Prepaid airtime is like sugar

31 January 2012

Africa has been freed from its shackles by the advent of prepaid airtime.

Prepaid triggered the mass adoption of mobile phones on the continent, which in turn filled the communications vacuum that has existed since the beginning of time. Africa missed the printing press, the wireless telegraph, the fixed line phone, and leaped all the way to mobile.

So why was prepaid airtime the trigger?

First, I’ll describe the experience of HLL in India. The company was trying to sell more sugar, so an exec decided to split the standard 1kg packet into two 500g packets. Revenue increased 20%[1]. The 500g packet was split into two 250g packets. Revenue increased 20%. And so on and so forth, until sugar was being sold in tiny sachets. Net result: Double the revenue and double the sugar sold.

The HLL revelation was unconsciously discovered by mobile operators in Africa in the late 90’s. The standard deal for a phone was a 24month contract comprising a fixed monthly fee.

Someone had the bright idea to rather sell SIM cards with no monthly commitment, but charge a higher rate per minute than if the user was on a contract to compensate for the packaging costs.

Prepaid airtime was born.

Over time pricing has evolved from per month, to per minute, to per second, with overall revenues growing exponentially along the way.

Airtime is sugar.

The poor are extremely sensitive to emergencies. If you have limited cash you cannot commit R100 at the beginning of the month for airtime. You would rather pay R2 per minute as the month progresses, just in case you are confronted on day ten by an emergency requiring R50… If you had committed the full R100 at the beginning of the month you would be in trouble.

Limited money = Limited flexibility = Demand for more control of daily spending commitments = Bite-size chunks of airtime = Prepaid

Result: Africa rising.

[1] The exact increase in revenues cannot be confirmed. This is an approximation from 3rd party sources