I. Marketing Businesses

Marketing businesses purchase products from microenterprises and sell them at a markup. They often offer market research to the producers, as well as product development, training, input supply, and access to technology. The following cases illustrate marketing business programs.

A. INDEPCO in Haiti (an original SEEP case)

(Information for this case was provided by Frank Lusby of Action for Enterprise.)

L'institut National Pour Le Developpement Et La Promotion De La Couture (INDEPCO) in HAITI is an association of low-income garment makers that is developing subcontracting services. The association has successfully carried out several modestly profitable subcontracts with its members for making uniforms for the government of Haiti at very low cost. Its 1998 contract for 60,000 uniforms was worth $138,000. INDEPCO made a small profit of $4,000 and, after paying for materials and other costs, was able to pass on almost 50 percent of sales to its members, who had no material costs and passed on almost half of their share directly to their workers. Action for Enterprise (AFE), a U.S.-based nonprofit organization, has provided INDEPCO with technical assistance to develop accounting, management, and training systems to support their subcontracting services. AFE is now helping to develop a formal subcontractor development program (SDP) that would train and certify subcontractors at different levels. INDEPCO is focusing on one customer and one product to develop its capacity. INDEPCO then hopes to enter international private-sector markets by taking advantage of Haiti’s potential for becoming an assembly center for international garment producers. Although INDEPCO currently embeds its training costs in its subcontracting margin, it is only able to offer minimal training service, which in turns limits its marketing capacity. INDEPCO is currently raising donor funds for its SDP initiative. With the development of the SDP program, INDEPCO will charge fees for training. It targets the year 2003 for becoming financially sustainable through fees and sales margins.

Created in 1983 in Colombia, Promotora de Comercio Social (PCS) is a nonprofit marketing organization that works with a large number of low-income producers, providing them with a market for high volumes of low-price products. By following a strategy of local market focus, PCS has been able to position itself well. It has built up a network of buyers—mostly department stores and supermarkets—locally and nationally. In addition, it occasionally obtains subcontracting assignments from the local textile industry. Instead of working with just one product or sector, PCS uses a methodology of diversity for products and for services provided. The organization currently provides practically all services in four or five subsectors that producers need. PCS generates its income by providing two main services: (1) buying goods directly from producers and reselling them and (2) subcontracting, in which PCS participates in bidding processes, competing for large orders from local governments or department stores. PCS’s additional services including designing and developing new products, packaging, and providing technical assistance related to cost management, quality improvement, and quality control. PCS also offers financial services in the form of an advance payment of up to 50 percent.

Of the low-income, rural artisans that PCS serves, half are informal-sector businesses, all have fewer than ten employees, and they produce in the food, manufacturing, leather, and handicrafts sectors. PSC has a supplier base of around 1,000 entrepreneurs and generates net annual sales of $3.4 million with an average markup of 11 percent. It took PSC nine years to start covering its costs, but it has been profitable since 1994 at a slim 3 percent margin. PCS has received loans from the Inter-American Development Bank.

PROARTE, a private, for-profit craft exporting company in Nicaragua, serves as a commercial intermediary between approximately 100 Nicaraguan artisans and international buyers. PROARTE originally was an informal component of a microfinance program sponsored by the Mennonite Economic Development Agency (MEDA). It was registered as a private company when MEDA, SNV (Stichting Nederlandse Vrijwilligers—Netherlands Development Organization), and a consulting company affiliated with MEDA invested in the company, loaning around $105,000 to get the company started. A highly motivated executive director with experience in the crafts industry has led the way toward initial high sales and promising profitability. PROARTE provides services that are oriented toward securing sales in the international market or maintaining good relationships with current buyers. PROARTE’s first contacts were Alternative Trade Organizations (ATOs—organizations established to develop marketing channels for products made in developing countries by workers receiving a fair wage), or the so-called asympathy market in Europe. Realizing that this market could prove to be very limited in the long term, the organization has moved on to other international buyers, mostly commercial wholesalers whom PROARTE identifies and courts mainly at international trade fairs.

PROARTE’s main suppliers, 30 percent of whom are women, are low-income rural producers of traditional Nicaraguan pottery and hammocks. PROARTE’s niche is the focus on Nicaraguan’s unique traditional crafts and the sale of these crafts through private-sector international trade fairs. In addition to being a market intermediary, PROARTE conducts market studies, offers some product development guidance, provides quality raw materials, performs quality control, and participates in international trade fairs to sell products. Although PROARTE was initiated with grants through MEDA, it also has received low-interest loans; but when it became a for-profit company, it mobilized private-sector investors who are linked to the Mennonite community that supports MEDA. PROARTE is no longer dependent on subsidies but still receives some assistance to attend trade shows, as well as other government benefits for nontraditional exporters.

