Charles Spinosa and Maria Letelier are partners in Market Expansion Partners, a consultancy that helps companies enter markets previously declared impenetrable, saturated, or unprofitable. It grew out of Business Design Associates (now Vision Consulting Ltd.), a consulting firm founded by Fernando Flores. Market Expansion Partners' clients include Cemex, and it helped develop the blueprint for Cemex's Patrimonio Hoy program. Changemakers' Kris Herbst interviewed Maria and Charles in mid-September 2002.

Changemakers (CM): Cemex's Patrimonio Hoy program is growing rapidly, but I noticed last month that many people had dropped out of the program in one Guadalajara neighborhood. A local resident told me that her neighbors were not making much progress in their housing construction projects as a result. Does Cemex need to do more to retain customers and maintain the program's momentum?

Maria Letelier (ML): Definitely. I think customer retention is important. This is a difficult market to retain customers in, and to have customers complete the whole project. There is far too much temptation [for potential customers] to spend the money on something else, and to feel trapped into a contract.

There are pressures from friends and family that make people feel as if they are not showing solidarity, as if they are trying to separate themselves from others in the community. No matter how excited people are – there are segments here.

We have found that support groups are extremely important for solving the issue of customer retention in lower income communities. People must give each other ongoing motivation, and listen to each others challenges in keeping with their goals. Any kind of grassroots community development or local partnerships that facilitate these support groups and local networking make a difference in retention.

In the case of CEMEX, they have been able to continuously engage people to build entire rooms for 70 weeks. This is quite an accomplishment. Yet there are particular segments with which it is more difficult to achieve this kind of retention.

CM: You are saying businesses must recognize that low-income customers fall into different segments, not all of which consist of people who are highly motivated or equipped to participate in this type of program?

ML: Segmentation is critical. The "masses" are not all alike. People are not homogenous – it's never the case in any market. The lower-income community includes people who can be making 1,000 pesos per month and people who can be making 4,000 pesos per month. This economic difference sometimes leads to very different financial practices.

Then you add qualitative variables to this economic variable, such as: certain people are more organized than other people – they have more practices for organizing themselves and their families than others. Some people consider themselves to be more magnanimous: part of their role in the community is to be the person who is helping the rest of the people in their immediate neighborhood – the rest of their family members – to somehow achieve patrimony and to succeed. Some people feel a lot more desperate and resigned – they've given up and they just don't want anymore.

All these segments are very different, and you can't address them all the same way. CEMEX has learned how to deal with these subtle differences, and they are way ahead of any other company I have encountered that is targeting the lower-income communities. They tracked customer behavior and were able to identify the group that most gravitated towards their offering. And they realized that they needed to establish more support for those that needed it – those that did not fall into the core target group.

CM: And there are other segments that need more attention, and a different approach? What would be an example?

ML: The people that are much more resigned; they're making less money per month and they don't have as many social networks. They feel a little bit more on the outskirts of the community – they don't even really have much social interaction with the others. Somehow they wound up in Patrimonio Hoy because somebody told them about it, and they give it a chance. But after awhile they don't feel like they have the motivation to go on.

CM: It is clear that engaging the low-income market takes more time and resources than other markets. Doesn't this require a strong commitment from top management?

ML: If you don't have somebody within the company who really stands for this – creating this new market and making the investment in the long term – it can produce all kinds of disasters internally. It is not just a matter of creating a division and keeping that division totally isolated, and not having somebody high up enough in the company [to champion it], then all kinds of politics emerge . . . because this business is not going to give you the same kinds of returns as other kinds of businesses in your portfolio, from a net present value perspective. On the other hand, it is appropriate to have the business operate in some separate way so as to have space to freely innovate.

One of the dangers for public companies is that these kinds of businesses will get killed off because they are not meeting investors' expectations for return on investment. These kinds of businesses are organic – they take a long time to grow. They may lend themselves more naturally to a private company where the owner may have the commitment and vision to make something happen and is willing to do whatever it takes to make it happen. There really isn't that much room for those kinds of convictions when you're dealing with a public company. Things have to be justified to investors.

