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International Marketing Plan Pre Paid Electricity System In Marketing Essay

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Published: Mon, 5 Dec 2016

The recent economic climate has seen many multi-nationals divesting from developed nations to less developed and developing nations. General Electric is a global firm that prides itself on proliferated growth and this report investigates the potential of a prepaid electricity system in Kenya. It details the proposed plan for this product and assesses the potential for such a product in Kenya.

Our analysis revealed that there is a demand for such a product particularly in the capital city of Nairobi. The product has been fully adapted to meet the needs of the Kenyan market. Communication has been given precedence as the success of the product is dependent on the extent to which consumers are receptive of the benefits a pre-paid service offers. Distribution channels have been proposed at strategic locations in Nairobi, so as to bolster the image of the company as well as products and services being readily available as and when consumers require them. The market entry strategy proposed is a joint-venture with major electricity suppliers in Kenya due to their superior understanding of the Kenyan market. Sales projections based on the incipient market of unconnected urban and rural households reveal lucrative growth potential. Profit figures show that the GE has a lot to gain by diversifying into the energy distribution sector in a Kenya.

This investigation shows that there is a strong enough market for an efficient and cost-effective prepaid electricity distribution system and providing that the culturally relevant factors of the product and its communication are adapted as detailed in the report, the product should be successful.

The report outlines each stage of the investigation complete with an appendix.

SECTION ONE

1.1 Introduction

As the U.S. economy cools, GE and other large multinational companies are shifting their focus to faster-growth parts of the world (Timmons, 2007). GE has been greatly expanding its presence across the world, particularly in developing markets. With GE Energy being one of the worlds’s leading suppliers of power generation and energy delivering technologies, we propose that GE expand into the electricity distribution market.

The usual way to pay for electricity is that it is metered and billed to the electricity customer. Billing and revenue collection of a vast number of domestic consumers especially at the poor end of a market can be difficult for electricity utilities. To counter this problem, electricity utilities respond by not supplying efficient electricity to consumers. Many consumers in developing countries are subject to electricity outages and are therefore forced to rely on other forms of energy such as firewood and charcoal despite electricity being a basic need.

Our proposed product is a prepaid electricity metering system that allows the consumer to buy credit from GE via distribution outlets to use a specified quantum of energy. This way the problem with billing and revenue is eliminated. Furthermore, this system will enable consumers to have better control over their electricity costs. The aim is to bring cost-effective, convenient and efficient electricity to a developing market. With GE’s global resources, experience, and industry-leading technology, GE energy is well positioned to meet the requirements for reliable energy needed by developing markets.

SECTION TWO

2.1 Country Selection

Our decision to introduce the electricity package in Kenya was a multi-criteria problem to which the Analytical Hierarchy Process was applied. A short-list of three countries, Ghana, Kenya and Zimbabwe was selected based on a surveillance of similar characteristics between these countries. The decision alternatives were based on different criteria including national, infrastructure, and customer criteria amongst others. The final decision to target Kenya was based on the pair-wise comparison of the various criteria, the scoring and the ranking of the three countries based on these criteria. The process is described in Appendix A.

2.2 Background

With GE’s on the ground presence in Kenya, and a rapidly growing diverse team, there exists an opportunity to introduce a new line of product, electricity top up cards in Kenya. Kenya is an emerging country with an estimated population of 37.9million people and the rising demand for electricity implies that there is incipient demand which makes the nation a potential market for a top of the range electricity package. Added to this is the restructuring of the Kenyan electricity supply industry (KESI) which emphasises competition in the electricity generation sector and has led to the establishment of the Kenya electricity generating company (KenGen) whose sole responsibility is to operate all public generating plants and compete with independent power producers (IPP). Moreover, Kenya Power and Lighting Company (KPLC) is the only distributor of electricity throughout the whole country and as the global credit crisis persists, they are unable to finance rising demand for electricity and have reported potential power shortages (Mbogo, 2009)

Kenya as a viable market for international companies such as GE who want to contribute towards the economy and development of less developed countries. The continued de-regulation of businesses in Kenya which encourages collaborating and partnering relationships has also increased the opportunities for foreign direct investment providing a formidable platform for the proposed electricity package.

