How to Operate a Profitable Internet Business in Africa

In 2012, I started following tech news in the eco-system, just as companies like Konga and IrokoTV raised big cheques. I became very curious about what this was all about, and believed in the hype, just as you probably did.

Fast forward, it is 2017, many of the companies that emerged in 2012 are either dead or burning through cash and will be dead soon. Only a few are doing well.

If you want to know about these companies, visit any African tech blog to see the graveyard of dead companies.

As an outside observer, what you might not realize is that those dying or dead companies built a lot of the talented people you see around you today. Thankfully, my company’s ability to operate well has kept me and over 70 others employed.

For that reason, I am happy I chose to work at Hotels.ng. The lessons learned from working at an executive level has given me insights on how to operate a company well.

I say this with obvious bias, but I believe that Hotels.ng is one of the most successful B2C internet companies in Africa 🙂

Often, the quality of advice in the tech scene tends to be poor and this is because:

1. 1. Your mentor, the first player in the business scene, was lucky and had a huge market to goof repeatedly in and still come out successful without learning the hardest business lessons.

 

1. 1. Your investor overestimates the market, and does not understand the business environment here in Africa (I am not even referring to the anyhowness of the government).

 

1. 1. You are receiving advice from someone that has run a traditional trade business in Nigeria. They are often great at market dynamics (demand & supply), but fail at operational efficiency.

 

1. 1. You are receiving advice from people on the same playing field as yourself.

 

1. You are inexperienced, and cannot always discern bad advice from good advice.

The advice in this article is solid, but may not necessarily work for your business, so the ability of discernment is key here.

Listen, the internet market here in Africa is overrated. Compared to developed nations, it hardly exists. Where it exists, the user’s ability to spend on your product is low.

Read the first three paragraphs of Asemota’s Jollof test to understand the idea of share of wallet.

I am going to assume that you know how to find and execute an idea. Now, here’s how to operate a company well:

1. Think Of Your Business & Growth Problems Using Frameworks

Every business’ aim is to provide enough value to users that they generate enough revenue to turn a profit. You need to create a framework for growth and revenue generation within that realization. Here’s a quick framework for assessing the market potential.

Market > Customer Acquisition Channel > Product/Business model

First, is there a market? Search for niches. For example, there are a bunch of people that are interested in buying car parts. And you know this market exists because there are a lot of people that own cars and cars get damaged and need parts. So, you’ve answered the first question (with data). There is a market.

Next, understand the behavior of people that need car parts. Markets typically have a herd mentality and if you go where they are currently buying car parts from, you can go get them (the customers).

For instance, if you set up your car parts store in Balogun market, where people buy fashion items, you might acquire a few buyers, but you will not get enough buyers. However, if you set up in Ladipo market, a market popular for buying car parts, then you would most likely make more sales there. In essence, understand the channels you can acquire customers.

Your product has to complement how you extract value for your company based on your observations of the market and acquisition channels.

The product comes last. The product is your business model and front-facing business. This is highly dependent on your market and acquisition channels. You will need to keep on optimizing this until there’s product-market fit.

For instance, operating many shanty stores for car parts in Ladipo could be better for your business than operating out of one big building at the back of the market.

If you figure these things out then, you are one step closer to running a good business, and these will help you avoid wasting your time and money doing the wrong things.

2. Understand For Whom You Are Creating Value For

A business that creates value for itself alone is doomed. A marketplace that creates value for only its users will most likely die, especially if it has not achieved network effects.

I often ask people who they think Hotels.ng creates value for as a business, and they often say our users. Technically, that is true. But from a business perspective they are wrong. We create value for hoteliers, and we successfully found a channel to acquire a market where people like booking hotels online.

And the same is true for any one-sided marketplace, and many other types of businesses. You create value in the direction in which money moves. If money is moving from the customer’s pocket to the hotelier’s bank, then you created value for the hotelier and he will reward you for it. Because a hotel room in Sheraton hotel on hotels.ng is the same hotel room on Booking.com, and customers often go for cheaper rates. So if your vendors (suppliers) feel valued, they will give you enough rewards that will be transferred to your customers.

The same is true for Uber. They amassed a large network of drivers (supply side), and made it possible for you to get a ride within the shortest possible time. The only reason why these drivers joined Uber is because Uber promised them value. This is why the service on Uber gets bad for the users when the drivers are unhappy as you might have noticed many times if you are a Uber user in Lagos.

Unlike Uber which rapidly educated a new market of people who book rides online, I do not advice you do this, especially in this African environment. You are bound to fail because the market is too small and there are not enough investor dollars to keep you afloat.

