How cheap is cheap? This is the question that Bizna Kenya posed to a number of Kenyans in the streets of Nairobi. “I do not always fall for the cheap,” said Eunice Njoki who runs an errands and courier business. “I’m not wealthy, but I believe in buying quality goods because overtime, the expensive always proves to be more economical than its low-cost substitutes.” Her sentiments are echoed by Joe Mwanzia, a 28-year-old teller in a Nairobi-based commercial bank. “Cheap is expensive.
This is not a cliché,” he says. “Cheap will give you a lower price but a higher cost.” Incidentally, Mr. Mwanzia found this out the hard way when he bought his first car. “I went to a car yard in Nairobi to buy a sedan which was selling at Sh. 1.2 million. But then I found a cheaper alternative that was priced at Sh. 800,000. I thought it was a great bargain and changed my mind immediately.” A month down the line, his cheaper option developed bubbles and boils on the dashboard. The CVT gear broke down, and the push-to-ignite button kept failing to respond. “There will always be a substandard aura hovering over cheap things,” he says.
The price wars
Interestingly, nothing exemplifies this mantra than the local mobile sector. This sector is currently led by Safaricom, which has built itself into the most profitable company in the East and Central Africa region. Over the past two decades, the sector has seen a number of charged price wars. Most of these have been instigated by Safaricom’s competition. For example, in August this year, Airtel attempted to instigate a price war by cutting its cross network calling rates by 50 per cent.
However, Safaricom opted not to engage in the same maneuver. “There are certain prices that will not sustain a business. This is why we are not going to engage in a price war, and in the process end up hurting our business,” Safaricom chief executive officer, Bob Collymore said during a press briefing.
This was not the first incident of heavy price cuts in the mobile market. In late 2010 when Mr. Collymore took over from Safaricom’s founding chief executive, Michael Joseph, a price war hurtled prices to lows of between Sh. 3 and Sh. 1. But Safaricom quickly realized that with these kinds of prices, it would not be able invest in its infrastructure. “We discovered that if we continued to charge these kinds of low prices, we would not be able to invest in the industry, and so we put our prices back up,” says Mr. Collymore. This move paid off, and today, Safaricom leads the market with 4,800 base stations. “Our competition was not able to invest in their infrastructure because they weren’t charging the right prices,” he says.
Other telcos such as YuMobile and Telkom – which was trading as Orange – did not recover from the effects of the low prices. In 2015, YuMobile exited the Kenyan market and sold off its network, IT, and office infrastructure assets to Safaricom.
Incidentally, the exit came despite the mobile operator offering unlimited data on its network at only Sh. 50 per day. “Consumers could get the unlimited data and wonder what to do with it due to its low network reach. This is the same case with today’s mega offerings where customers are offered bulk packages that are not in tandem with network power,” says Patrick Kimani, a telecommunications officer at a Nairobi-based ICT firm. His sentiments are echoed by Mr. Collymore, who says that such packages are uneconomical and unaffordable for the company. “People who offer these kinds of unlimited packages end up going out of business,” he says. According to Elizabeth Nyayieka, a business coach and financial markets analyst, the current price cuts will inevitably leave the competition further in the red. “A business must attract customers, but still be able to offer reasonable prices. This is not the case with some mobile players. Their populist prices will leave them lamenting over lower profits or even losses every financial year,” she says.
Strikingly, one of the major lines of complaints has been the astounding profits that Safaricom makes. Many people have felt that they reflect the high prices that the company produces. But is this true? “Safaricom is a publicly traded company. Its net profits are not shacked up by a few individuals but are rather paid out as dividends to its 582,000 shareholders,” says Ms. Nyayieka. For example, in the 2017 full financial year, Safaricom posted a net profit of Sh. 55.3 billion. This was a 14.3 per cent improvement from the net profit of Sh. 48.4 billion that the company had posted the previous year. Out of this mega profit, Safaricom paid out its investors Sh. 1.10 per share dividend. This meant that the company would pay out Sh. 44.1 billion as dividend to its shareholders. In the 2016 financial year, the firm had paid out a dividend of Sh.0.97 per share equivalent to Sh. 38.9 billion from a full year net profit of Sh. 48.4 billion.