The nation’s capital, Nairobi, which makes up for roughly 31% of the urban population and accounted for 61.8% of electricity consumed in 2006 (KNBS, 2008) and is the proposed location for this project as it offers an immense opportunity for the success of the electricity package whilst helping to restore the underperforming generation sector in Kenya.

2.3 Situation Analysis

Kenya is the biggest exporter in East Africa and its economy has grown by 6% over the last 4 years. If electricity drives the demand for more growth as believed, then having an efficient electricity supply should increase the growth prospects of Kenya. Alternatively, if it is growth in the economy that drives demand for electricity and energy, then Kenya are still best placed for the proposed product. As H Jabbal, Chair of the Energy Regulatory Commission (ERC) of Kenya stated, “Energy is our problem” (Mushtaq, 2008). Demand for electricity is increasing by about seven percent but more than 80 percent of the country’s rural population have no electricity. Economic growth is dependent on adequate energy supply and Kenya is suffering on that front.

As an equatorial country where it is dark by around 6.30pm every day, there is considerable demand for lighting throughout the year and although there is a wide diversity of energy sources available in Kenya, the actual patterns of use by low-income households are constrained by poverty and supply. While many will use light from the open fire, most low-income homes rely on kerosene in simple wick lamps as well as candles. Around 90% of rural low-income homes rely on wood for cooking; mostly using 3-stone open fires, with a minority using improved stoves such as the Upesi. (HEDON, 2007). Although electricity is used for cooking and lighting, it is mainly used by high income groups. Access to grid electricity is still very restricted for low-income groups, especially in the rural areas however nearly half of urban homes do have access.

Consequently, we propose the introduction of prepaid electricity meters across the energy distribution network in Kenya The demand for a cost-effective and efficient supply of electricity in conjunction with the existing inherent problems of the post paid system are the major driving factors for this market.

Over 40 countries have implemented prepaid meters in their markets. In United Kingdom the system, has been in use for well over 70 years with about 3.5 million consumers. The prepaid program in South Africa was started in 1992, since then they have installed over 6 million meters. Other African counties such as Sudan, Madagascar are following the South African success and our research shows that this concept can find ground in Kenya. (Srivatsan, 2004)

The monopolistic power distribution market in Kenya is gradually transforming into a competitive marketplace. Differentiation in service with a focus on efficiency and cost-effectiveness is going to be the key competitive factor to gain market share. Prepaid meters with their advantages over conventional ones is likely to help GE Energy differentiate and offer value-added services to consumers.

Table 1: Market Drivers and Restraints

Market Drivers

Power sector reforms

The competitive and customer focused deregulated power distribution market in Kenya will force market participants to make the existing metering and billing process more competent. This is likely to drive the prepaid market.

Increasing non-technical losses

Metering errors, tampering with meters leading to low registration and calibration related frauds are some of the key components of non-technical losses. It has been reported that prepaid meters control non-technical losses better than conventional ones.

Opportunities in the emerging electrifying markets

80% of people in Kenya do not have 100 percent electrification; hence new markets are being created by the increasing generating capacity. Prepaid systems can be more easily introduced in such new markets rather than the existing ones.

Market Restraints

Consumer behaviour

Consumers seem content with their existing “charcoal and wood” system, and hence it is likely to be difficult to convince them to adapt over to electricity system let alone a prepaid system. Consumers might not appreciate the concept of “pay and use” as far as electricity is concerned because it might be perceived as an instrument to control the common man’s life style.

Initial investment

Utilities might be discouraged by the huge initial investment, which includes the cost of instrument, marketing campaign, establishing distribution channel, and other management costs.

Rapid technology changes

The rapid technology changes happening in the metering market are expected to delay the decision to go for prepaid system.

Uncertainty over the success

Prepaid system is not as proven a concept in all markets hence there is bound to be uncertainty over its success, if implemented. The success of the system depends on the commitment by utilities and for this they need to get convinced on the real benefits of prepaid meters.

