke with their noodles segment, these guys bought Dangote Noodles. Like Dangote Noodles. Like Aliko Dangote’s Noodles.
Apparently, Dufil group is the lowkey elephant in the room. Dufil group is the guy that has a 5 bedroom duplex in Dolphin estate at Ikoyi, but drives to church in a Toyota Venza, nobody really knows he has any serious money until he invites you over to his house and you see a silver 2019 Porsche Cayenne parked at one corner, and a black 2020 Mercedes Maybach parked at another corner. Dufil group is the real “30 billion for the account” without the gold chain, Gucci, and Versace.
Nigeria’s Market Class
I spent a good amount of time last week trying to find out Nigeria’s middle class income distribution, and most of what I saw was old data from 5,6 years ago, I consider that to be unreliable, and since I don’t like to be the bearer of fake news (we’re still trying to catch the 3 dragons that burnt down the Ejigbo BRT station, someone said he saw them in an Uber ride going to Badagry), I decided to create my own hypothetical class distribution based on observation, but not data.
These are the first guys that came to class, not necessarily because they were punctual, but because their parents were so rich, they could pay the Head masters to input the time they wanted them to get to class, and not the time they actually did, like my guy who went to a top private school here in Lagos, and was instructed to just look sharp during WAEC, his result was probably full of A’s and B’s, I wonder what he wrote. These are the guys that “genuinely” make it rain on the gram, these are the guys that park private jets at the private jet hangar beside Legends hotel (you can get a good view of the hangar from De bull Restaurants and Bar). Remember those Arewa boys that were driving Lamborghini’s and Ferrari’s around Abuja? Their fathers are in this category.
The people in this class are usually top CEO’s, captains of industries, and politicians.
I don’t really think there’s anything you can reasonably sell to these guys that they can’t afford.
These guys got driven to class by the family driver, they’re usually business executives, top employees at some multinational firm, and/or entrepreneurs. These guys can afford brand new cars, and cars in the N30 million range, but they usually have to pay in installments for them.
Very strong purchasing power.
These guys followed the school bus, upper level Nigerian middle class, usually earn between 1-3 million naira monthly, the extravagant ones kill themselves trying to afford Lekki phase 1 and Victoria Island, will usually buy a tokunbo (foreign used) car, kids go to top private secondary schools in Nigeria, chances are very high they get their first degree abroad.
A sibling escorted them to class. This is the average and normal definition of the Nigerian middle class, usually earns between N200,000 – N750,000 a month, usually working class, can afford Uber, has a Bachelor’s degree, and typically lives on the mainland or somewhere in far off Ajah.
Walked themselves to class, not primarily because where they live is safe, but because they were more likely to kidnap the kidnapper, than the other way around. Earn below N80,000 a month, hope for better days, hate Lagos traffic (it is always better to endure Lagos traffic in an air conditioned car than to sit uncomfortably in a hot and stuffed danfo (yellow bus).)
Didn’t come to class. Couldn’t afford tuition, these are the “40% of Nigeria’s population live below the poverty line” people, these people usually use self-made products. If these people buy your product, you probably have a multimillion dollar business. There are 80 million human beings in this class, and I consider that to be extremely messed up.
The class/classes your business operates in and influences determines how big and successful your business will be.
If your primary user base is Class A, chances are you’re signing big cheques, but not too frequently.
Dufil group operates from Class A to Class E, almost everyone buys Indomie, from those reading this in the study of their 5 bedroom Banana Island property to those reading this in their N150,000 a year bedsitter apartment in Warri, Delta state, everyone buys Indomie, it’s a mass market product.
There’s also one class that’s not outlined above primarily because it overlaps into the other classes, and that’s the class that 80% of Nigerian B2C startups are building for;
There’s a growing class of millennials earning considerable income, and earning from unconventional means. What makes this class standout is their spending habits. Unlike most Nigerians, they do not spend majority of their income on food, they tend to be a little bit reckless with finances, they’re the kind of people who could close a N300,000 deal today, and buy a N200,000 iPhone tomorrow, if they’re movie buffs, they pay for Netflix subscriptions, and they will usually move around with Uber.
This class of people make their money from pretty unconventional means, at one end are those working with tech startups and companies in Nigeria or remotely, and at the other end are those who trade Forex, Bitcoin, freelance UI/UX designers and developers, or just sell stuff on WhatsApp and/or Instagram.
These were the people getting harassed by SARS officials, and championing the #Endsars movement. Apparently, if you use an iPhone, look fresh, and drive a Mercedes, you could either be in this category, have a rich dad or be an Internet Fraudster.
This class tends to find value in tech products and will likely be loyal customers if you can catch and retain their attention amidst the tens of startups offering the same value proposition as you and also vying for their attention.
The issue is, I do not think the market size of this class is up to a million, most people in this class live in Lagos, tend to prefer iPhones (and other luxury smartphone brands) over Transsion products, and are usually millenials.
It’s a small class, and if you’re going to build a billion dollar business in Nigeria, you need to build beyond this class alone.
Nigeria and by extension Africa is a ripe market for disruption. Due to weak economic prospects and poor social mobility, the total addressable market for most products is really a small fraction of the total population of the country
Developing new innovative pricing and business models, understanding the class you operate from, and expanding that class by offering more and more products and services that cater to other classes will eventually birth the breakthrough required to empower more Nigerian startups to become billion dollar businesses.
Inspired by The Holy Spirit.
P.S: I’m presently working on an eBook where I go deeper into market segments in Nigeria, business verticals, and a couple of other stuff required to build billion dollar businesses here in Nigeria. If this is something you’re interested in, you could click here to my landing page and signup to get notified when it launches, get early access, and a 30% discount when it finally goes live.