Outside Looking In
I was minding my own business as usual on Facebook (liking every random comment and reading every link) and then I saw an advert on my side bar for an online classifieds portal called dealfish.co.ug. I clicked on the link and it took me to the site which said I could post a free advert. I immediately created an advert for this website. I got an error message: “Sorry www website addresses are not allowed.” I was very upset and sent an email to them querying this and they told me they don’t accept the classified adverts to include a web address reference. Well unlucky for them, I discovered Kampala mart.com It’s when I realised that finally the internet revolution is taking place in Uganda. Online classified portals like eBay.com and gumtree.com, the largest in the UK have been around for some time. In Uganda, these are starting to take off big time because of two very important things:
1) Africa is starting to finally get connected to the rest of the world via huge fibre optic cables being laid under the sea all around Africa.
2) Mobile telecom companies continue to provide cheap internet to their customers on their mobile phones including using 3G technology.
Internet and the opportunities available to an internet entrepreneur are so serious that it is being projected that according to an article I read at wired.co.uk (“get rich move to Africa”)] Africa may soon have its first internet billionaire, I agree and immediately tell you why to invest in this sector in Uganda but first;
THE CONS(of course)
1. Internet stability and usage in Uganda
Usage and computer illiteracy
Whilst it is well and good that our internet usage is growing increasingly by the day, there still remain millions of people who are below the poverty line, are computer illiterate and/or cannot afford to have internet. A large portion of people still access internet from office rather than home which can hinder the convenience aspect.
In the UK for example internet usage is over 82% of the population. Almost everyone has internet in their home. By comparison in Uganda, it is about 10%, but it is growing significantly because as per ITU statistics, internet penetration in Uganda has grown in leaps in bounds. In 2000 only 0.1% of the population had access to internet. It was still low in 2007 where only 2.5% of the population had internet but this has since then significantly increased to over 9.6% in 2010!
Stability and cost of internet
Internet stability in Uganda is very tricky. Many times internet is slow and where it is not slow it is expensive. This of course is changing but till then, this remains the main hurdle for potential users. I however expect that with increasing internet on mobiles particularly with the telecom companies rolling out 3G, then this shouldn’t be a problem especially if the online classifieds portal invests heavily in a mobile version, that is, one that is very easy to view on mobile phones and not just the smart phones. This is critical because mobile phone usage including internet is probably going to be the next revolution in Africa and Uganda in particular. It already is under way anyway.
2. The little fish will be coming after you….
I later on set out the cost of start up for a serious online classifieds operation but the reality is that this kind of business can be done from a laptop in someone’s bedroom. This is a typical “briefcase” type of business.
Low cost These days so many web hosting companies offer you a free website and even allow you to host your website for free say for 6 months. They will in addition provide you with a free domain. The cost of this all? £8.99 for 6 months. 1and1.co.uk for example offer just such a package.
Therefore with a little assistance from a programming friend if you have no IT knowledge, you can set up your website and have it hosted for free!
As for advertising the site to reach Ugandans, easy! There is an advertising revolution going on and it is no surprise that Capital FM, the leading Ugandan FM station is losing advertising revenue [if you are to believe a 14 September 2011 Redpepper article on the same.]
I cannot comment on the accuracy of the figures in the Redpepper article but they are certainly right in the sense that worldwide advertisers are shifting from traditional advertising of radio, TV and newspapers. The reason is simple; with online advertising, you can measure how many people are “seeing” your advert. You therefore can set an advertising budget and only pay for people who are interested in your advert because if they are they will click on it, hence “pay per click”. In case you didn’t know this, you are years late to the party! This is how Google has been making its money and it is likewise how Facebook makes its money.
Now how will you advertise your website to Ugandans? Well Facebook has a “clever” computer. It knows where a user originates from and so when you choose to advertise with them, they will tell you how many “Ugandans” you will reach with the maximum advertising budget. They also give you a rough estimate of a good minimum advertising budget you can set. You can however choose what you can afford.
On the basis of the above, you can therefore set your advertising budget in Facebook at even $2 (they will simply show your advert to less people). If you set your advert to run for 30 days, that is $60 which at an exchange rate of $1 = Shs 2,605 works out at Shs 156,300 a month.
You can therefore technically start this business with your old laptop and only Shs 156,300!
That is a good thing right? Yes, but so is it for everyone else. You can therefore expect that there will be many of these in no time and I mean MANY OF THESE ARE COMING SOON, YOU ARE NOT THE ONLY ONE WHO WANTS TO GET RICH (OR DIE TRYING).
Let’s see how many online classifieds portal I can find with Google search:
Now the catch It means therefore that for the investor, you have to ensure your site stands out from the crowd so as to attract both advertisers and visitors.
You will therefore have to employ various marketing strategies so that your website has sufficient customers coming there and then you can lure in the advertisers (where did you think you were going to make money from duh?). Gumtree the leading online classified website in the UK for example has clear statistics on their website to show their customer reach. This information should be sufficient to convince an advertiser.
Alternatively you will need to consider developing a niche. autotrader.co.ug for example is one such site. They have focused solely on cars.
3……the big boys are coming too!
Unlike a traditional business model say farming or taxi business, online business are not location dependent and therefore whilst the buyers and sellers may be in Uganda, the business owners may be foreign. After all, hosting a website doesn’t need a Ugandan presence and neither does “pay per click” advertising. As an investor in this sector, you can therefore expect that once you start, you will be competing with the really big fish who in their global expansion will most certainly look to tap into this market. Can you for example compete with Craigslist or eBay should they choose to focus on Uganda? What about Schibsted? Not heard of them? Well you should know them because in this business, they are not sleeping, they are expanding.
