Solving a macro problem through a micro solution
It’s Sunday evening and you’re doing the weekly grocery shop. Trolley in hand, you cruise up and down the aisles of your local supermarket, avoiding the junk food at all costs.
You pull into Aisle 8: Toilet Paper. You quickly survey your options. A single roll sets you back $1; but that won’t get you far. For $8 you can get a 12-pack. On a per roll basis, that’s a third less expensive. So you grab the 12-pack.
Now picture what it’s like for someone living at or below the poverty line. You might only have $10 to spend on weekly groceries for your family of four. The 12-pack is still the more economical option, but you can’t afford it. So you grab a single roll.
And what if the supermarket doesn’t stock toilet paper in single rolls? Well, then you’re in trouble.
This is the predicament faced by millions of low-income households in the developing world. Best-case, you pay more. Worst case, you go without.
Buying less, more often
In Africa, 86% of employment is informal (International Labour Organisation, 2018). The informal sector is characterised by low pay, irregular hours, no benefits (eg healthcare) and no job certainty; all without a social security net.
Relying on informal employment means you have no income security. You don’t know when your next pay-check will come, or how much it will be. ‘On average’ your household might earn $3.20 per day (the World Bank’s poverty line for lower-income countries), but that does not reflect the reality of how you live, earn and spend. Your income is sporadic and unpredictable; you might earn $5 one day, and nothing for the rest of the week. You also might need to pay hospital bills, or school fees, or an outstanding loan. This makes it impossible to plan your monthly or weekly spend; and so you spend day-to-day and conserve whatever cash you can (to learn more, have a read of Portfolios of the Poor or Poor Economics).
To meet the needs of low-income consumers, a marketplace for consumer goods sold in small amounts has emerged, sometimes referred to as the ‘sachet economy’. These are consumer products such as soap, sugar and cookies that are sold in single-use packaging, mainly in the informal settlements. This is a good (albeit environmentally problematic) example of matching the product to the behaviour of the consumer. Service providers such as telecommunications, banks and utilities have also seen rapid market growth through adapting their products to the sachet economy — designing for high frequency, low value transactions. Single rolls, not 12-packs.
Cooking gas is no different. In Sub-Saharan Africa, 83% of households cook with dirty fuels or solid biomass, the most prevalent fuels being charcoal and kerosene (International Energy Agency, 2017). Charcoal and kerosene are readily available on any street corner; a 1kg tin of charcoal might cost US $1.00, a 500mL bottle of kerosene $0.50. Cooking on an open flame requires minimal equipment, making these fuels highly accessible.
Fuels such as charcoal and kerosene are, however, immensely damaging. Dirty fuels are deadly to inhale (contributing to 3.8 million deaths per year), they fill the home with smoke (equivalent to the second hand smoke of 400 cigarettes per hour), they are inefficient, and terrible for the environment. All this has led the WHO to declare lack of access to clean cooking an environmental and public health emergency.
LPG is well-suited to emerging markets, but it is only sold in bulk
Liquified Petroleum Gas (LPG) is safe, efficient, readily available, and clean burning. LPG is also easily transported without grid infrastructure — unlike Liquid Natural Gas or electricity — critical for emerging markets.
When you do the math LPG is not only a far superior cooking fuel; it’s actually cheaper on a per unit basis than charcoal or kerosene. In Kenya, the average household using LPG as their primary cooking fuel spends 17% less than a household relying on kerosene, and 28% less than one relying on charcoal (Kenya Ministry of Energy, 2019 & Kenya Bureau of Statistics, 2019).
The catch: LPG is only sold by the cylinder, and the smallest readily available cylinders (6kg in Kenya) cost $10-$12 to refill. Despite being more economical, the upfront cost of LPG is prohibitively high, and there is no payment system in place to facilitate smaller transactions. As a result, low income households are financially excluded from cooking with gas.
To solve the clean cooking crisis, we need to acknowledge the root of the problem. Consumers are not ‘irrationally’ purchasing dirty fuels; they are making very difficult choices under uncertain conditions (to learn more, have a read of Scarcity: Why Having Too Little Means So Much). Households do not cook with harmful fuels because of any “cultural” preference (a convenient excuse we hear all too often); they do so because it’s what they can afford. It’s a rational decision they’re forced to make because the market has failed them.
The time is right for a new approach
At PayGo Energy (PayGo), we set out to solve a simple, yet intractable problem: How can we make LPG affordable and accessible for the mass market? We hypothesised that if the sale of LPG could be matched to the typical purchasing behaviour of the market, then customers would quickly adopt LPG as their main cooking fuel. The key was in the packaging — gas sold by the gram, not by the cylinder. Single rolls, not 12-packs.
To prove our hypothesis we started with the customer. Back in 2016, we put a cylinder of gas and a cookstove in 10 households. We visited each household daily, and weighed their cylinder by hand. We then charged the customer for the amount of gas they had consumed over the previous 24 hours. Through this initial pilot, and a wider market survey, we proved that low income households could be reliable consumers of LPG, and had the ability to pay if provided with a mechanism to make small, regular payments.
Fast-forward four years and we’ve commenced commercial production of our patented Cylinder Smart Meter (CSM). The technology has evolved through many iterations, but the core purpose of the product remains the same: enabling customers to purchase gas in small amounts.
We’ve proven that low-income households in emerging markets can be consistent, reliable consumers of LPG. Amongst PayGo’s customers, the average household spends $1.80 per week on cooking gas, and tops up credit more than once a week. This is a customer segment that, despite comprising over three quarters of the market, is almost entirely overlooked by the LPG industry. Over 80% of PayGo’s customers are first time users of gas.
We believe that expanding LPG distribution in emerging markets can be a win-win for suppliers and consumers. For suppliers, tapping into new markets and undeserved customer segments is a huge commercial opportunity. For consumers, access to clean, safe, affordable and convenient cooking — often for the first time — is life changing (not to mention life saving).
To unlock emerging markets, the industry needs to rethink how gas is sold. So long as the cylinder remains an indivisible unit, distributors will continue to price out the majority of households. Let’s start with the consumer — how they live, earn and spend — and design products to meet their needs.
To continue the conversation, send us an email (email@example.com) or follow PayGo Energy on LinkedIn.