CM: I understand that to meet investors' expectations for growth, you – as consultants – have been encouraging Cemex to start a foundation in order to raise funds for Patrimonio Hoy, and to partner with government and social sector organizations to help raise funding.

ML: In our white paper, we documented best practices. Among them, we found that the Grameen Foundation helped the Grameen Bank grow faster [ed.: the Grameen Bank of Bangladesh pioneered the practice of making microcredit loans to poor people, enabling them to become entrepreneurs]. This is one way to go.

CM: Do you think government should provide some support?

ML: Yes, I do.

CM: But in the social sector there is tremendous distrust of business, and this rift is especially wide in Mexico. How can business bridge this gap when it is seen as exploiting the environment and poor people?

ML: When people in the social sector do not see companies taking a stand on issues that are politically sensitive, than there is this type of suspicion. Some companies do not want to say too much for fear that their claims will be used against them later. However, not taking a stand about what they are doing leads other constituencies to fill in the gaps and invent their own stories. In the end, the company is most affected because it looks like it is trying to hide something, and this sends out a message of exploiting people.

[Another] big pitfall . . . is that people can publicly take a stand against you and say that you're taking advantage of this community . . . . Social activist groups will take a stand against you . . . maybe because they really believe that this isn't good for people in the community. Local government sometimes will take a stand against you.

If you are going to enter this kind of business and be present in lower-income markets you need to have a voice politically. You need to be organized and have people taking care of that: writing white papers, giving speeches, finding ways to get government and social activist groups to see that what you are doing is worthy. It's easy for social activist groups to succeed in showing people that what you are doing isn't that beneficial because they can just get a few distrustful customers that feel envy – or have been hurt by your business for whatever reason – to speak up. That's always going to be a threat.

CM: Some of Cemex's competitors and social activists have criticized Cemex by saying they charge high prices for cement in Mexico and make excessive profits. What do you say to people who criticize companies like Cemex by suggesting that the best way to help poor people is to reduce the price of their products so they are more affordable?

ML: My view is I would rather see companies spend money on programs like Patrimonio Hoy than on reducing the price of the product itself. I don' think that price reductions will help make people more productive. And creating systems, like Patrimonio Hoy, that help make people be more productive in the long term requires lots of resources on the part of the company. I believe the media should also note that tremendous amount of time, energy, and resources that companies such as Cemex put into introducing services like Patrimonio Hoy.

CM: What justifies business involvement in social development? What benefit is created by such involvement that isn't provided more effectively by social sector organizations and government?

Charles Spinosa (CS): First of all, you can spread the money that's going to be spent on social welfare much further if social agencies work with these kinds of businesses. Your social welfare dollar will buy you a whole lot more, and I believe it probably will be more effective. I think the Grameen Bank model is a very good model there. [Ed.: the Grameen Bank's board consists of three top government officials, nine elected borrowers, and founder and CEO Muhammad Yunus.]

For example, I think building homes in the poorest sections of Mexico using the Cemex program and some dollars from SEDESOL [Mexico's federal social development agency] would get many more houses built more cheaply. [Ed.: Letelier and Spinosa's white paper "The For-Profit Development Business", p. 35, finds that combining Cemex's Patrimonio Hoy program with SEDESOL's VivAh subsidized housing program enables the same government money to serve three times as many people and leaves them with higher home equity than either program alone.]

The lower-income people on the ground become wealthier and better housed, faster. I think that's the first and primary benefit for social organizations when they link with businesses.

CM: Is there some particular thing that businesses do better than social sector organizations and governments?

CS: The one thing that these companies can do – that I believe most social entrepreneurs and social service agencies cannot do – is train people how to engage in exchange transactions well. They can also train people in how to engage in planning for exchange transactions well. In my view, these are the two things where social service organizations tend to be weak because they are not engaging in genuine exchanges with people.

CM: Explain what you mean by engaging in genuine exchange transactions.

CS: One of the things that's important is the trust you need to have for exchange. People are always going to feel cheated if they aren't learning how to engage in exchange transactions well – with confidence, with adequate planning, and with an adequate understanding of what to expect from the person with whom they are exchanging.

