While the U.S. boasts one of the highest smartphone penetration rates, China and India have overtaken it in total ownership numbers. Smartphone growth has come to a standstill in the U.S., while markets like Pakistan, Bangladesh, and Nigeria are growing at a tremendous rate.
For companies whose business is to sell virtual or digital services, these markets are where your next batch of users could well come from; but keep in mind that your existing business model most likely costs more than users from these emerging markets are able to pay. Take India for example (median income at $600 compared to $28,000 in the U.S.): Access to Netflix would cost an average person in India about $400 each month. Would you be willing to spend two thirds of your income on a video streaming service?
Rather than slapping users from emerging markets with a price tag that’s a magnitude above their spending ability, companies need to take a different, four-step approach to growing their revenue:
1. Get the pricing right: Use the Big Mac Index
The Economist publishes a great model for highlighting purchasing power across the world: the Big Mac Index. The Index can be applied to digital goods as well and works even better in this context. While a burger has fixed costs attached to its production (raw material, transportation, etc.), a piece of digital content (whether it’s a virtual credit, access to a service, or a song download) most often does not. This means digital content companies can be much more flexible in their pricing.
There are two good reasons to localize pricing — differences in income and differences in user spending behavior. For example, our carrier billing data for payments done on websites from December 2014 shows the following average transaction sizes for various emerging markets:
- Thailand: average transaction size $3.46, monthly average revenue per paying user (ARPPU) $10.58
- Brazil: $2.63, ARPPU $12.29
- India: $0.82, ARPPU $1.53
- Indonesia: $0.74, ARPPU $2.92
- Nigeria: $0.54, ARPPU $0.93
Brazilians pay less money in each transaction yet end up paying more in total than people in Thailand. And while Indians and Indonesians spend roughly the same amount of money per transaction, Indonesians end up spending twice as much in total. Charging one price across all these markets would inevitably mean losing revenue in some of them.
The right way to go about localizing revenue in such markets is identifying where spending behavior is similar and introducing tiered pricing, i.e. one price for the U.S. and Europe, a second one for mid-income economies, and a third for the lowest spending countries.
2. Give bite-size chunks of access to content
Transaction sizes below $5 are a reality for emerging markets – users with low income are not able to pay more than a small chunk of money at once. In a country like India, people usually have $5-$10 available on their phone balance (see pre-paid packages available from Vodafone).
Our own experience shows that if merchants try to charge too much at once, a sizeable amount of revenue can be lost – for example, we see about 8 percent of payments failing in Ukraine and 11 percent in Philippines as users who attempt to purchase digital content do not have enough money on their phone account.
This means digital merchants need to scale down on the pricing logic – rather than selling a $9.99 access to a service for a month, in most emerging markets it makes sense to sell $0.99 access for a day. Such a strategy has been used by one of India’s leading streaming service providers, Ditto TV.
It’s important to note that this doesn’t mean you should block users from spending a larger amount of money to access more content for a longer duration; instead, it means giving them more choice in how much they want to spend. One streaming merchant that we are working with in Southeast Asia is getting 80 percent of its income from 30-day access passes, but the proportion of users buying access for less than a week is also over 80 percent. Not using the bite-size chunks strategy would mean a significant impact in both the number of paying users and total revenue for the company.
Selling daily passes and bite-size chunks of access to entertainment is not uncommon in Western markets either. One of the most successful fantasy league businesses, Fanduel, has used this approach very successfully.
3. Figure out the right payment channels
Besides pricing strategy, emerging markets vastly differ in the way people conduct online payments as well. While almost everyone in the U.S. has a credit card, a number of issues prevent the spread of credit cards in growing economies (identity and reputation management, debt enforcement, informal economies), and they’re not going to be solved anytime soon.
Southeast Asia, for example, (one of the fastest growing regions for mobile devices) has a 1-37 percent credit card penetration. Instead, people rely on alternative payment methods to conduct transactions online. In addition to carrier billing, other payment solutions dominate in certain areas, for example:
- Brazil: bank transfers through Boleto Bancario
- Russia: e-wallet Yandex Money
- India and Africa: most local online payment solutions still rely on carrier billing, for example Airtel Money (India), Flous (Kenya) and MTN Mobile Money (10 markets in Africa)
- China: e-wallet Alipay and scratch card provider Junwang
- Central and Eastern Europe: pre-paid cards PaysafeCard and Skrill, e-kiosk payments with QIWI, direct debit solutions (usually focused on only one country)
4. Custom content for custom tastes The final key aspect of getting your emerging markets strategy right is content and language. Most U.S.-based fantasy league businesses are, for example, based on American football, which very few people care about outside the U.S.
If you already have the technology in place, putting in the effort to turn your football league into a soccer league for Brazil will capture a much wider audience. Or if you’ve built a card game, figure out which games local audiences like — India’s most successful mobile gaming company, Octro, has built its success upon a local version of poker called Teen Patti. The same goes for streaming content – some of the most successful audio and video streaming services in emerging markets cater to local audiences (e.g. Yala, Gaana, and Ditto TV.
Beside catering to local tastes, Western merchants often tend to forget that not everyone in the world speaks English – in fact, English is understood by only about 15 percent of people. Building a local fantasy soccer game for Brazil will not be very successful if you don’t translate the service into Brazilian Portuguese.
Looking again at data from our own billing platform, we can see that even a culturally similar region such as the Middle-East and North Africa presents a challenge in terms of localization – for Morocco, you need to localize to French; for Iraq to Arabic; for Turkey to Turkish.
Emerging markets have become an undeniable, major force in the digital ecosystem. The bad news is that lessons learned from building a successful business in Western countries are almost impossible to apply to the new regions of digital consumption. The good news? Those who do figure out the peculiarities have billions of new customers waiting for them.