2.4 Market Audit

The market audit in Table 1 below identifies market drivers and restraints for our proposed product.

SECTION THREE

3.1 Objectives

The objectives for GE Energy on this project are highlighted below. This will enable GE Energy to review its future position in the future.

Objectives

Growth/ Survival

To attract customers and gain a 30% market share in the next 5 years

Profitability

A 15% return on total investment is expected over the next 10 years.

Achieve annual returns on incremental invested capital in each city after 3years.

Market Expansion

Expansion into the national market i.e. move into other cities in Kenya

Expand into other Sub-Saharan African countries where demand for this product should exist.

SECTION FOUR

4.1 Market Segmentation and Target Market

The primary segmentation strategy adopted will be population segmentation. The primary target market for the product would be residents of the city of Nairobi. Nairobi is the capital of Kenya, the largest city in East Africa and has a population of about 2.9 million people. The urban population of Kenya accounts for 40% of the total population. Nairobi makes up about 31% of Kenya’s total urban population which accounts for 61.8% of the total electricity consumption in Kenya of which Nairobi accounts for 31% of this consumption. If these figures provided by KBNS (2008) are reflective of Nairobi, then the city offers a formidable population platform to introduce a top of the range electricity package to help revamp the underperforming electricity sector in Kenya.

With regards to income segmentation, the richest 20% of the population accounts for close to 50% of the total income and consumption in the Kenyan economy of which a large majority is concentrated in the capital city of Nairobi. This city is home to Kenya’s main stock market (the Nairobi stock exchange) and in recent years has become one of the major cities in the African economy with major global companies such as GE and Cisco moving their headquarters to Nairobi from cities such as Johannesburg and Cairo. Kenya is viewed it as an ’emerging market and one of the future driving forces of the African economy’ (Yibrah Tesfasghi-GE President for Africa).

The urbanization of Nairobi between 1992 and 1996 has resulted in an increase in poverty rate from 25% to 50%. This is a result of the number of slums being built in the city by people who had migrated from rural areas. Nonetheless, the middle and high income population in the city still offers a formidable platform for an electricity package suited to their needs. As pointed out by Mr Ian Henderson (a British investor in the Nairobi housing scheme), foreign investors have neglected the middle class whom they feel have no disposable income, however they relish the opportunity to get on the property ladder and benefit from superior infrastructure as enjoyed by the highest income earners (Kenya Engineer, 2008).

Another segmentation strategy to be adopted is benefit segmentation strategy. According to Keegan and Green (2004), it is possible to segment a market based on the superior understanding of the problems a product solves. The government of Kenya is seeking Independent power providers to come into Kenya to help meet the ever growing demand for energy within the economy (Economics Intelligence Unit, 2007) which is reinforced by the work of Otieno and Awange (2006) on the energy resources in East Africa, arguing that the electricity provision in Kenya is underperforming despite the Governments electricity reforms of the late 1990’s, hence the government’s initiative to encourage Independent power providers to come into the country to help revamp the electricity system.

Our market segmentation strategy builds on the notion that the city of Nairobi offers a population and income base (PPP Adjusted) along with the needs of the electricity sector in this city. The proposed market of Nairobi is not mutually exclusive. Depending on the extent of success in the market; the product may be extended into other locations within Kenya.

4.2 Target Market

An analogy approach has been adopted in working out the potential target market size. As shown in Figure 1, the unconnected urban population in Kenya is 24% of the total unconnected market, (8,000,000/ 28,000,000). This value of 24% has been extended to the urban population of Nairobi which is assumed to be 40% of the Nairobi population of 2.9million. Thus the urban population not connected in Nairobi is 324,800. The total unconnected rural population is 71% of the total unconnected market (20,000,000/28,000,000). The rural population of Nairobi is assumed to be 60% of the Nairobi population of 2.9 million. Thus the rural population not connected is 823,600. The total potential unconnected market of Nairobi is 1,148,400.

Figure 1: Population of Kenya living without electricity.

Table 2 is a percentage break down of the alternate forms of energy being used by the unconnected rural and urban population within Kenya, Electricity consumption only accounts for 0.7% of the total consumption of energy in Kenya.