Even dealfish.co.ug for example is the “Ugandan” branch of the Dealfish brand which at last count is in 9 countries.
I will not be surprised if even local newspaper giants like The New Vision(with Government’s deep pockets) and The Monitor (which is backed by the mighty Nation Media Group) soon venture into this sector. New Vision for example has the enteruganda.com portal (under construction as at date of this article) which can easily be spun into an online classifieds website and the Monitor now has an online business directory which can easily have a classifieds section.
So the business is expected to be tight but is it the real McCoy?
And Now the PROS
1. Excellent profitability and return on capital in less than 1 year
And now you are about to find out why everyone is looking to go into this sector. I set out below my projections of the estimated profitability, start up cost and return on capital that can be achieved for this sector.
I have used the Kampalamart.com website as a model. Their model is this; Customers can post ads for free. Some can however choose to enhance the visibility of their ad to three locations on the website: The top most banner The side banner or A featured ad banner on key pages
These three prominent places unlike the other ads within the myriad of ads in the categories cost money. These are the ones financing the company and it is this model I use to show the profitability of this sector.
You should of course be aware that there are other models of getting revenue:
You can for example charge for certain categories. For example on gum tree.com where rentals and job postings(by employers) are charged. You can use a pay per click concept whereby certain “adverts” are targeted to specific customers depending on their online behaviour (behavioural advertising).
I therefore set out my analysis as below. In the model below I present two totals columns. The present position and the projected position.
I project that there will be a 60% growth in revenue and a 25% increase in costs. The growth in revenue is based on internet usage growth in Uganda between 2008 and 2010 as per ITU statistics.
Analysis 1: Profitability information
(exchange rate of $1=2,605 used)
Current: 5,522,600. Projected: 8,836,160
(based on 6 top banners, 6 side banners, 16 featured ads each charged at $200, $100 and $20 per month, respectively)
1. Rent and service charge: Current:1,237,375. Projected: 1,237,375.
(Based on 25sqm in worker’s house, a “grade A” building which charge rent at about $10-$18 per square metre(psm) and service charge of $2 psm.)
2.Web hosting: Current: 36,859. Projected: No change
3.Salary: Current: Shs. 1,800,000. Projected: 2,250,000
(3 staff comprising of manager/IT personnel and office administrator)
4. Marketing: Current: 656,300. Projections: 820,375
(including Facebook advertising and other marketing techniques)
5. Transport, communication and other: Current: 800,000. Projected: 1,625,000
Total Expenses. Current: 4,530,534. Projected: 5,969,609
Total Monthly profit (revenue less expenses). Current: 992,066. Projected: 2,866,551
Total Annual Profit. Current: 11,904,792. Projected: 34,398,612
Analysis 2: Start up capital information
1. Website development: 3,907,500
(estimated at $1,500 for a good website to support online classifieds and e-commerce)
2. Rent(6 months in advance): Shs 6,642,750 3.
3. Office equipment: Shs. 8,495,000
(computers, office desks, UPS, internet installation, multi purpose machine, legal costs, signage) 4.
4. Miscellaneous: 849,500
Total: Shs. 19,894,750
Return on capital (Total start up capital/profit): Current: 1.67 years. Projected: 0.57 years
2. Gain on eventual sale
A savvy investor will tell you that if you want to get wealthy quick, start a business with the end in mind. In other words, prepare for when you will eventually sale it. When you eventually sale the business you have successfully built, you will make money from the acquirer who will most likely be one of those big boys like Schibsted? Not heard of them? I told you, you need to find out about them!
3. Low start up costs
I did mention as one of the pros the low start up cost being able to result in a lot of competition. If you are one serious investor, this however shouldn’t deter you. It should only spur you into action. The low costs can be to your advantage.
You therefore don’t necessarily have to start with the Shs 20m as per the information above. You can start like I mentioned with as little as Shs 156,300 and go on to become successful so go on, what are you waiting for, do we not all want to be billionaires so freakin’ bad?
SUMMARISING AND THE FINAL WORD
First the numbers.
On the basis of my analysis:
Capital investment(A): Shs 19,894,750
Profit per year (revenue excluding all expenses) (B): Shs 11,904,792
Return on capital(years to get capital back or A/B) is 1.67 years
If you look at 60% growth, you can however look to recover the investment in 0.57 years!
Now the basics you must get right before investing.
Excellent website design. You need to invest in a good website that will make it easy for users. You need to remember that not many Ugandans have internet at home and so will most likely be browsing in office, in an internet cafe or on their phone and so a simple design which can support mobile phone browsing is most likely
Appropriate aggressive marketing. You will need to move fast or smart to capture the market with different marketing techniques otherwise your website will get drowned in the crowd. I am not necessarily saying splash out on huge newspaper adverts(which we know cannot necessarily be measured for success). There are numerous methods for example a free press story, interviews, article marketing, Facebook advertising et al. A clear target market. Who do you want to reach? You need to know who you are targeting and then go on to develop your service with that client in mind. A good example I gave is auto trader.co.ug.
Despite the threat of the big competitors coming, this is truly one of those sectors where even the little guy can win and go on to be the next Google, the next Facebook. You don’t need to capture a huge portion of the market to be successful. Kampalamart.com for example at the date of this article had about 388 Facebook fans. If this represents their market share of an estimated 304,000 Facebook users in Uganda[early 2011] then this represents only 0.13% of the market BUT from the analysis above, they would already be profitable! Need I say more, go on GET RICH (OR DIE TRYING).
And now the disclaimer: While I have taken steps to research this information as well as based on my experience, you should not rely on the information given here to base your investment decisions. You should seek business advice from a professional knowledgeable of your specific circumstances. I shall therefore not be held responsible for any loss you may incur when acting on this information.