BTW, read this article on Reforge on how to build online marketplaces to avoid common pitfalls that I often see in Nigerian marketplaces.

To recap this point, always recognize the direction in which you create value, and optimize for the side that receives the most value.

3. Do Not Incentivize Bad Behavior From Users

Many times, companies forget why they are in business. You are in business to make money. These means that there are varying degrees to which to reward customer loyalty. If your customer acquisition and retention is hinged on always giving me a coupon code that is greater than your margin, then you will burn more money than you will ever make and no investor is ever going to take you seriously.

Coupon codes and customer loyalty schemes should be designed for profitability and not to burn money. The only other scenario where you might share coupons freely is to educate a new market like Uber did in their early days. For the record, I am against educating a new market in Africa, because the market is too small compared to the costs.

A coupon code as an incentive to download an app could mean more business as the customer is most likely going to make more transactions with you now they have your app.

To understand how to win with customer loyalty rewards, read this post from Casey Winters.

4. Understand Your Growth Levers

It’s silly to assume that once the sale is made online, all activities stop. In truth, the offline bit is the most operationally challenging thing you might encounter. Your skills in marketing and product — if you have any, might be irrelevant here if you don’t have the ability to analyze problems using mental frameworks. Your offline operations are mostly the bits that will make or break your business.

Let’s do a calculation. Company A has a subscription service selling cosmetics online, and their net revenue per item is ₦1,000. Every month, they process 3,000 transactions, but are able to fulfill only 1,000 because of cancellations due to customer attrition, bad vendors, misplaced orders, et al

Hence company A’s total net revenue per month is1,000 * ₦1,000 = ₦1M

Company B sells the same thing as Company A, but has lower margins and transactions. Company B’s net revenue per item is ₦900, they process 2,500 transactions every month, and eventually fulfill 1,500 of them.

Hence Company B’s total net revenue per month is 1,500 * ₦900 = ₦1.35M

You look at Company A, and you might scorn at them for being having a 33% success rate when they have a larger opportunity to be more efficient, but realistically most companies start off around this success rate.

Company B on the other hand has a 62.5% success rate, and such high success rate does not happen accidentally. It takes work.

Still comparing both company A and company B, it is obvious that both of them still have a lot to understand in their growth mechanisms. These things take time to figure out, so do not do too many optimizations at once. The critical thing is figuring out what will make you grow as a business and optimizing them in order of priority.

If you have ever wondered the kinds of enormous thought that goes into fixing operational challenges for higher efficiency, then ponder how Amazon’s 2 day shipping might work.

5. Know Your Runway & Understand Your Burn Rate

Quite often, companies shutdown because one day they realize there is no money in the bank. This is one of the most repeated reasons I see when companies shutdown. Just a year ago I was a big believer in Go hard or Go home.

The problem with that mentality is that it makes you mentally lazy and not do the right things which is to fix your revenue crisis. The phrase itself means to do the dirty work to make everything well again, but many entrepreneurs have turned the phrase on its heels to mean do more of the things causing a crisis (burning money).

Knowing how much money you have in the bank and how long it will last, will help you plan right and cut expenses where your company is too fat.

6. Don’t Tie Your Company’s Value To Your Staff

This happens more often than you realize especially in small companies. If the only reason why your company makes money is because of one employee in your company, then you are heading towards a dead end. You have a problem if you have a staff that cannot be easily replaced. Address the problem as soon as you can to create some form of redundancy so that your company is not wrecked after the employee leaves.

Never assign a god status to any of your employees — if not you will lose the objectivity needed to measure their performance and results well, and worse, difficult to critique when they do bad work for you, which they inevitably will. The end result is that your staff will abuse the privilege and he will most likely have less loyalty to your company.

It’s easy to swallow the modern-workplace pill of letting your staff work as they wish in a lax environment as it helps to unleash their creative freedom. This might be true, but only to a limit. The culture of the workplace is more important, not what you allow in the workplace.

7. Do Not Book Revenue Into The Future

This is a common operational oversight — booking revenue into the future. In the example of company A above, it’s possible that company A could make ₦3M every month, but in truth they only have ₦1M entering their bank every month. When you book revenue into the future you assume you have more cash than in the bank. These makes your books unclear and your debts are no longer obvious to you as you spend more money than you actually have. Eventually, you go bankrupt.

A repeated reason why I see people do this is because they want to show investors good numbers. It’s not worth it because you would have deceived your investors (especially those that do not understand tech businesses well enough), and this reporting method does not prepare you well for later funding rounds where due diligence is critical.