Table 2: Annual Energy Consumption Share by Type and Sector (Yr.2000)

Firewood (43.8%)

Charcoal (46%)

Wood Wastes (0.6%)

Farm Residue (6.4%)

Electricity (0.7%)

Kerosene (2.2%)

LPG (0.2%)

Total Demand (100%)

Rural Household

89.4%

46.2%

61.9%

99.5%

8%

53.1%

5.6%

80%

Urban Household

2.3%

36.5%

38.1%

0.5%

61.8%

46.3%

66.7%

13%

Cottage Industry

8.3%

17.3%

0%

0%

30.2%

0.7%

27.7%

7%

Total

100%

100%

100%

100%

100%

100%

100%

100%

Source: Study on Kenya’s Demand, Supply and Policy Strategy for Households, Small Scale Industries and Service Establishments 2001.

SECTION FIVE

5.1 PRODUCT: “WASHA”

A product communication adaptation strategy is being proposed. Although prepaid electricity cards exist outside Kenya, the product is being adapted to meet the standards of the Kenyan public. The product name is going to be “WASHA” which means “light” in Swahili (One of the Main Languages in Kenya). The prepaid meter will include a smart card to hold information on units consumed or equivalent money value. When the card is inserted, the energy meter reads it, connects the supply to the consumer loads, and debits the value. The meters are equipped with light emitting diodes (LED) to inform consumers when 75 percent of the credit energy has been consumed. The consumer then recharges the prepaid card from a sales terminal, online or distribution point, and during this process any changes in the tariff can also be loaded in the smart card. More details of how the product works are detailed in Appendix B

5.2 Benefits of Product

Table 3: Benefits of Prepaid Meters

Benefits of Prepaid Meters

Improved operational efficiencies

The prepaid meters are likely to cut the cost of meter reading as no meter readers are required. In addition, they eliminate administrative hassles associated with disconnection and reconnection. The prepaid meters could also help control appropriation of electricity in a better way than conventional meters. (South Africa’s experience)

Reduced financial risks

Since the payment is up-front, it reduces the financial risk by improving the cash flows and necessitates an improved revenue management system.

Better customer service

The system eliminates billing delay, removes cost involved in disconnection/reconnection, enables controlled use of energy, and helps customers to save money through better energy management. In Western and African countries, the installation of such meters has resulted in energy conservation of 5-15% depending upon the category of the consumer (Pabla, 2004). According to ESCOM(South Africa’s power utility), the prepaid metering system has proved to be far more cost effective compared to the traditional billing system and in Tanzania, consumers who have adopted this system receive energy providing they have paid for it whilst consumers connected to the conventional billing system are still subject to power outages.

The benefits of the prepaid meters are highlighted below in Table 3.

5.2 PRICING

The price set is designed to meet the following objectives:

Must provide a means to recoup adequate revenue.

Should promote overall economic efficiency in the Kenyan market

Should be fair, equitable and transparent to all customers as stated by the Kenyan energy regulatory board.

The tariffs should be cost effective.5.21 Pricing Objectives

5.22 Price

The Kenyan electricity industry operates a tariff based system, whereby energy generators such as KenGen and other IPP’s supply the energy to Public energy suppliers (PES) who then distribute the electricity to final consumers.

The price we intend to charge consumers will depend on the tariff given by the energy generators. This price is highly regulated by the Energy Regulatory Board. (This will be further discussed in Section six under Mode of Entry). Our prices would constitute of two components.

Energy charge: The energy charge covers the cost of electricity that is supplied to GE by the generation companies and is levied per kilowatt-hour of energy consumed.

Variable charge: This is a variable charge dependent on the volume of energy consumed, which will contribute towards meeting fixed costs and other costs of supplying the electricity.

Price Generation Formula

P = (α*Q) + (β*Q)

Where P is the total price of electricity, α is the energy charge, β is variable charge and Q is the volume of electricity consumed. The following price generation formula has been put forward to work out the price that would be conveyed to consumers as prepaid tariffs.