D. PROEXSAL in El Salvador

Sociedad Cooperativa de Productores y Exportadores del Salvador de R.L. (PROEXSAL), a marketing cooperative in El Salvador, was created in 1994 to serve as a marketing channel for member producers. PROEXSAL works closely with the Cooperative League of the USA (CLUSA), a U.S.-based cooperative development nongovernmental organization (NGO) that provides technical assistance to smallholder farmers wishing to cultivate organic or other nontraditional agricultural products. CLUSA works intensively with the producers on crop production, and PROEXSAL, which established cooperatives for refrigerated storage and transportation, as well as packaging centers, links the cooperatives to distributors (grocery stores). The cooperative’s strategy, however, is to gradually turn over to its members many activities, such as cultivating seedlings and managing packaging centers.

PROEXSAL’s niche is providing nontraditional agricultural products, particularly organic, to hotels, restaurants, and high-end grocery stores within El Salvador. Its services include buying and selling produce, conducting market studies, and developing products. Two of PROEXSAL’s innovative features are (1) services to train buyers in how to handle organic produce and (2) a strategy for providing producers with market information. The organization facilitates trips in which buyers visit packaging centers to talk with producers.

PROEXSAL operates with a net profit based on 25 percent commission on gross sales. Its annual sales have been between $418,000 and $680,000 for each year from 1996 through 1998, but its sales and profitability are volatile. In 1997, sales increased 600 percent but costs increased only 137 percent. The next year sales increased 38 percent while expenses increased 25 percent. In 1999, PROEXSAL is focusing on reducing costs. PROEXSAL is an innovative model of a cooperative that enters the market and then hands over business to its members, while still endeavoring to maintain profitability.

E. Good Practices in Marketing

The “Good Practices in Marketing” study presents (1) a framework for thinking about marketing services (several cases which are summarized above), (2) findings from a 1999 Inter-American Development Bank (IDB) survey of marketing service providers in Latin America, and (3) conclusions.

The framework states that the cornerstone of marketing is marketing business services; that is, buying products from entrepreneurs and selling them to customers. The other services are ancillary and fall into two categories: those relevant to the input phase of marketing and those relevant to the output phase. Services of the input phase include technical assistance and training, product development and design, raw materials provision, and financial services. Services of the output phase include quality control, packaging, transportation, market information/penetration, and paperwork/legal assistance.

The survey covered 131 marketing service providers; 43 percent were NGOs, 39 percent private businesses, 25 percent cooperatives, and 10 percent government agencies. Because a marketing business is more sustainable and because a marketing business usually requires marketing services to succeed, it was surprising to learn from the survey that only 25 percent of providers offered both marketing business and marketing services. In fact, the majority, 73 percent, offered only marketing services with less than a handful providing only marketing business services. Many private companies offered marketing services alone. Those few that calculated their margins operated within an 11-40 percent markup, with an average markup of 29 percent. Providers used a mix of strategies to finance their services: fees, sales, donations, credit, equity, and loans. Because the cases above were the most financially viable of the providers, they were selected for detailed analysis.

The paper concludes that the following elements are the keys to success in developing marketing services:

·        Developing Strategies. Many different marketing strategies are successful, from mass marketing to developing specific market niches, and from domestic marketing to export marketing. The key is to develop a clear strategy that matches the products that the target population produces and the market conditions. Good marketing strategies are important both for marketing the products and for marketing services to entrepreneurs.

·        Providing Marketing Services. A clear need for marketing services is evident, and offering marketing business services alone is almost entirely outside of current practice.

·        Measuring Cost and Profit Carefully. The study recommends costing each service separately and charging customers the price of that service, rather than embedding fees for services in the markup. This practice encourages clear demand signals. Customers who pay will let a supplier know if the services do not meet their needs and will seek alternatives if the providers’ services are not competitive.

·        Reaching Sustainability. All the successful cases generated surpluses, but they struggled for years to reach modest levels of profitability. The general strategy used by most organizations is to subsidize marketing services with marketing business services. But the best practice trend is to deliver each service through a sustainable cost center, rather than cross-subsidizing unprofitable services with profitable ones.

The Good Practices in Marketing study raises one challenge: because microentrepreneurs need marketing services, how can BDS donors, researchers, and practitioners develop practices for delivering these services that are affordable for microenterprises? Or, as the BDS field prices the services according to cost, will they necessarily push lower-income producers out of the market?