There is a simple case of this – let's take the Cemex example. Generally, lower-income Mexicans tend to look at the world in a patron-client way. They tend to look at people with whom they are holding exchanges as potential patrons, so they expect the loyalty and care of patronage. For example, they expect the patron is going to take care of them when they don't have the money to pay for something.

Well, that's not part of an exchange relationship. If you do expect it's going to be part of an exchange relationship, you're going to feel cheated and then you're going to approach exchange relationships with fear – they will not be your first choice of relationship. You're not going to want to explore how to do them better because of the fear, resentment and bad feelings. This prevents lower-income people from using the experience of engaging in exchanges to make their lives better.

One of the problems that social workers and social organizations have in Mexico, and in other places in the world, is that they end up appearing like patrons. They end up appearing like a member of the traditional community and it is very hard for them to get out of that – many times they don't.

Pairing up with businesses enables them to develop the kind of identity they want . . . just as a business is developing its identity: forming a relationship with people as a transactional equal – a social worker can become the type of teacher we have in the first world, rather than a kind of patron or wise man that you have in other communities. This gives the social agency and people employed by it a better ability to work with people.

CM: How do businesses help create an understanding of successful exchange relationships?

CS: There are many ways you can do this. If I am able to set-up an exchange where I buy the first washing machine or television, etc. in my community, then I can let other people use it and charge them money – and I have exchange relationships with them. That's part of the vision of [Grameen Bank founder] Muhammad Yunus. That's part of the vision I think that also underlies the work we are doing with Cemex.

The idea is to get people to get things that are valuable so then they can be productive with that value. But in order to do that, they need to be able to engage in exchange relationships.

CM: What other benefits can the business sector offer the social sector to help promote development?

CS: Businesses have had to develop certain skills over the years to learn how to overcome barriers when they are launching something – when they are bringing something to market. With Patrimonio Hoy, we saw all of these barriers somehow got addressed, and will continue to be addressed – whether it was a logistics barrier or a cultural barrier.

Businesses are always looking at ways to improve things to make them work better. That's what we found in Mexico – that SEDESOL [Mexico's Ministry of Social Development] was interested in working with Cemex in order to learn these kinds of skills. When we first approached SEDSOL, they were running into a lot of the same impossibilities and resignations about what could be done in these markets, in terms of housing, that we had encountered earlier. And we had already figured out how to overcome them.

ML: The people in the social sector we have interviewed in Mexico found that Cemex had much more up-close knowledge of the community – believe it or not – much more information and learning. They also saw that Cemex had a lot that they could teach SEDESOL in terms of setting-up an effective organization that works.

There are a lot of barriers to entering these communities – for example, logistics plays a huge role here. When you're going to the outskirts of communities, Cemex has all kinds of skills that SEDESOL lacks – such as having a great logistics organization and technologies. In short, because of the pressure to succeed against competition, large companies have invented many best practices and ways to succeed where other organizations have not.

CM: Is there hard evidence that private sector programs like Patrimonio Hoy are creating social benefits?

ML: With Patrimonio Hoy, we found that no matter how many rooms people planned to build before – they may have planned to build one or two – now they plan to build at least three more rooms. They could envision a bigger house than before as a result of the [architectural and design] technical advice they had received from Patrimonio Hoy.

Before joining Patrimonio Hoy, at least 18 percent of people hadn't built anything in more than ten years, and they had no intention of building anything. Yet now they were building with Patrimonio Hoy. So now we were able to say that 18 percent of the community that didn't have intentions to build are building – non-active builders became active.

Cemex customers also were able to see that they were actually saving money on this. Those who were trying to build actively were now spending less overall than they had been spending.

CM: And what's in this for the business sector? What do you think of University of Michigan Business School Professor C.K. Prahalad's estimate that two-thirds of the world's population are poor – four billion people – yet they represent a neglected multitrillion-dollar market?

ML: I definitely think there is a large customer base that is often ignored. Most businesses are not physically present in these communities – it's mostly Coca Cola and companies that are known for having trucks and things that can get to these areas, and can organize themselves to get to there. Definitely, I think there is a potential market there that people ignore.

