top of page

Paygo vs. Retail: Demystifying Distributors' Key Challenges

This is Chapter 2 of 'Why SaaS', a series of articles produced by Solaris Offgrid aimed to empower last-mile distributors to make more informed decisions on the IT resources that can help them leverage their operations to thrive in the Paygo sector.


Introduction

1. The ever-present cash flow constraints of Last Mile Distributors (LMDs)

2.- More complex organisation = more complex set of skills

3. Investing in IT to support complexity of last-mile operations

In a nutshell...


Paygo vs Retail PaygOps Why SaaS

Introduction


Financial exclusion is still affecting the lives of 1.7 billion people worldwide. For them, having no banking services equals no access to credit, and no credit often translates into the inability to access a sustainable source of energy or to afford essential services such as water, sanitation, health, and so forth. This holds especially true in Sub-Saharan Africa (SSA), where, as depicted in Solaris Field Stories Episode 3, at least 66% of adults don’t have a bank account.


Given the financial constraints of the unbanked, they understandably have to lean on acquiring products with cash-savings, which represents a solution only for some of them, especially those with enough cash-savings located in urban -or peri-urban- areas where retailers operate. But how is it possible for a family to acquire a solar home system (SHS), a water pump, or even a fan with cash in a region where, according to the UN, more than one-third of employed workers live on less than $1.90 a day?


Let’s not forget that the population in rural areas of SSA keeps increasing drastically. According to the Food and Agriculture Organization of the United Nations (FAO), “by the middle of the century, the estimated rural population in SSA is projected to increase by 63%. Sub-Saharan Africa is the only region in the world where the rural population will continue to grow after 2050.”

Therefore, serving the last mile in SSA is a tremendous, but complex opportunity. As per the Global Distributors’ Collective’s 2019 Status of the LMD Sector Report, “last-mile customers often have low, fluctuating, or unpredictable incomes. Most live in remote, rural areas with poor transport and telecommunications infrastructure.” Simply put, households at the last mile cannot afford to pay for accessing essential goods in cash, which requires local businesses to provide credit.


Through Pay-as-you-go (Paygo), consumers who cannot afford to pay for an asset in one go, have the chance to pay for it in instalments, more flexibly over time, thus not only being able to get access to clean energy solutions, but having access to financial services for the first time in their lives and, thereby, building a payment and credit history. And, given the success of the model, consumers are now gaining access to reliable products and services that are literally changing their lives, with multiple industries beyond solar, such as Agriculture, Clean Cooking, Water Access, or even Transportation, providing new financial opportunities for larger underserved communities.


Paygo has allowed SHS distributors to rapidly increase their sales to reach millions of installations per year. According to the Off-grid Solar Market Trends Report by GOGLA (2020), SHS Paygo sales increased 38% from H1 2018 to H1 2019, and 73% of the sales of lanterns, SHS and multi-light systems come from Paygo vs. 27% that comes from cash sales. Furthermore, Paygo has become such a propelling force driving consumers to adopt financial services that it generates an estimated 1.6 million mobile money transactions monthly (GSMA, 2017).


However, as we’ve seen the impact of the Paygo business model on successfully tackling energy poverty and propelling financial inclusion, what could possibly prevent a company in the region from adopting such a revolutionary business model?, how does it differ exactly from Retail? Let’s explore the answer through the following key challenges:


1. The ever-present cash flow constraints of Last Mile Distributors (LMDs)


To begin with, a cash model retailer is able to collect 100% of the margin and make a profit as soon as they sell, requiring them to keep cash flow positive between the sourcing and B2C transaction stages, and although the cash flow may be reduced at times before they manage to sell, they usually manage with no complications. They take care of the usual expenses that come along with the model, such as transport, taxes, clearance costs, sales channel but, for instance, a (cash model) distributor importing an order of hundreds of devices today, could start selling them as soon as the sourcing is complete, and collect their corresponding sales margin with relative ease.


Now, as good as that sounds, SHS and other essential appliances sold by retailers are still cost-prohibitive assets to afford with cash upfront for most households in remote areas of SSA. Therefore, although a retailer would constantly make a profit on the day of the sale, the market size to serve those who can afford such services paying by cash tends to be limited in the SSA context, making it non-viable to address the whole 600 million people in need of energy access, for instance.


In contrast, the journey to profitability for a Paygo provider requires way more patience and, among many other factors, tons of working capital. “The Paygo industry is a highly capital-intensive one and can require up to eight times more capital than cash sale-based companies” (Dalberg Global Development Advisors and Lighting Global 2018; Lighting Global, GOGLA, and ESMAP, 2020). And while there is an increased profit margin on a Paygo model, such increase is usually eaten up by higher costs of financing and the complexity of its operations.


A Paygo provider must endure collecting the profit margin toward the end of the 6 to 18 months lease period (exposing such a margin to customer default risk), while in parallel take care of stages such as distribution and maintenance. All of this while attempting to keep the cash flow running, which represents an immense challenge, especially for early-stage and medium-sized organisations. If able to manage such implications, they can reach higher volume sales, as the model has proven to provide increased affordability for the consumer and enable Paygo LMDs to cover a larger segment of the market unattended by Retail.


Year after year, Paygo keeps expanding its market size and positioning higher its value. According to GOGLA’s latest market report (2021), “approximately three quarters of all SHS sold globally are sold on a Paygo basis.” In other words, the SHS market size of Paygo is now three times larger than that of Retail; without Paygo, the SHS market would only amount to 25% of what it did through 2021.


Semi-annual Evolution for Key Appliances Sales Volumes - East Africa (Source: GOGLA)


The Paygo methodology and the tools are already in place, allowing several LMDs to deploy the model at scale and, ultimately, transform lives. However, as we explored recently in PaygOps’ Fintech Leadership Vision, thousands more local distributors are still needed to reach SDG7 by 2030, as “investment in the sector is highly concentrated, with just ten companies receiving 78% of total investment in the sector between 2012 and 2019” (Lighting Global, GOGLA, and ESM