Transcript Pricing and Marketing Issues in Microfinance

Pricing and Marketing Issues
in Microfinance
Presentation by Motaz El Tabaa
Executive Director ABA
Chairman Egyptian Microfinance Network
Chairman Global Microfinance Network
What is Microfinance
The provision of Financial services to lower
income people mainly poor and very poor.
“Microfinance is a way to extend same rights and
services to low income households that are available to
everyone else. It protects people against shocks and
allows the majority of the population to become part
of country’s economic activity. It can help to build
markets and show that profits and principles can
reinforce each other.
Kofi Anann, UN Secretary General, 10 October 2005”.
What is Microfinance
• Microfinance offers poor people access to
basic financial services such as loans, savings,
money transfer services and microinsurance.
• People living in poverty, like everyone else,
need a diverse range of financial services to
run their businesses, build assets, smooth
consumption, and manage risks.
Who are Microfinance Target Clients
• The population of the earth is estimated at 7
Billion, out of which 5 Billion are living in
Africa and Asia.
• Poor people who live under $2/day estimated
at 3.5 Billion and extremely poor who live
under $1/day at 1.2 Billion, 90% of which are
located in Africa and Asia.
Household Life Cycle: Financial Needs
Household Formation (c,s)
Death (C, I)
Birth (C,S,I)
ONGOING FINANCIAL NEEDS
Working Capital (C,S)
Productive Assets (C,S)
Investments (S,C)
Asset protection (I)
Health (C,S,I)
Shocks (C,S,I)
Education (C,S)
Old Age (I,S)
Marriage Ceremony (C,S)
Pricing and Sustainability
• Correct pricing is essential to the viability of
any financial institution.
• Responsible Microfinance should consider
Institutional and Financial Sustainability.
• Sustainability should not be a reason to cover
inefficiency.
• Microfinance is much more expensive than
commercial banking.
Pricing Bases
• Cost based – prices are based on the cost of the
product plus a margin.
• Competition/Market based – prices are based on
the prices charged by competitors
• Demand or Value-based – prices are based on an
assessment of the value of the product to the
customer
(Microfinance Institutions through a package of
financial
&
non-financial
services
and
commitment establish the value to customers)
Combining the Three Approaches to Pricing
Combining the three approaches provides a
three-step process to pricing financial services:
1. Price to cover the full cost of delivering the
product/service
2. Compare this price with that of the competition to
see if it can be raised
3. Assess demand for MFI’s USPs (8 Ps of marketing!)
and see if the price can be raised further.
Where Do MFI’s Products should Lie?
Price
Quality product
Convenient, serviceoriented environment
Pricing Methods
• Conventional Finance :
- Interest Rate (Fixed/Indexed)
- Interest Method (Flat/Declining)
- Timing / Frequency
- Ongoing - Upfront – In arrears
- Commissions & Fees
- Penalties
Pricing Methods
• Islamic/ Shariah Complying Finance :
- Mosharka & Modarba Participate in profit & loss
- Morabha & Istesnaa & Salam Cost + Predetermined
profit
- Igara
Cost + Profit margin
Margin is determined by committee as reference with
an absence of reliable Islamic Interbank Benchmark
Islamic Microfinance pricing Concerns
•
•
•
•
•
•
Products are of higher risk
Implementation is difficult
High level of uncertainty/expectation
Higher delivery and operational cost
Penalties not permitted which increase risk
Margins are usually higher and set in line with
interest guidelines
Do we need to consider Marketing
In Microfinance
• Despite dealing with poverty MFIs need to
enhance its marketing effort to achieve its goals.
• Marketing is an essential part of the MFIs
strategic plan.
• Increase of competition led MFIs to change their
concept from “Product Priority” to “Client
Priority” , thus placed marketing on the top.
Do we need to consider Marketing
In Microfinance
• All managers recognised the strategic need for
improved marketing function – particularly with
growing competition. Few felt they has adequate
understanding of marketing
• Market-led approach allows banks/MFIs to:
– Identify different client needs
– Tailor products/delivery systems to meet those needs
– Examine cost-effective ways of serving niche markets
The market-led approach
– Good for low-income clients who will receive more
appropriate products communicated and delivered in
a high quality and cost-effective manner
– Good for the MFIs that adopt it because drop-out
rates fall, income streams increase and sustainability
is easier to achieve ….
Marketing – Micro Environment
Customers
Markets
size, growth,
segments
needs, buying
processes,
perceptions
Competitors
who are they,
strategies,
market share
Distribution
Marketing Firms
service delivery
channels, costs,
efficiency
effectiveness of
branding strategy
Stakeholders
opportunities,
problems
Marketing Communications Mix
Public Relations
Personal
Selling
Must give consistent,
clear compelling
company & product
messages
Sales
Promotion
Direct
Marketing
Advertising
Do MFIs Need to Worry About Branding?
•
Does a brand matter if…?
–
–
–
–
–
You have limited competition
Small client base
No marketing department
You are an NGO
Belong to an international network that does
branding for you
Branding will help
– Differentiate the institution
– Unify the organisation and guide internal
initiatives
– Enhance marketing effectiveness
– Build client value
– Strengthen against bad times
– Increase institutional profitability
Putting all Together
• Your Corporate Brand, Product Strategy and
Product Delivery and Customer Service
Strategy are held together and directed by an
Institutional Marketing Strategy
• This plan helps to focus corporate marketing
for the next 2-3 years
• Includes overall objectives, sub-objectives and
activities to accomplish strategy
Maintain Mission & Strategy
• It is crucial to ensure that
the Marketing is consistent
with strategic goals and
initiatives
• The brand must be aligned
with the mission, vision and
values of the organization
• Pricing Strategy is reflection
to Mission & Vision
Brand
Strategy
Mission,
Vision
& Values
Thank you
Motaz El Tabaa
[email protected]
www.aba-sme.com