II. Marketing Service Providers

Marketing service providers help microenterprises reach markets through services such as providing information, training, and linking producers to buyers, without selling the products for them.

A. AgReform in Egypt (an original SEEP case)

(Information for this case was provided by Mark Driptich of CARE Egypt.)

AgReform, a project of CARE Egypt, links farmers to market information through a marketing service called Link Trips. Unlike traditional government extension agents in Egypt that prescribe what crops to plant and when, sanction farmers for not complying, and guarantee a particular price, this service starts with participatory rural appraisal, including gender analysis, and identifies constraints and opportunities that could be addressed through access to information. AgReform staff then identify sources of useful information within Egypt and organize farmers visits to those information sources. Farmers contribute to the cost of the trips, and staff follow up afterward to help farmers apply the information and organize additional trips. Eventually, farmers begin to take trips without staff facilitation, and permanent market relationships emerge. When the AgReform staff withdraw, leaving farmers with regular directories of information sources, they move into new communities where they facilitate new trips.

Because Link Trips is focused, empowering, and replicable, it becomes integrated into the fabric of rural farming so that long-term subsidies are not required. This service also demonstrates that farmers are willing to pay for information. The program tends to focus on the supply side, however, with most sources of information being technical advisors and suppliers rather than potential customers, which is the result of staffing by agricultural experts. The challenge is to identify marketing experts to work with rural farmers, and to develop the marketing skills of technically competent agricultural experts. Another challenge is whether to replicate the service with another international NGO or whether to choose a local NGO or government agency. The advantage of working with a local NGO or government agency is that those organizations might be able to recover costs more easily because their cost structures are lower.

B. Private and Government Export Marketing Services—What Works?

The United States Agency for International Development (USAID) conducted an evaluation and analysis of export support programs in six countries. The survey interviewed private-sector exporters to evaluate the programs from the customer perspective. The survey identifies two successful export promotion programs—EXITOS in Guatemala and INSOTEC in Equador—as well as successful aspects of other programs. The study concludes that programs that work—

·        Focus on achieving export growth and improving the private provision of services, rather than on offering long-term subsidized services through governments or nonprofit enterprises;

·        Focus on services that lead to long-term linkages with commercial sources of services;

·        Help sell linkages with buyers, suppliers, and investors rather than play an intermediary role;

·        Do not limit assistance to one provider, but allow firms to select the source of the service using cost-sharing mechanisms;

·        Avoid government service provision (nonprofit or free-standing projects performed better than membership organizations);

·        Ensure that assistance is time-bound, results-focused, and based on an economic rational;

·        Before intervening, analyze the market for services: Is there a viable market? Do private-sector sources of service exist? What is the gap? What temporary solution can fill the gap? What do entrepreneurs think of existing service providers? What else do entrepreneurs need?

The challenge raised by this case is how relevant the findings are for microenterprise export marketing.

C. FIT, ILO

The Farm Implement and Tools (FIT) program, an action research program of the International Labor Organization (ILO) project, explores how business development services can be offered sustainably or profitably to small enterprises. The program starts with a demand assessment that considers an enterprise’s constraints and the enterprise’s ability to pay for services. It then examines models of private-sector services in the country where the project will take place, as well as in other parts of the world. The program adapts these models to the needs of target clients and offers the services on a pilot basis. The services are then quickly modified according to customers’ feedback. The following three types of services have emerged from this process:

1.      Formalizing existing services that entrepreneurs offer each other. This type of service mainly consists of facilitating specific networking opportunities. One such opportunity is “Enterprise Tourism,” in which entrepreneurs in similar businesses visit other entrepreneurs to learn something specific; for example, metal workers may watch someone making solder from old batteries. More than 1,400 such trips have occurred in East and West Africa, and entrepreneurs are willing to pay the full price for the trips. In Cambodia, FIT is building the capacity of a private-sector travel agent to offer the service. Another networking opportunity is through “User-led Innovation,” in which FIT facilitates forums for entrepreneurs to communicate more effectively with traders and customers. A series of facilitated meetings between groups of metal workers and farmers in western Kenya resulted in developing new equipment worth, on average, $700 in new sales per business.

2.      Offering services available in the private sector. In examining the private-sector market for BDS services, FIT was surprised by its findings: a large number of private-sector trainers, particularly in markets in which little or no subsidized training had been offered. For example, in Uganda, FIT identified 160 independent trainers and 89 small-scale, private, training institutions. These institutions offer a wide range of courses in marketing, import-export trading, and management and vocational skills. FIT’s intervention was to offer courses that train trainers in “Rapid Market Appraisal” and “User-led Innovation,” and to facilitate a network of trainers to build their capacity. FIT is engaging in subsector development for business training services. Private-sector trainers seem to be able to pay for these services.