Table 4 below shows the bulk tariff and variable charge rates that would be adopted.

Table 4: Electricity Tariffs & Rates

Tariff

Supply Voltage

Consumption Range (units)

Variable charges per/kwh

Bulk tariff/Energy charge per/Kwh

Domestic

240 or 415

0-50

Ksh9.6

Ksh2.36

51-300

Ksh9

Ksh2.16

301- 3000

Ksh8.4

Ksh1.96

3,001- 7,000

Ksh7.6

Ksh1.76

Application of the formula:

The national currency of Kenya is the Kenyan Shilling (Ksh)

The current exchange rate between the Kenyan shilling and the dollar is shown below.

$1 = ksh80 (1/01/2009)

Assuming KenGen supplies at a bulk tariff of Ksh 1.96 per/Kwhr, the variable rate will be Ksh8.4 per/Kwhr if 305 units of electricity is consumed. The total cost to the consumer would be Ksh3160 which equates to $39.5 given the exchange rate above.

Additional prices would be charged to consumers in terms of, signing on fees, conversion from previous supplier’s fees, changes to installation, and so on. This will to some degree constitute the sales promotion packages available to the consumers. Also different prices may be available to the consumers in terms of electricity recharge cards, based on their purchasing power at any given time. These price differentials are discussed under distribution (Section 5.41).

5.23 Pricing Strategy

A polycentric pricing strategy has been adopted, based on the notion that GE is diversifying into this area of operations and the prices proposed have been solely dependent on the energy generation charge rates in Kenya. The prices of the main electricity companies such as KenGEn and Kenya Power & Lighting Company (KPLC) were reviewed in other to come up with a price that would compete with the going prices in the market as well as satisfy the pricing objectives stated above. As proposed in the market segmentation section, Nairobi offers a formidable location for the product to be implemented; the prices being charged are affordable and reflective of the middle and high income earners in the city of Nairobi. It is worth pointing out that prices would be stepped and may go down depending on the level of success of the product and the ability of the firm to recoup its costs at the commencement of the project in order to make it more affordable to the lower income earners.

5.3 PROMOTION

The electricity prepayment system is a new innovation into the Kenyan electricity system hence our promotional mix will not only be aimed at bolstering sales but also communicating the benefits of the prepaid electricity system. The promotional mix would be tailored towards engendering consumer’s acceptance and appreciation of an efficient electricity service. The following are the key aspects of the promotion mix that will be used to communicate with potential consumers.

5.31 Personal Selling & Public Relations

Due to the fact that this is a relatively new innovation in the Kenyan market of Nairobi, it would be imperative to adopt some elements of personal selling. Sales personnel’s would be trained on how to communicate the benefits of a prepaid electricity system to the consumers; some of the possible benefits include; being in control of your budget in terms of deciding how often and in what value the y wish to purchase the electricity. Also because of the low literacy level of some of the indigenes of Nairobi, it would be quite important to make them see the need for moving on from alternate sources of energy such as charcoal and battery powered sources. In order to maintain a good rapport with rural/urban communities within Nairobi, participation would be encouraged from local community opinion leaders as having them on board can help influence some consumers into signing on to the prepaid electricity system.

5.32 Advertising

A form of advertising that is putting all other mediums in Kenya under threat is the SpanImage LCD screens. These screens offer the company that signs up to the SpanDSS system a chance to tailor their message to suit the needs of target audiences and adjust their marketing messages as and when they require. These systems are powered by internet controllable systems which offer GE the chance to train its own staff in-house on how to use the SpanDSS LCD or Plasma monitors. The messages to be communicated via advertising sources would include phrases such as “Making your life easier”, “Electricity at your convenience”, “You control what you use”, “No more exhaustive bills”, and so on. Other forms of advertising that would be adopted at a later stage will be TV, Radio and Internet, once they are proven effective in Kenya.