You can tell a compelling story, but don’t hide the true pictures especially from investors you have on board. You might lose their confidence because of this.

My advice: Report both numbers. Report actual revenue and ideal revenue. This way your investors will understand your business better, and it gives you clarity into what to optimize.

8. Keep Your Costs Below Your Revenue

A business becomes profitable when its expenses are below its revenue.

If you cannot project when you will be profitable, and actively understand what you need to do to make this happen, then you are spiraling towards a dead end.

The chances of your business’ survival is hinged on how quickly you can pay for your operational cost (marketing, salaries, business expenses, et al) from your investor’s money to the point where you make enough revenue to not need that money.

The reality in this African business environment is that there’s a very small market of users, and you will not experience Sillicon Valley-esque user growth on this side of earth. There’s also a limited amount of money from users that is available to be spent on your business.

After raising money, it’s very easy to increase your expenses, and give all your employees a raise. In fact, they will expect it. What you want to do is to be competitive in the job market while attracting the best brains. If a few employers raise salaries, then the there’s a huge disparity in the job market and other companies find it hard to recruit for that role, and they make it hard for their expensive staff to find a new job in their role because no employer can match their former salary. This is why the good senior developers here in Nigeria are trying to find jobs abroad because only a few employers can match their salaries.

In most companies, salaries are typically the biggest company expenses. Your job is to cut down on unnecessary expenses especially recurring expenses. Make sure you are paying market rate or cutting out those expenses. Examples of these include internet, power, phone calls, transport, et al.

Lastly, if you are going to balloon salaries and expenses, make sure you are insanely profitable.

9. Pick A Metric

It’s pointless operating a company that is not being optimized towards key metrics. If you are optimizing for many things at once, you will fail too. Understand what shows the biggest indicator that your company is growing and build towards that. This should be number of transactions or revenue.

Once you have identified these metric(s), make it your mission to grow this metric by at least 5% every week. Make all your staff focused on this, from your managers to entry-level staff. If you grow a compounding 5% every week, you would reap the same rewards in 4 years as a company that as grown 1% every week for 19 years.

If you make growing your core metric(s) priority, you will achieve it and probably reach a saturation point depending on how big the market is, but you would have done the hard thing and created a company culture where doing the hard thing trumps every other thing.

While doing this, it’s important that you periodically review how everyone’s work contributes to this metric because people will most likely game the metric as explained by Goodhart’s law here.

10. KPIs: Align Staff Activities With Company Growth

As your company grows, it will need more structure, and roles become more defined. It’s important that as roles get defined and departments get created that you set the mission of each department. This is the time to translate mission to metrics for your employees.

Remember how you selected the core metrics for your company? Now, you have to distill it further to show how each department contributes to this metric. For instance, if my core metric is to increase revenue by 5% every week, I would measure my finance team on their ability to collect money and prevent payment failures, and my sales and marketing team on the volume of transactions or amount of money they can bring in.

On the issue of KPIs, it’s important that you set up a system that measures and rewards staff performance. And this can happen in 2 ways:

1. 1. Measure activity.

 

1. Measure results

For example, if I gave an employee a job to fill a 1,000 liter tank with water every month, the number of times he went to the stream to fetch water will be the wrong criteria on which to measure the employee’s performance. Frankly, you should not care about how much effort because the effort the staff put in does not correlate to your company’s bottom line. You should measure the results. Is the tank filled with water or not? You can then prorate the staff’s performance over how much water is in the tank.

Here’s another scenario where measuring activity is just as important as measuring results. If you run a massage parlor, as an employer what you care about is the satisfaction of your customers and how many massages each of your staff can give. The number of massages being given affects your bottom line significantly and you would want all your masseuse giving a high amount of massages per month. Then, counterbalance the activity KPI with the item that will be negatively affected (unsatisfactory massages) if they strongly optimize for it (quick massages) by making the negative effect count against the activity. A reward and corrections system works here.

KPIs should always be tied to a concrete metric like money in the bank, and not a vanity metric. Number of transactions could be a vanity metric if those transactions do not lead to money in the bank. When you place the incentive on money in the bank, your managers and staff reorient themselves to work on activities that bring cash into the bank.

KPIs should also be set up in ways that incentivize creativity and innovation around the process.

11. Staffing & Hiring

Hiring too many people for the same role will surely happen especially when you are trying to scale up fast. It’s important to address this early on and to only hire for roles you need. Increase your headcount based on the number of activities and processes you have to run, and make your staff specialize on time.

It might be helpful to hire someone really smart and with a few years of managerial experience (2–5 years) to manage each department as you expand. Before you hire, make the manager highlight the real need for a new staff in their department.

