CHAPTER
6
The cell phone business accounts for a large portion of the growth of marketing to the economic bottom of the pyramid (BOP). With almost 5 billion subscribers globally, multinational companies are realizing that they can no longer afford to ignore the viable business opportunities that this market sector can provide.
Like Ricardo Salinas, Carlos Slim, Mexico’s telecommunications mogul, foresaw the potential goldmine that the BOP market represents if only given accessibility to an affordable phone service—and he pinpointed the solution at just the right time. In 1989, Telmex created a cell-phone subsidiary, Telcel, which introduced the golden concept of pre-paid credit to the Mexican market.
Fixed lines in Mexico were predominantly unaffordable and not just among the bottom of the pyramid sector. Only 10% of the population owned a phone in 1998, an embarrassingly low figure for a country trying to open its borders to the international market. Up until 1997, Telmex had a monopoly of the fixed line industry and could afford to charge whatever it wanted—and it certainly didn’t hold back, charging tariffs which worked out to be around 600% higher than in the U.S.
A year after Slim bought the company, Carlos Salinas de Gortari, the President of Mexico, authorized spectacular tariff increases without demanding corresponding improvements in the telephone service—for some, it could take up to two or three years of begging to have a phone network installed in their home and some people were never even granted the luxury. I remember when I moved to Mexico in 1994, I was warned that if I wanted to buy or rent a house, the first thing I should do is find out if it’s equipped with a phone line.
The rates were high compared to American and European standards. Relative to local earnings, they were extortionate. After massive protests in 1991, Telmex sympathetically relented by increasing phone rates a mere 170 percent as opposed to its initial 247.4 percent blow. With wage increases that year allowed to rise by 18 percent, you didn’t need a PhD from Harvard to realize the numbers didn’t quite match.1
There are two models phone carriers can use to charge for calls, and since the early days of mobile telephony, both have been adapted in order to offer competitive pricing. Although countries like Hong Kong, Singapore, Canada and the United States adopted the model in which both the caller and receiving party pay for the call, they capped rates by offering monthly unlimited call plans. European countries have also compensated their customers by adopting the alternative model in which only the calling party pays. Telmex opted for neither, charging for every minute of both incoming and outgoing airtime until eventually, years later, laws were passed to ensure that only the calling party pays and, for the select few who could afford a phone, when it came to paying their bill at the end of each month, the sky was the limit.2
When Telcel introduced the option to purchase pre-paid service, it lifted a paralyzing burden as it meant being in complete control of how much you spend with no minimum fees, bills or monthly charges. Pre-paid service is when the customer pays in advance for a specified volume of use over a specified period. Many pre-paid customers would not otherwise be able to obtain a phone service due to their credit profile or inability to make a fixed financial commitment. The option to pay for cell phone minutes in advance when they have cash, means that phone accessibility has opened up to a huge additional sector of previously untapped customers. Many opted out of owning a fixed line, buying a cell phone instead, for three reasons: in some areas there is no landline infrastructure and even when there is an infrastructure it can take years to have to have a landline installed, secondly it is more practical, efficient—and even sometimes cheaper—to have mobility, and thirdly owning a mobile phone has become a necessity as well as a status symbol.
Carlos Slim preempted the direction the phone industry was taking. New technologies such as the use of high-speed Internet to make voice calls (known as VoIP, Voice over Internet Protocol) delivered through user-friendly services such as Skype and Vonage means that users can now circumvent high-cost, long-distance phone charges. For the most part, these services are even free. While other companies were distracted with their feeble attempts at penetrating the long-distance, fixed-line business, Carlos Slim quickly seized his chance to corner yet another market. By the time the competition had opened their eyes to the fact that long-distance, fixed-line phone services were becoming obsolete, nearly everybody who owned a cell phone in Mexico already had a pre-paid or post-paid plan with Telcel—and because it’s cheaper to call somebody else who uses the same cell phone provider as you, the number has continued to spiral like a Ponzi scheme. Nearly 20 years later, 7 out of 10 cell phone lines belong to Telcel.
Nevertheless, because of limited competition, like Telmex, Telcel continues to be a relatively expensive service. When Ricardo Salinas bought the frequencies for his cell-phone service, Unefon, in 1995 a large segment of the population couldn´t pay for a fixed or mobile phone. Therefore when Unefon entered the market, its strongest selling point was that the service was notably cheap, but even though Unefon argued that the urban coverage was sufficient, the network had severe constraints. Despite its consistent customer growth, network coverage barely reached the most populous urban areas, alienating a huge clientele base that Telcel was monopolizing. It wasn’t a deal breaker because its clients tended not to leave the city frequently anyway and Unefon still managed to attract the customers who would rather pay less than Telcel was charging and endure the limited network coverage.
Determined to crack the telephony oligopoly, in 2003 Ricardo Salinas purchased Iusacell, which had been Mexico’s first cell phone company. He had tried to purchase it before the ’90s and failed. Now it was on the brink of bankruptcy but it had built a brand name, extensive subscriber base, broad nationwide coverage and used cutting-edge technology, some of which Unefon lacked. Finally in March 2007, the two companies joined forces under the holding company Grupo Iusacell. The new enterprise was born with more than 3.4 million subscribers—equivalent to approximately 6% of the wireless telecommunications market in Mexico, successfully cracking another monopoly, even if it was by a small margin.
Ricardo found himself up against one of the biggest telecommunications giants, not just in Mexico but in the world—and thus far Telmex had been blissfully operating with no imposing competition in a virtually unregulated territory. While struggling to survive against the big bully, Unefon needed customers. At this point, he was facing so many hurdles that most people just laughed in his face. “How on earth can he expect poor people to embrace technology?” asked Ernesto Piedras, head of the Competitive Intelligence Unit, a consulting group.
