Value Creation for Low-Income Homebuilders
In the second blog in the series, the authors focus on the importance of using a retail distribution market systems lens to gain insights into the business realities of selling construction products and services to low-income customer segments. For example, low-income customers buy in smaller lots and often have important considerations related to decision-making, coping strategies, and trust that require specific business strategies and tactics. The blog examines a few examples from TCIS’s work in relation to how they applied systemic thinking related to retail distribution to improve housing outcomes for incremental builders.
CEBU CITY, PHILIPPINES (04/06/2022) - TITP store employee shows inquiring customers a sample of how GreenAntz Builders eco products are installed inside the store in Cebu. The Terwilliger Center’s partnership with Green Antz focuses on introducing new affordable and quality eco-friendly building materials to the market. The partnership also focuses on developing innovative route-to-market approaches in making these products accessible to low-income families, so they can build stronger, resilient and decent homes.
Over the past five years, the Terwilliger Center for Innovation in Shelter has partnered with many manufacturers and building services providers, articulating the value they can create for low-income consumers (incremental homebuilders is our preferred term in the housing system), and working with them to manage the risks of selling to an unfamiliar market segment.
Creating value for incremental homebuilders is one of the most effective ways to create inclusive housing markets. This idea is one of the most powerful findings from our housing market systems development work. Targeting the retail-distribution function is a good place to start. (By that we mean the combination of firms that produce, transport, warehouse and provide goods and services to low-income homebuilders).
Why retail-distribution? There is a growing body of evidence that for markets to evolve in ways that benefit disadvantaged communities, the retail-distribution function must deliver stronger value to low-income consumers. In doing so, it can become a key business-influencing function within the market system.
But for this to happen, retailers, distributors and manufacturers must think beyond a trading relationship (i.e., product for money). They must also create value, beyond the product itself, to cater to the largest retail segment. Through trial and error, market players figure out how to create and deliver the housing outcomes low-income homebuilders want at a price that is affordable to them. That is the “value” we are looking for. We hypothesize that market players can accomplish this by focusing on minimizing and mitigating risks for incremental homebuilders.
This idea ties back to our previous blog on the centrality of the concept of risk management. When low-income consumers understand that they must shoulder the burden of most, if not all, risk in the home construction process, they will default to the strategies that have served well elsewhere: word-of-mouth referrals, direct experience, and community social capital. Under such circumstances, these consumers may choose high quality housing products, services, and advice more by accident than design.
Positive change will be evident when firms go beyond a transactional mentality of pushing products and move towards creating value for incremental builders, which can create competitive pressure. When firms develop a loyal mass market customer base by creating value for them, other firms will also begin to recognize the influence of this market segment and will adjust their business plans accordingly. Thus, the market system becomes more inclusive, and firms have a direct stake in continuing to pay attention to the voice of low-income homebuilders. In turn, the housing system empowers homebuilders to demand products and services that meet their unique needs and wants, creating a virtuous cycle of increasing empowerment.
These mass retail strategies often employ a portfolio of value-adding tactics that green technology manufacturers, distributors and retailers can use to build a long-term relationship with incremental builders. Three of the firms we have partnered with shed light on how a focus on value creation can pay off for both the materials manufacturers and low-income consumers. All three are the outcome of green innovation in the Global South.
Minimizing risk in the construction value chain in Peru
Most households in Peru have few options other than unskilled laborers to build their homes. With certified builders constructing only a portion of the housing stock, 12.8 million Peruvians (40% of the population) live in homes of dubious quality. Even households that formally acquire their land through urban developers that sell registered plots with basic water and sanitation services can end up building poor-quality, informal homes. This leaves them with an asset they cannot use as collateral for formal financial services, as well vulnerable to hazards, such as earthquakes.
In response, the Terwilliger Center developed Guardian Constructor (GC, Trusted Builder in English) to boost the quality of incrementally constructed homes while minimizing risk in the construction process for product and service providers, as well as for middle- and lower-income households.
