FROM the responses we recently got from regular readers of this column, articles on disruptive innovation, among others, have had a profound effect on reshaping mindsets at the personal level.
The Human Capital Telescope of Brett Chulu
Enabling customers to pay DStV subscriptions via EcoCash, Econet’s mobile money/banking service, gives us an opportunity to deepen our understanding of disruptive innovation dynamics.
In fact, this development represents the classical case of a disruptive innovation that is beginning its assault on upper market segments.
In light of this, we shall revisit the concept of disruptive innovation, drawing illustrations from EcoCash.
EcoCash’s disruptive journey
A disruptive innovation is one that enables large segments of the population to have access to a product or service to which they were denied access because these products or services were either prohibitively expensive or required users to be highly skilled.
For an innovation to earn the moniker ‘disruptive’ it must first enable the less skilled and less wealthy to access a product or service.
This can be done by either changing a business model or deploying a technology that simplifies both cost and technical complexity at the user interface. EcoCash fits this billing well. Many of the unbanked people in Zimbabwe are now formally using basic banking services through EcoCash.
That registered subscribers of EcoCash, at more than 2 million, are far more than the total active customers of our traditional banks is testimony to EcoCash’s non-user-to -user courting power.
Four features of a disruptive innovation First, a disruptive innovation initially offers low performance on the metrics valued by upper market segments and thus it first gains a foothold in lower market segments.
This seems to be the case with EcoCash, as the direction of Ecocash’s cash flows is tilted towards the rural areas, where physical bank density is very low.
Adopters of the disruptive innovation in the lower market segments are moving from a no-access situation and thus the initial performance will more than meet their expectations. To the lower market segment, what upper market segments despise as being crummy, is quality to them.
Our rural folk surely do not view EcoCash as a crummy product, if it enhances their personal productivity by saving them precious time. Here is a very basic business lesson, very simple, but often easy to overlook—it is the consumer who is the arbiter of quality and not the business.
Second, a disruptive innovation, on inception can take stand on either of two launchpads. It could begin its business life in a segment of the population that has never used the product or service. In fact, these are more correctly defined as non-users of an entire industry.
Interestingly, when a disruptive innovation takes this route, it coincides with the description of a blue ocean, defined as a completely new market, or even industry, in which demand is created as opposed to being fought for and in which there is zero competition.
Alternatively, a disruptive innovation steps into the lower segments of an existing industry. In the case of EcoCash, both launch pads apply.
EcoCash is being adopted by both the unbanked and those who are partially banked, the banked being low-income earners who have social ties with the unbanked. Bankers are on record as saying the majority of existing banking clients in Zimbabwe earn less than US$800 per month. It is from these that money is flowing to the unbanked.
Third, a disruptive innovation almost always begins by earning low margins, making it not worth the attention of incumbent businesses who in fact are willing to exit those segments being invaded.
Marketing research data usually confirms the upper segments’ total dislike for the disruptive innovation. We can easily infer that EcoCash began as a low margin business on the basis of at least two analyses.
On the one hand, EcoCash’s income model is based on high volumes, in which relatively small charges are levied for facilitating a transaction. On the other hand, my own analysis of M-Pesa, a similar and more established business in Kenya, shows that M-Pesa is largely a low margin-high volume business.
During Safaricom’s 2011/2012 business year, the average revenue per registered M-Pesa subscriber was US$13, 30. It is almost impossible for EcoCash to have been a high margin product when it was launched.
Fourth, a disruptive innovator may eye the lucrative margins resident in the upper market segments. It makes a lot of business sense to have a go at the sweet spot located upmarket.
What the disruptive innovator does is to look at the performance metrics required by upper segments and strives to match these through upgrading the performance of the initial disruptive innovation. This is the path Econet seems to be taking with EcoCash. The introduction of DStV payments via EcoCash is testimony to this assertion.
It’s not your average consumer who can consistently pay for DStv. Cleverly, the disruptive innovator will shy away from replicating the business models and cost structures of the incumbents ruling in the upper market turf. You can see this at play in the case of EcoCash.
Who, between EcoCash and banks, is bound to lose the battle for DStV transaction income? Your guess is as good as mine—it’s those banks that are not integrated with EcoCash. Cheekily and adroitly, disruptive innovators extend their low cost model upmarket. That’s a giant act—a combination of low cost and high quality is out of the norm—inherited business wisdom thinks this way: cheap goes with low quality; expensive goes with high quality.
The disruptive innovator’s proposition of low-price and high-quality is powerful enough to change the upper market segment’s negative perceptions of the product they once despised. This is beginning to happen. I participated in a conversation with two gentlemen who run their own businesses.
One of the discussants remarked something to the effect that many people (meaning the relatively well-off) who had not warmed to EcoCash may find it too convenient to ignore. My prediction; expect more services that appeal to the relatively well-off to be brought into the EcoCash payments ecosystem.
Incumbents latching onto the high- price/high-quality model may respond by playing low-balling, but with an inherently higher cost structure, they eventually throw in the towel.
Reflect on it
Once a disruptive innovation begins its upmarket march, it may be a little too late for incumbents to mount a successful defense strategy.
Chulu is a strategic HR consultant who is pioneering innovative strategic HR practices in both listed and unlisted companies. firstname.lastname@example.org.