Currently, in the National Government’s 2018/2019 fiscal year, Safaricom is expected to contribute nearly 80 per cent of the government’s projected dividend earnings. The government holds a 35 per cent stake in Safaricom, which will give the exchequer Sh. 15.42 billion in dividends. But that is not where the company’s contribution to the national revenue kitty ends. In the financial year ended March 31 2018, Safaricom paid out taxes worth Sh. 24.62 billion. In 2016, it had paid the National Treasury taxes worth Sh. 22.2 billion and a dividend worth Sh. 13.6 billion. “It would be tactically impossible for Safaricom to retain its position as the biggest single contributor to the national taxes kitty, or to pay out dividends, and still launch new products if it succumbed to economically unviable prices cuts,” says Nyayieka.
One of the main concerns among customers has been the usage of their data bundles. But Mr. Collymore notes that despite recording fair prices in data packages and network availability, customer usage is more influential in the way packages such as data bundles are consumed. “If you are downloading a document, or a movie or even (on) social media, it will be downloaded in HD. So if you compare to other networks, the data bundle will get used faster because it is more of a fire hydrant compared to a tap,” he says.
According to a statement from Safaricom, its pricing policy is informed by a duo strategy that enables its customers to continuously enjoy faster and more convenient products while keeping its foot on the growth peddle. “Our prices are largely informed by the need to continue investing in infrastructure and remain relevant to the consumer,” says Mr. Collymore. Safaricom has also developed an edge by becoming a trend setter. “In 2002, when Safaricom introduced per-second billing, the cheapest airtime cards available from Kencell cost Sh. 300. Many of us remember what caused the migration from Kencell to what was then packaged as The Better Option. This was simply because the airtime available was rather expensive and speaking for 10 seconds cost as much as speaking for 60 seconds,” says Wilbur Ahoya, a telecommunications expert. “These were not just operators trying to outdo each other. This was an operator catering to the needs of their customers. Similar trends such as M-PESA, the ability to remain connected in many parts of the country, and the free customer care on 100 have all brought many Kenyans on board the Safaricom ship.” Ahoya further says that with convenience at their finger-tips, many customers do not see the reason to leave.
In the same vein, customer confidence is higher in Safaricom than in other brands. This is mainly because of consumer trust that Safaricom has built over the past 18 years by consistently demonstrating a commitment to improve its infrastructure, bring new diversified products into the market for its customers. For example, Safaricom was the first company to introduce 3G and 4G network in Kenya, which it continues to enhance. In the 2017 financial year, Safaricom built 450 additional 4G sites, 653 3G sites and 250 other sites. By the start of this year, Safaricom’s 4G network was available in all 47 counties. This meant that Safaricom’s multi-billion investment in the high-speed network since its launch in December 2014 had seen the business achieve 1,400 4G sites, covering over a third of the country’s population. Around 224 of these sites used the enhanced 4G+ technology, allowing customers to achieve speeds in excess of 150 Megabits per second. Safaricom has also connected over 200,000 households to its home fibre network. “We continue to invest a significant portion of our capital expenditure (capex) to enhance the data capabilities in our network,” says Safaricom chief financial officer Sateesh Kamath. “We deployed Sh. 35.3 billion in capex, are planning to invest Sh. 36.4 billion in the business this year.”
In the first half of the current financial year, Safaricom invested Sh. 17 billion in the improvement of its network. “We achieved solid results driven by strong M-PESA gains, further diversification of our revenue mix to tap into new growth areas and investment in new revenue streams. We also increased network roll out and acceleration of broadband and fibre deployment,” says Mr. Collymore.
This investment in infrastructure, coupled with a market sensitive pricing mode saw the firm add 1.4 million customers to its subscriber register in 2017. This brought its total subscriber base to 29.6 million, of which 20.5 million are active 30-day M-PESA users. “In-network opportunities still endure. Additionally, more integration of the M-Pesa ecosystem such as PayPal and Google Playstore will underpin growth in revenue per user of M-PESA,” says Genghis Capital in a note on the firm’s growth prospects for the current year.
Currently, Safaricom has introduced several technologies over the past 18 months including Tap-To-Pay and Scan-To-Pay for payments in its Lipa na M-PESA platform to shorten the process of making payments. Safaricom has also re-integrated till numbers of the merchants so that when a cashier selects M-PESA as a mode of payment the merchant system reconciles the amount to the latest Lipa na M-Pesa payment received. This eliminates the need for the customer to give their mobile phone number or show a payment confirmation message.
These improvements have come hot on the heels of its active Lipa na M-PESA agents’ rise to 109,000. “These are investments that portray a business that is mindful of the future needs of its clients, and how those needs can be fulfilled more conveniently,” says Mr. Kimani.