It was frustrating because Ricardo foresaw the potential goldmine sitting at the bottom of the pyramid. To put the possibilities into perspective, take just nine countries: Mexico, China, India, Brazil, Russia, Indonesia, Turkey, South Africa and Thailand. If you add up their total population it comes to about 3 billion people, representing 70 percent of the developing world population. If you then add up those countries’ total economic output (or gross domestic product GDP) and convert that total into the value it would be equivalent to if spent in the U.S. (a term called purchasing power parity), it would come to $12.5 trillion, which represents 90 percent of the developing world. That number is larger than the GDP of Japan, Germany, France, the United Kingdom and Italy combined.
Now if you compare those figures to how much the bottom of the pyramid could potentially spend on connectivity, you will ask Ernesto Piedras why he wasn’t trying to sell phones.
To prove how rapidly cell phones are penetrating the global marketplace, you need only look at the sales figures. According to statistics from the market database Wireless Intelligence, it took about 20 years for the first billion mobile phones to sell worldwide. The second billion sold in four years, and the third billion sold in two. By the end of 2011, five billion cell phones were in use and most of this growth is in the bottom of the pyramid markets. The research shows that even the world’s poorest families would rather spend their money on communications than any other category, including health, education and housing. However, to reach the 90 million who did not already own a cell phone, Unefon would need an innovative strategy—in terms of distribution, affordability and accessibility.
If the BOP sector is going to spend its money on a product they can’t afford, you better be damn sure it’s worth their while. As the Elektra stores had already found out, the bottom of the pyramid markets are very brand conscious, which makes sense. An aspiration to a new and different quality of life is the dream of everyone, including those at the BOP. Therefore, aspirational brands are critical for the BOP consumers. They are also much more cautious about getting more bang for their buck than most.
To open up that market Ricardo knew that he couldn’t have a traditional business mindset. He would have to think outside of the box and find a way to reach those people and then guarantee the most superior-quality phone and service possible—at a fraction of the existing price. Affordability and accessibility go hand in hand when dealing with cell phone service because low-income customers don’t necessarily have a disposable income and so regular monthly installments aren’t an option, regardless of how cheap a minute costs. Ricardo had to give up on average revenue per customer or user as a measure of attractiveness and focus on the contribution per minute of cell phone time.
Lowering the prices by just 5 or 10% doesn’t cut it in that market either. When dealing with the BOP, you can’t think of price in terms of average revenue per customer but rather how much you will be making per minute of cell phone time that otherwise wouldn’t be used. There is no way to charge BOP customers the same fee existing users are willing to pay because they just won’t pay it. In India, a cell phone minute can cost less than $0.01 but the $6.4 billion-dollar market proves that companies can still make a profit while one cent away from donating the minute for free. By calculating the price elasticity (the change in demand for a good or service relative to its change in price— i.e., the quantity grows more than the pricing is reduced) of call charges, Ricardo would have to reduce prices by 80% in order to attract the most customers possible—and he did.
For the first time in the history of telecommunications in Mexico, Ricardo started a price war in Mexican telephony. Unefon cut prices to one peso per minute of call time instead of five and offered up to 50% discounts based on volume. Shortly after, long-distance calls within the country cost two pesos a minute and calls to the U.S. and Canada cost three, a dramatic reduction from what it had been at the beginning of the decade. Competitive pricing was further exacerbated when Unefon adopted the European “calling party pays (cpp)” plan instead of paying what in essence adds up to twice the fee. Once the ball was rolling, even Telcel had to play the game, and although Mexico’s phone system is in dire need of stronger competition and better regulation, it has jumped leaps and bounds in terms of affordability and accessibility for the BOP over the last 10 years.
Carlos Slim’s clear strategy of introducing pre-paid to the telephony market so long before any of his competitors has been the lynchpin of his success in the cell phone market. Of course, there are many other factors that contributed to his success but he saw that when you have a population with a low and unreliable income it’s necessary to provide cheap or even subsidized handsets and the option to pay in advance when you can—even if the pre-paid minute is more expensive than the post-paid minute.
Even though he entered the market later, Ricardo Salinas took this model one step further and offered his customers more competitive rates, challenging Telcel’s monopoly of the market and ultimately succeeding in making cell phones more affordable for everyone—once again aiming to serve his target market, the bottom of the pyramid sector.
You can learn from Ricardo Salinas’ success in the cell phone market by employing the business techniques he uses religiously. First, have a vision; a clear goal for yourself or for your company. Although it seems easier, it is much more difficult to be clear and simple. The best businesses thrive on a simple business plan that is applied throughout the company structure. It avoids confusion and allows everyone involved at the company from the mailman to the CEO to focus on the same vision and work on achieving it.3
Since I have been a part of Grupo Salinas, I have also learned that less is more. If Ricardo asks you to write up a business plan, he expects it to be summarized in one page. He has dozens of businesses to oversee and cannot afford to waste time sifting through pages of waffle.
He is a structural person and has an almost photographic memory, absorbing information visually. Every executive at Grupo Salinas uses software called Mindmap, which is literally a way of mapping your mind on a computer. The idea is to start with a concept in the center of the page, such as your goals for that year, and then work outwards in all directions, producing a growing and organized structure composed of subcategories.
It is a graphic method of organizing your thoughts, often taking on the same structure as the thought process. By mapping your thoughts in a program, they can be shared; they are clear and simple, logically leading from one idea to the next; and most importantly they are easy to interpret without needing lengthy, time-consuming explanations.
Breaking ideas down into a shared language is anotherway Ricardo encourages employees to communicate and work together, while enabling him to absorb as much information as possible, as after all, he is only one man overseeing hundreds of departments in multiple companies.