Expensive employees do not necessarily make good employees. When hiring, pay for the role you are hiring into, and not the individual you are hiring. This helps sets expectations and places the right individual in the right role. You only pay for the individual when you are hiring into senior management, and when hiring senior management, you have to be very careful in considering the work background the senior manager is coming in from.

Here’s the deal, employees will always either underestimate or over estimate their worth, this is why it’s important to set a base pay for each role and the range in which an employee can earn in that role. Clarifying this will prevent an HR crisis down the line and adjust yourself and employees expectations to reasonable limits.

On recruitment, it’s important that you look out for certain traits and skills in each role you wish to fill. You also need to hire people that fit within your company culture to avoid clashes. Here’s a method you can adopt to find the right recruits.

Group the departments within your organization into different skill levels. For instance engineering, marketing & product could go together because they require technical skills. Legal & Finance could go together because they mostly require a University degree in their respective fields.

Then group the roles in your company into their requirements. For example: Entry level, Junior, Senior, Head of Department, C-level

You would eventually end up with a matrix, and then you can fill in the sort of aptitude and ability you would expect someone in this role to have. The personality traits and core skills should be the primary requirement before assessing the candidate for basic job requirements/technical skills. You might need to regularly review this matrix as your experiences with new recruits re-adjusts your expectations about the traits you hoped your hires possessed.

12. Never Postpone Firing Decisions.

Your employees will probably hate you, but it has to be done.

Explain to them why people had to leave, some might hardly understand and they would prefer the company runs out of steam than for you to fire their co-workers. They would still blame you when the company dies, so there’s obviously no winning.

Just make sure you do right by your investors and employees as often as you can. But here are 3 occasions when it is imperative that you take the bold step and let employees go:

1. 1. When you have a lot of redundancies, meaning you hired for a role you do not need or have too many people doing the same thing.

 

1. 1. When your staff breaks the code of conduct. It’s important that you have a rule book so that it’s obvious when someone breaks the rule.

 

1. When a staff consistently under performs or cannot cope with the work, but before you do you should have exhausted helping that staff find the right place within the company to excel.

13. Understand your marketing channels and Unit economics

Unlike big brands, you most likely have a few dollars to spend on marketing per year and you would need to get the most value for your bucks. This is why your customer acquisition strategy should be performance focused and the results should be tied to money in the bank.

Figuring out the channels that work best for you, how to attribute marketing results, and optimizing these channels for much gains should be top priority for you as CEO.

It takes time and months of iteration to figure out the best customer acquisition channels for your company. The easiest thing you can do for yourself is observe where the bigger players in your industry are spending on marketing and do likewise, but be careful to measure how marketing spend contributes to revenue. Sometimes, the bigger players are just as clueless as you.

Make your marketing team understand the unit economics of your business and incentivize them to optimize their campaigns for your business’ bottom line (money in the bank). If you don’t they will run amok, spend all your cash, and measure vanity metrics that do not extensively affect your bottom line.

Marketing at Hotels.ng has evolved overtime, and it took us 2 years to get to a point where we run as efficiently as possible.

14. Bring your core activities under one roof!

The death of a company comes when a company

1. 1. Cannot iterate their product fast enough.

 

1. 1. Cannot understand their financials (Expenses Vs. Revenue)

 

1. Does not understand its customer acquisition channels.

Failures in any of those 3 things above often leads to a company’s death. As a founder, it’s important that you have in-house teams that understand how to operate these 3 arms of your business, and your inability to understand any of these 3 things or bother about learning a lot about them means you should not be starting a business.

15. Bonus: Get some Press

Tell your story or no one else will. Too often, I see founders never bother about press. Their assumption is that their work will speak for itself and yes it might, but it means that when you could have been getting 10X of the press you are getting, you only got a bit.

I am not advocating that you prioritize press. Do not. Press does not help your growth, and it does not make you operate any better.

What press does is that it gives your company good SEO, clout and leverage with users, potential recruits, and investors. Press has never killed a company, the lack of good press however could stall a company’s fundraising opportunities and make a company die.

These are all I have for now, there are many more pointers but these should be enough to keep you up at night trying to operate your African business better.

I only scratched the surface on each of the points I raised. The idea of this post is to bring to mind some of the top things you should be thinking about. Speak with experienced professionals that have gone ahead of you and they will explain most of these things in further details.

You could also shoot me an email at ayemijohnson[at]gmail[dot]com

Thanks to Mark Essien, Femi Fawole, Ayo Shittu, Remi Martins, Solomon Osadolo, and Osarumen for reading drafts of this.