The assumption is that most people can't pay [for goods]. But what we found is that people are willing to be customers – they do want to get ahead. And if you find a way to sell to them in a way that fits with their lives, it's possible.

CM: Is this a multi-trillion dollar market opportunity?

ML: Many economists say that you can't necessarily go by the number of people in a country because per capita income is so low when you are assessing whether or not you should go into a country. But it's clearly a large market. The reason you can't estimate its size so clearly – whether it's exactly a one trillion or one billion market – is because it depends on how committed a business is to creating that market.

CS: I'd be happy to go along with Prahalad's arithmetic, but I also share Maria's skepticism about it. It involves measuring productivity that is not normal productivity – this is not a cash market. People are involved in various kinds of gray market activities. These people live casual lives, economically.

But I think the key here is that whatever the size of the market is now, it can grow enormously through these kinds of interventions into these economies, as for-profit development businesses work with the customers. The number of people in the market is huge no matter how we calculate their buying power.

CM: Does developing ways to sell goods to low-income communities provide strategic advantages to businesses that go beyond expanding their customer base?

CS: Yes, in selling those goods, they can break out of the strategic convergence that is going on in most industries. We find people in an industry are assuming there is only one major ground of competition.

For example, if you look at airlines – other than Southwest Airlines which has a different model than its competitors – you can see them all competing to have certain kinds of meals, waiting lounges, frequent flier programs. It's hard to distinguish between United, American, Continental, etc. on how they are competing for your service.

In financial services: convenience, convenience, convenience is what they are offering the customers. And how are they offering profits to their shareholders? Consolidation, consolidation, consolidation – economies of scale, all the way. You'd be hard pressed to find banks that are not in that mold.

By and large there is enormous convergence on the competitive strategy in any industry – they are going after the same lucrative customers in the same way. That's one side of the convergence. The other side of the convergence – the other side of your business model – is they are making profits in the same way

ML: What we are saying is that often most companies are competing on the same basis, and there is little room for differentiation. We've seen it time and time again. If you look at the case of Cemex, there were two obvious responses to the need to differentiate itself in the lower-income market, once it recognized that was a valuable market to gain share in.

On one hand, it could make things easier and more convenient – this tendency to assume that ease and extra convenience is the response to everything. Many businesses take convenience to be the ultimate value that customers appreciate. It's an obvious truth at this point – they all try to make things more convenient.

So Cemex came out with a smaller cement bag. But that didn't do it – it seemed like it would be more convenient, but it was not a hit.

The other way of differentiating is to try to appeal to people in some sticky way. "Stickiness" is a word that has been in for the last five years: being emotional appealing in a sticky way.

In Mexico, the obvious response is to try and brand your cement as soccer, which is what [Cemex competitor] Cruz Azul did. It had some success, especially in Mexico City, where the Cruz Azul soccer team is particularly loved by their fans – and that happens to be where the Crux Azul cement brand succeeds. But nonetheless, it's not knocking the socks off people. It's not something that is changing the way customers are living in Mexico.

In any given market category, at any given moment in time, there are always certain drivers that seem to be the obvious ones that companies should appeal to. Focus groups and quantitative research are conducted in ways that tend to extract this information from people, as if it is obvious. Obviously, we all want more convenience banking, faster Internet connections, better broadband – that's going to make our live easier. But companies normally don't really have a way of listening beyond that.

There are some exceptions, like IDEO, the Bay Area firm that designed the Palm Pilot and a lot of other products where they do customer observation and use more innovative techniques. So, there are companies that realize that listening for the obvious is not necessarily the way to go – that there are other bases for competition if you understand your customers. But for the most part, I would say companies converge on a certain set of attributes or features – one or two values.

CM: What is a good way for companies to differentiate themselves in low-income markets?

CS: In marketing, there is a lot of lip service given to the claim that it is not enough anymore to create innovative products. What you have to do is get into the way the customer uses the products and be a partner to make the customers' use and experience of the product easier. This is emerging as a common sense. (For example, see "Three Questions You Need to Ask About Your Brand," Harvard Business Review, Sept. 1 2002). And I endorse that view.