3.      Offering services being provided in industrialized countries through the private sector. While many small business development services in industrialized countries are subsidized and of questionable impact, several sustainable services offered in the private sector include trade shows, publications, support services through franchise agreements, flexible office space, and business directories. Having conducted some promising market tests and research, FIT is experimenting with publishing and selling advertising papers in which large companies will market to small enterprises and small enterprises will advertise their businesses.

The action research of the FIT project concludes that it is possible to identify services that can be financially sustainable in the private sector. The best way to do so is to approach the endeavor as a foreign investor hoping to identify a services niche, rather than as a development agency offering subsidized programs. In institutionalizing service development, the FIT program is challenged with determining who will carry out continuous market surveys and service development. Likewise, in reaching scale, it is challenged with determining who will replicate the services in different geographic areas.

(This summary is based on the paper, “Jamaica MicroNet Incorporated: Increasing Business Success in Low-Income Communities,” James C. Hanna, The World Bank; T. de Wilde.)

Jamaica MicroNet is a business concept under development in Jamaica to provide business development services to low-income mciroenterprises by establishing a private-sector business. The project designers conducted a market assessment of the demand for services among microenterprises and assessed the existing supply of business development services. Their conclusions led to a business design with the objective of (1) helping a large number of low-income microenterprises to penetrate higher-income markets in Jamaica and (2) helping to accelerate the supply of sustainable business development services for such businesses. MicroNet is designed to reach 20,000 clients (20 percent of the market) and to offer the following three basic services:

1.      MicroKnowledge, training to improve basic business skills in a group setting;

2.      MicroMarket, tools to connect to new markets; and

3.      MicroTech, technology to enhance knowledge, solve problems, and generate network solutions.

MicroMarket services will facilitate market access by providing materials, technology, and personal coaching by experienced entrepreneurs. It will include the following three key services:

1.      Communications, including low-cost photocopying, printing, faxing, e-mailing, telephone, message, storage, and mail services;

2.      Advertising, including assistance in developing and using relevant marketing materials; and

3.      Product packaging and labeling, which includes selling packaging materials and labels, as well as providing individual coaching.

MicroNet will expand through a system of branch service centers. Over a three-year period, it plans to open ten branches, one at a time. The total investment costs are estimated at $4.2 million, which includes some $500,000 in service development, monitoring, and evaluation work. To date, private investors have committed to $3.6 million and the remaining $500,000 is expected to come from donors willing to fund the services development, monitoring, and evaluation costs. The project is designed to achieve an internal rate of return of 13 percent over five years. The services pricing strategy is to charge break-even costs for the basic training and set higher margins for other services, which will nevertheless be priced lower than existing market prices. Costs per client for the basic services would be $42, which includes a five-day training segment, child care, materials, facilitators, and refreshments. This pricing is competitive with existing training packages. Despite the private-sector nature of the project, MicroNet plans to measure impact by tracking outreach, financial sustainability, and clients’ business performance.

This project is a creative attempt to design a BDS service as a private company with many characteristics of microfinance institutions and private-sector BDS providers. The most innovative feature is that private investors have already pledged investment capital. One challenge the project will face is seeing if it attracts microenterprises, rather than small- and medium-sized enterprises that will also be attracted by the low-cost, high-quality services. A second challenge is to see if it feasible to provide the services at the estimated cost and to see if entrepreneurs are willing to pay the projected prices.

III. Market Infrastructure Developers

Market infrastructure developers develop institutions in the market aimed at helping microenterprises access markets permanently. As with marketing service providers, market infrastructure developers focus on reaching large numbers of entrepreneurs and, in many cases, reaching the poor. They make training and product development integral to their programs, and they raise long-term funding from public-sector sources.

A. Gram Shree Mela in India (an original SEEP case)

Gram Shree Mela (GSM) are occasional five-to-seven-day market expositions funded by the government of India and organized by nongovernmental organizations (NGOs) throughout India to help rural producer groups and NGOs link disadvantaged rural producers with urban markets. Over a period of ten years, 144 GSM markets have been organized with 50-100 participating NGOs and producer groups, representing some 30-40,000 producers. At the GSM market, producers groups and NGOs sell directly to urban consumers and gain access to market feedback, training, and information about their competition. For many groups, the GSM festival is their main marketing outlet, although other groups develop relationships that lead to further sales throughout the year.

