Both you and Safaricom are to blame for the outrageous Safaricom Profits

Written by
  • 4 years ago
  • Posted: May 7, 2015 at 3:41 pm

A business exists to make profits – just in the same sense life exists to reproduce. Why else should anyone set out to start a business unit if not to mince money from service/product users? Micah Solomon of Forbes asked a similar question and came up with three answers – YES a business exists to make profits. NO – A business might exist for other reasons other than profit making; and BOTH – a combination of profit making and not profit making may define the sole objective of some unique business ventures. If you read what Solomon says in his Is The Point Of Customer Service To Make A Profit article keenly, you’ll realize that the end goal for all businesses including those that answer no to the question of profit making is profit making – or as Solomon puts it, “checking the bottom line”.

So yes, Safaricom’s sole purpose is to make profits – and the bigger it makes that profit, the better for the management and the shareholders. It is also supposed to be better for customers too. Generally, customers do not appreciate companies that make losses. In the recent years, all telco companies in Kenya except Safaricom were making huge losses – making them unable to offer quality services that would meet customer expectations. Both the loss making and the resulting poor service provision forced their customers out of their networks to become Safaricom subscribers – a situation that forced Yu Mobile to close shop after selling its infrastructure to Safaricom and subscribers to Airtel.

From last year both Airtel and Orange are back to profit making. This is due to the “piga hesabu” promo by Orange and a number of service offerings by Airtel culminating with the Airtel Unliminet. The result is that both Orange and Airtel have witnessed a slight growth in subscriber numbers.

So yes, customers also want to be associated with profit making business entities. At a personal level I was distressed when I read news to the effect that Samsung profits were deepening – and the recent news that the gadgets giant is back to position one has brought a huge relief in my social well being.

Safaricom Profits – Why she is to blame

Since very many years ago Safaricom has been on profit making spree and this has helped her increase number of subscribers year in year out to a point where the government is thinking of declaring her a dominant player. Today, Safaricom announced that her net profits jumped 38% from 23 billion Kenya Shillings to 32 billion Kenya shillings – that is 9 billion more shillings extracted from her 23.3 million customers. On average, Safaricom customers contributed a net of Kshs 3.8 per day on Safaricom’s profits or Kshs 19.4 per day on total revenue. That is, in approximate figures, for every Kshs 20 you spend on Safaricom services and products, the company makes Kshs 4 – which translates to 20% net profit margin.

The 20% profit margin is not the biggest margin companies are making out there. You can’t compare that with, for instance, Apple’s profits. As we told you about a year ago in the article Apple vs Android: When market share doesn’t bring food to the table, Apple has a profit margin well above 50%.

But 20% profit margin is still way too high if we consider Safaricom business model. In cases where businesses are modeled around distribution channels, it is always nice to give the guy handling the least quantity of products (retailers) a higher profit margin than the distributor, who again should have a higher margin than the producer. For example, if your business is manufacturing pens, then you can assign a 3% profit margin for yourself, 4% margin for the distributor and 5% margin for the retailer. This is because 3% of a million pens the distributor will get from you per month is more lucrative than the 5% margin the retailer will get from selling only 100 pens per month.

Safaricom has this distribution model in the credit cards and MPESA business units. The retailer of credit cards normally gets a 5% margin whereas the distributor is assigned some 3% (not exactly sure). Safaricom should therefore earn, from credit cards, a 2% or less net profits. If we were to prorate the same argument to all the other products and services, then we would agree that Safaricom ought not to make more than 5% net profits. If the revenue is 163.4 billion shillings, then Safaricom ought to have made only 8.2 billion shillings in after tax profits this year.

When a company makes outrageous profits, what this means is that the company has over priced the products and services which then implies that the customers are paying more than the actual value of what they are paying for. The actual profitable value for making a call could be Shs 1 per minute, but since that service could be way over priced, we end up paying Shs 4 per minute.

Safaricom Profits – Why you are to blame

The reason you are to blame for Safaricom’s abnormal profits is that you are a loyal customer despite the highly priced products and services by Safaricom. Of course we understand that you have to stay where you get value for money – but normally customers agree to pay slightly more for better services, but never outrageously more for slightly better services. In the article How the new Safaricom Karibu Tariff compares to Airtel Monthly Unliminet, we showed you how Airtel Unliminet is at least ten times better than the Karibu Tariff, but most people do not want to compromise a little bit on network quality to reap huge on savings; they would instead pay ten times more for better customer care. So I wonder why people should send tweets like the one below in response to the unbelievable Safaricom Profits

If half of Safaricom customers moved to Airtel and Orange in equal numbers, both Airtel and Orange would have significant subscriber base that would enable them to get substantial cash flow that would then enable them improve on the quality of their services. In addition to that, the heightened competition would ensure that Safaricom further lowers the cost of her products and services then ultimately the demand/supply curve would stabilize around the true cost of products and services.

As it stands, Safaricom is forced to act as a monopoly and that’s why even when they transfer the MPESA servers from Germany to Kenya, a move that saves them the MPESA service and maintenance cost to the tunes of millions of dollars per year, you don’t hear anything to the effect that the cost of MPESA transactions will go down. As a monopoly therefore, Safaricom will still make huge profits to the tune of 20+% margins instead of the expected less than 5% profit margins.

What is your opinion on the topic?
Odipo Riaga
Managing Editor at KachTech Analytics Ltd
Film Director, Tech and Business Blogger, Chess Player, and Photographer. God is Science.
Odipo Riaga on FacebookOdipo Riaga on LinkedinOdipo Riaga on Twitter
Article Categories:
TECH NEWS