But I think you can't just look at what makes customers feel the product is more convenient, or what makes them feel happier. You have to look at how the product plays a role in peoples' lives to make them more productive – to help them do the things they really care about in life.

And that is certainly what you have to do in these lower-income markets. If you learn how to do it in the lower-income markets, you are also going to learn the basic techniques for doing it in middle-class markets and other markets throughout the world. I believe that's an important emerging skill for most companies.

ML: Part of what Charles is saying is that the focus can't be just on the product – the focus has to be on the entire offering. When we work with companies, we always include things like sales force training. We find we need to intervene in different areas like customer contact training because this is part of the offering, part of the experience that Charles is talking about. It's part of getting the relationship right.

In cases involving low-income communities, like the case of Cemex, we found that they were aware that they had to go beyond introducing small cement bags – easy, small cement bags that people can walk home with because they don't have money to own a truck – that wasn't going to be enough. We were fortunate to have a client who understood that they had to offer them a whole system.

CM: This is a case where the company didn't anticipate that the customer would place a higher value on owning large cement bags, above convenience, because they are a status symbol in the community that enhances a person's reputation or "social capital." You have been helping companies understand how traditional values, such as this, can conflict with values they hope to promote, such as accumulating personal savings and making investments in better housing.

ML: We believe that looking at how products fit peoples' identities – and how people seize identities – is a creative process that leads to these kinds of insights. A lot of people have value conflicts, not just lower-income people. The skill of identifying value conflicts is something that is applicable to all markets.

CS: We call this cultural innovation. First, it means looking at people at the level of their values, not at the level of their immediate need; and then looking for where their values are in conflict. Anybody who is living in a society where progress matters is going to have conflicts in values simply because of that progress.

So then we say: if you provide a product for people to resolve their value conflicts, you are engaging with them in a very important part of their life and it's going to enable three things. First, it's going to enable them to be more productive. It's going to enable them to have better relationships with people, both in the productive domain and outside the productive domain. And third, they are really going to care about someone that helps them.

You are going to build a better kind of customer loyalty and relationship, based on what they really care about – what they are doing in their life, as opposed to on grounds of simply satisfying a need. And businesses tend to focus on satisfying needs, or unarticulated needs, without looking at how customers value them.

So a business that satisfies my need for sweet things, say, for ice cream, is going to find the best ice cream to satisfy that need without considering whether I feel ashamed of having this need for ice cream [because I want to lose weight]. I believe the more powerful way of approaching consumers is to take into account not only their needs, but the way they value their needs. That's what value conflict work does.

We believe it is critical to do it for poorer people simply because you have to make them more productive, so they can pay for your stuff. That's a very simple thing.

CM: How do you resolve conflicts between traditional values and more modern values?

ML: People need to be able to engage in exchange relationships, but at the same time they need to increase their symbolic capital in the community. It's not either/or – we talk about "bridging."

For example, the tendency is for U.S. companies to try to make things extremely transactional, and then add a little bit of emotional appeal on top of that, and that's enough. I think companies are stuck on making things as transactional as possible, and a lot of times those transactions are backed up by a lot legal forms and claims with small writing that people distrust. It makes the whole thing look less than transparent.

Often the misunderstanding is that people just need to have some kind of great advertising and emotional appeal showing families together and a lot of warmth – and that's enough to hook lower-income communities, especially when you are talking about non-American lower-income communities. What we're saying is, "No, you need to take steps toward teaching people exchange relationships, but you also need to participate in increasing their symbolic capital or social capital. For that exchange value to mean something to them it also has to be aligned with what they already understand is valuable."

You need to create trust in order to do business in these communities. You need to do things that create trust in the community and get spread by word-of-mouth, because you listen more to your friend in these communities than you listen to the small writing on paper.

CM: So building a sense of community is more important in low-income markets than enhancing an individual's ability to conduct transactions?

CS: Companies tend to think of consumers as individuals. But traditional communities tend to be groups. And if you don't deal with the envy factor on the basis of community – especially in most developing markets, let's say the ones around the Mediterranean and in Latin America – you're dead.

I think most companies are not set up to do that. I don't think it's that hard to do, but I think they have don't have the cognitive tools or the people to do it right now.