Digitization is often hailed in the realm of development as a cure-all for the challenges faced by small, highly informal enterprises. It’s seen as a gateway to higher incomes, greater dignity, enhanced market access, and an increase in the number of viable businesses, especially in resource-scarce environments. Real-world experiences urge us to approach this notion with caution. Often, the consolidation driven by digitization can depress prices, harming entrepreneurs’ livelihoods without significantly boosting demand or efficiency. In 2023, we undertook a study to investigate if, how, and to what extent digital platforms genuinely impact enterprises, focusing on profitability, resilience, and asset acquisition. We surveyed some entrepreneurs who used digital platforms(platformed) and some who did not(unplatformed) across Kenya, Nigeria, Bangladesh, and India.
In Kenya, we engaged with 400 micro-entrepreneurs in the retail sector across Nairobi, Kisumu, Mombasa, and Eldoret to assess the impact of digitization. Our focus was on the retail trade sector, which constitutes over half of employment in Kenya’s predominantly informal economy and accounts for 62% of enterprises in this sector. Digital platforms serving these entrepreneurs primarily provide access to inventory and value-added services. Our hypothesis was that these digital platforms facilitate information exchange, providing micro-enterprises with critical information and enabling the outflow of data that could create efficiencies, reduce operating costs, and increase net incomes. We were particularly interested in how these platforms enhanced access to digital financial services.
Platformed micro-entrepreneurs had higher operating incomes
Platformed micro-entrepreneurs reported significantly higher revenues than their unplatformed counterparts. However, there was no significant association between the frequency or duration of platform use and their income or revenue. What did change with time and regular usage was the proportion of stock obtained through these platforms. The longer and more frequently MEs used digital platforms, the greater the proportion of their stock sourced from these platforms. MEs who used digital platforms at least multiple times in a month incurred 40% of their operating costs buying inventory from these platforms, compared to just 20% by less frequent users.
| Variable | Platformed | Unplatformed |
| Average_income* | 61179.90 | 43821.14 |
| Average_spending | 38331.00 | 32008.13 |
| Average_profit* | 22848.90 | 11813.01 |
Two alternative explanations are possible. First, micro-entrepreneurs might obtain better prices through these platforms, allowing them to acquire more stock for the same amount of spending, thereby leading to higher incomes. Alternatively, retail trade platforms may attract more sophisticated micro-entrepreneurs who already have higher incomes. The evidence seems to support the latter. Notably, income differences were only observed in Kenya among the four markets studied. Additionally, if the benefits were primarily from long-term or frequent platform use, we would expect to see cumulative advantages over time, which we did not – at least not consistently.
Platformed micro-enterprises had better access to formal financial services
We observed a significant association between platform use and access to formal financial services.
Platformed users were also more likely to receive payments predominantly through mobile money (55%) compared to unplatformed users (33%), who favored cash transactions. This suggests that on-platform micro-entrepreneurs may have higher self-efficacy with technology, positively influencing their use of digital financial services. Retail trade platforms often provide trade credit as a value-added service. However, only 24% of platform users reported utilizing this credit, compared to just 13% of off-platform micro-entrepreneurs. Additionally, on-platform micro-entrepreneurs accessed bank loans at more than twice the rate of their off-platform counterparts (36% vs. 17%). Statements may facilitate better record keeping and in turn, improve access to formal credit.
They can give you products on credit for like a week and also like when you use their Mpesa buy goods service, there are some incentives but that I think is more about being given a credit limit.
34-year-old female shopkeeper in Eldoret town
Assisted onboarding, autonomous
A significant 86% of platformed micro-entrepreneurs discovered digital platforms through a sales agent, while 61% of unplatformed micro-entrepreneurs who were aware of digital platforms learned about them through their social networks. Although only 29% of platformed micro-entrepreneurs signed up independently, 50% typically interacted with the platforms online via apps or websites. This indicates that initial low self-efficacy and perceived usefulness necessitate in-person interactions during onboarding. These interactions are crucial for demonstrating the platforms’ value and teaching new micro-entrepreneurs how to use them. Once this initial phase is complete, platforms can adopt a more hands-off approach to engagement.
I knew [about the digital platform] from friends who are in the shop business, they told me about it.[…] They told me that their price was the same as the wholesale that was near but they had free delivery[…], everything is in good condition, and it makes your work very easy. The first step[to onboard] is that I met up with an agent [from a retail trade platform] who sent a link to my phone then on clicking it, I downloaded the app, it requested my details.- 38-YO male shopkeeper in Kawangware, Nairobi.
38-year-old male shopkeeper in Kawangware, Nairobi
Agents bring significant value to interactions beyond taking and fulfilling orders. Among users who preferred dealing with sales agents over using the application, 78% intrinsically valued in-person interactions. Specifically, 40% generally trusted agent advice during transactions, and 17% had special needs that typically required direct human support.
The reliability of platforms may also drive the need for agents. Users need to trust that orders will arrive on time and in the right condition. Dependence on agents may increase to compensate for any operational unreliability, ensuring there is someone accountable for delivery.
However, a key challenge with relying on agents to onboard and manage relationships is scalability. It requires more time and money to maintain a team large enough to provide in-person interactions with a geographically dispersed network of retailers. This can hinder the platform’s ability to scale effectively.
What makes some micro-entrepreneurs more inclined to use platforms than others?
“Platformability,” as we call it, is influenced by a combination of structural and behavioral factors. Access to the internet and smartphones facilitates joining and using these platforms. However, with most MEs primarily interacting with these platforms through agents, smartphone ownership is not a prerequisite to using platforms. Nevertheless, there is a positive correlation between smartphone ownership and platform use, frequency of use, and whether users intend to continue using the platform.
It’s important to note that interactions with platforms do not always result in purchases. Platforms are crucial for micro-entrepreneurs as tools for price discovery. Many micro-entrepreneurs compare prices across multiple platforms and local wholesalers before selecting a supplier. Internet access and smartphone use make these interactions smoother and more efficient.
Behaviorally, platformed users tend to feel more confident about their ability to order items online and handle more complex online tasks, such as e-commerce. However, we did not observe a significant association between platform use and the perceived effort required to learn these tasks. There were no significant differences in self-reported willingness to innovate either. It is possible that MEs not currently using the platform are not making an effort to learn how to engage in e-commerce because they are uncertain about the process and unconvinced of the benefits.
All in all, Platforms serve as valuable aggregators for micro-entrepreneurs (MEs), offering the potential for scaling interventions and financial services. Our study found that MEs value the convenience, stock access, and competitive pricing of digital platforms, though they are willing to switch between platforms. While platforms aid in price discovery and stock sourcing, their full potential is hindered by limited access to trade credit. MEs with platform credit were more likely to increase usage, emphasizing the need for financial services. Platforms, with initial human support, can efficiently scale interventions, enhancing the growth and resilience of micro-enterprises.