The Gram Shree Mela market expositions have high levels of customer satisfaction and generate significant sales: $1 million in 1997 and a cumulative total of $4 million. The sales-to-expense ratio is 4:1 after conversion to U.S. dollars (USD). (In nominal rupees, the ratio is 5.3:1.) Despite this apparent viability, Gram Shree Mela markets are subsidized. All participants receive government grants to develop the productive capacity and increase the incomes of the rural poor. Travel expenses are subsidized, although these have been gradually decreasing in recent years. The markets are organized by local NGOs who receive a management fee.

In a survey of the 100^th Gram Shree Mela, 98 percent of the participating NGOs and producers groups said that GSM markets are a good marketing outlet; 73 percent were “satisfied” with the markets, and 60 percent were repeat customers. The GSM markets also offer training workshops to participants to improve their marketing skills. At the 100^th Gram Shree Mela, 66 percent attended workshops, and 60 percent were satisfied with them; in addition, the Council for the Advancement of People’s Action and Rural Technology (CAPART) also surveyed customers and found that 63 percent of final customers purchased goods at the market. Customer survey results were also returned to producers so they could improve products for future markets.

The market niche the Gram Shree Mela markets serve is middle-class, urban workers who have an appreciation for basic rural crafts, for helping the poor, and for affordable prices. This niche has been developed through government-supported advertising. The GSM market offers some limited training to NGO staff, but it is generally the role of NGOs and producers groups to build the capacity of the rural producers. The GSM is simply a market link.

Some challenges include improving producers’ responsiveness to the market, marketing to larger companies, increasing scale, and monitoring and evaluating the impact of the GSM. Gram Shree Mela markets are unique because they are a government-sponsored and government-subsidized market that nevertheless reaches large numbers of people, generates significant sales at relatively low costs, achieves high levels of customer satisfaction, and has endured for over a decade.

B. SADP/NASFAM, Malawi (an original SEEP case)

(Gail Carter and Tom Carr of ACDI/VOCA provided information for this case.)

The Smallholder Agricultural Development Project (SADP) is a five-year-long program that was developed to help smallholder Malawian farmers gain access to tobacco markets. It evolved into a national smallholders farmers movement with 40,000 paying members, 2,500 farmers clubs, 17 regional associations, and a national association—National Smallholder Farmers’ Association of Malawi (NASFAM)—that is now overseeing the development project that started it. This infrastructure was instrumental in helping smallholder farmers benefit from privatization and liberalization in Malawi’s traditional export crop—tobacco—and is now helping farmers diversify away from that crop to nontraditional commodities with growing markets, such as chilies and coffee.

Unlike other organizations, the Malawian associations, rather than creating a tobacco marketing business, were formed to help collectively address problems and access services to solve those problems. The focus from the start has been generating benefits to farmers, rather than developing association businesses. For example, rather than entering the transportation business, SADP developed associations and helped them negotiate transportation agreements with private-sector transporters. It also has focused on overcoming corruption and mismanagement in other systems designed to serve farmers. Ironically, one strategy used was not to finance farmers clubs or associations; rather, SADP provides technical assistance and links associations to sources of credit when necessary. Thus, the associations are financially independent and managed like a business from the start. SADP’s main inputs are substantial organizing and training, broad sector-level advocacy, and providing market source and price information in regular bulletins. SADP also keeps a comprehensive database on tobacco market trends and smallholder production. To help clubs get organized, SADP provides a package of training and follows up with significant field presence to provide ongoing advice. As the plans for privatization and liberalization developed, SADP represented smallholder farmers at meetings of donors, government, and the private sector.

SADP is a labor-intensive project with 83 staff and has received donor funding of $3 million. Yet, the cost per member is only $75, cumulatively, and $12.5 annually. All eleven associations in existence in 1997 were profitable with an average income-to-expense ratio of 2:1 and a modest joint profit of $15,000. The program estimates that income for members using the transportation service (20 percent of members) was 13 percent above that of nonmembers, and input costs for those accessing input services saved 9 percent.

The program is also unique because, by keeping operations simple, focusing on a basic commodity crop, addressing key structural constraints, and developing a strong farmer-focused approach, SADP has achieved significant scale and impact in a short time. In addition, SADP has created an infrastructure for the long-term empowerment of rural farmers in Malawi. Challenges include scaling up to further to meet the national demand and developing farmer flexibility to diversify quickly out of tobacco and into other cash crops in response to market demand.