GC collaborates with urban developers – Menorca being one of the principal players - which sells formal land plots with water and sanitation services to middle- and lower-income households but does not assist with home construction. GC offers architectural design and construction services to Menorca clients via GC-branded construction SMEs (Small and Medium Enterprises). To help households pay for design services and incremental construction, GC offers financing by onboarding financial institutions who can offer suitable financing products. Lenders have agreed to join GC because of the strong brand of Menorca as a GC partner and were excited by the demand generation of low-risk clients.
GC is meant to be an open-source network that on-boards firms at every stage of the construction process and facilitates connections through the GC network. GC offers support as firms jointly seek to orient their business models around the needs of lower-income households. This includes creating a commercial hub with a customer relationship management system to oversee potential clients. The hub also provides business advice to the SMEs on how to formalize operations, access financing to grow, and improve their margins; all of which incentivize them to join GC. The result is households who receive access to quality design and construction services and build higher quality homes.
Making high-quality solar energy systems attainable
Good-quality solar systems typically carry a higher price tag. Even though they often offer cost savings over time, a higher initial cost makes them inaccessible and not attractive to low-income consumers. While low-income homebuilders in Kenya had access to solar products, they were often of mediocre quality and difficult for households to return when faulty.
SunTransfer Kenya Ltd had, since 2009, pursued its mission to bring high-quality, off-grid solar power to rural areas. By partnering with the Terwilliger Center, the firm was able to develop a business strategy focused on lower-income clients, which entailed initially opening three community based solar centers in Kenya.
We subsequently worked with SunTransfer to extend this process to train agents who could bring SunTransfer’s products directly to consumers’ homes. The shift to the agent model was based on the prohibitive cost of setting up the solar centers. One solar center at the time cost U$5,000 to set up and required at least three staff. Tweaking the model by recruiting and training solar agents and attaching them to existing financial institutions enabled SunTransfer to expand its market reach and grow sales through a cost-effective model that offered value to households at low operating expenses.
This was a win-win-win, not only for consumers and for SunTransfer, but also for the financial institutions that could then offer renewable energy financing. One of Kenya’s leading microfinance institutions (MFIs), Juhudi Kilimo, streamlined its loan process to finance SunTransfer solar panels because the company offered a quality-guaranteed product with a one-year warranty. The attraction to MFIs was also because of the relationship SunTransfer was forming with communities. In a sense, SunTransfer became a 'community gate keeper' and MFIs were keen to leverage on the already existing outreach networks established by SunTransfer.
Now more rural Kenyans can have access to high-quality renewable energy technology and comes with easy repairs and replacements. A simple financing model helps families get a system quickly with affordable payments.
Making homes longer lasting and more disaster resilient
Filipino firm Green Antz was on the Terwilliger Center’s radar because it was a social enterprise with values that aligned with ours, and because, since 2012, it had been a successful business converting plastic waste into construction products. Founder Rommel Benig had wanted to bring the company’s products to the low-income market segment but could not get initial traction and instead partnered with one of the country’s largest construction companies, Ayala.
A second chance to create value for low-income consumers came when the Terwilliger Center offered Green Antz support. We provided ideation workshops, product development, market validation, prototype development, and go-to-market approaches.
The Philippines team helped Green Antz pivot its marketing content so that it resonated with the low-income segment and helped the company test and rebrand how it communicated with this consumer. As an example, one retailer, Cebu Overseas, installed a mockup of Green Antz ’s product in its store, giving customers the opportunity to see and feel the product.
Since 2019, at least ten hardware stores and three social-housing developers have started using Green Antz products as an entry point into affordable housing. Green Antz is also exploring how to start bundling its products offered in hardware stores with design and financial services. And over the past two years, Green Antz has not yet increased their market price (even though there is already an evident increase in input materials) as they wish to reach increasingly lower-income segments.
All three firms have directly created value for low-income homebuilders, but their value goes further than that: they show it is possible to engage with this market segment successfully and profitably. They are leading the way, and in the next stage, we hope to see other market actors crowding in behind them.
Author: Sheldon Yoder, with contributions from Yoselin Huaman, Gema Stratico, Masua Mutua, Al Francis Razon, and Monica Rashkin.