LCD Monitor from SpanImage

(Source: http://www.spanimage.com/projects.html)

5.33 Sales Promotion

The pricing system being adopted is a sales promotion strategy in its self, due to the fact that prices go down as electricity consumption increases, this will be communicated to consumers as a benefit of the product and a chance to minimize costs. Other sales promotion strategies to be adopted at the start would include offers such as get 5 households to sign up and you all get a percentage of your tariff. A pervasive sales promotion trend that seems to be imbibed in the Kenyan technological industry is the idea of designing partnership with appliance manufacturers. Due to the fact that some households do not need electricity as they do not have appliances to use it for, a partnership would be proposed with Nakumatt (A Kenyan supermarket chains which also trades in electronics) whereby people who sign up to the prepaid system are given electronic appliance coupons to shop at Nakumatt.

5.4 PLACE

This marketing strategy refers to the location where the product can be purchased. It represents the distribution channels and it can include physical stores (supermarkets) or virtual stores (online stores). For the prepaid electricity, place refers to the logistics and mechanism through which the consumers get the electricity. It includes various methods of transportation, storage and distribution, all of which work together to make the product available to the consumer.

5.41 Distribution

Electricity would be provided by swiping electricity cards in retail outlets, vending machines, via internet or via SMS on cell phones. These are our proposed channels of distribution and they are explained in Table 5 below.

Table 5: Channels of Distribution

Retail Outlets

Being the first of its kind in Kenya, it is quite imperative that at initial start up that the product is provided and serviced at traditional brick and mortar retail outlets. This is in order for consumers to come in and seek more information on how the system works and sign up to the electricity top-up system. This distribution channel offers the most cost effective method open to an electricity company. Consequently, discussed distribution channels would be implemented only after the brick and mortar outlets are up and running in strategic locations within Nairobi such as Mwazi Road/Ring road, Old Embakasi Road, Uhuru Highway, Waiyaki Way.

E-Top ups

After pre-paid meters have been installed in the homes of the customers, they are given an electricity swipe card with a unique identity number which they can use to buy virtual tokens in any of our selected retail outlets. These retail outlets would also be equipped with machines which would allow the cards to be swiped upon cash payment and electricity is automatically received in the meters.

Vending Machines

When customers sign up to the product/service, it becomes quite imperative for GE as a firm to provide superior logistics to competitors. In order to provide our targeted consumers with a quick and an easy access to top-up their electricity, vending machines will be conveniently located at the two largest supermarket chains in Nairobi; Nakumatt and Uchimi as well as local grocery stores, phone shops and retail outlets. We hope this would be a practical and smart street answer to the requirements of our target market in Nairobi. Also, this would be ideal for our middle-income segmented market and also those with irregular income and no bank account and are willing to make cash purchases for immediate services.

SMS

Our decision to distribute the product through retail outlets is primarily because 70% of retail outlets are based in our target market, Nairobi. Prepaid scratch cards will be readily available at retail outlets which allow electricity to be sold via this channel. Cards with different denominations ranging from KSh100, KSh200, KSh500 KSh1,000 and KSh2,000 will be available at these retail outlets. When a consumer needs to top-up electricity for their prepaid meter, they simply go to a vendor and purchase scratch cards from them. To redeem the card value, they scratch the card to reveal the number and send an SMS request number with their meter number and unique PIN code to our dedicated SMS number (000). After sending the SMS, the consumer receives a response with a 12digit credit token number, which is entered into the prepaid meter through the keypad, credit loaded and electricity received. According to the Communications Commission of Kenya (CCK), the total number of SMS users in 2007/2008 was 287,145,378, indicating an increasing use of SMS in Kenya, gives consumers the opportunity to purchase electricity at their convenience 24hours a day, 7days a week. This growing figure played a role in deciding to use SMS purchase as part of our distribution channels.

Internet Top-Up

Given indicators that suggest that e-commerce would pick up fast in the country due to increased awareness and progress made in the tourist industry, relative stability, rapid growth of internet usage as well as increase in the number of monthly credit card holders and users, buying electricity over the internet would be another channel of distribution. This distribution channel would however be introduced later depending on the success/growth of internet shopping and cost of using the internet in Kenya as recent figures show that internet costs are high in Kenya. We hope to use this distribution channel because of its convenience and associated low costs.

Table 6: People, Processes and Physical Evidence

P


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