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Thursday, July 22, 2010

Spotlight on Microfranchising: A Look Into the Future of Social Enterprise

By Shital Shah

This post is part of a series that introduces iuMAP, a web-based social enterprise directory developed by Ayllu and launched in media partnership with NextBillion. The purpose of the series is gathering feedback from the NextBillion community as the map unfolds and to share some of the information we've collected and analyzed. You can help triple iuMAP's size by submitting social enterprises and giving feedback. You can also catch up on the series reading the first and second entries.

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In the previous posts we introduced the iuMAP and discussed the challenges of scaling.  Scaling is important for social enterprise's purpose of sustainability, profitability and impact, and has been discussed many times before.  For the next few weeks we will focus on microfranchising because it is a model used increasingly by social enterprises as they scale. 

There has been some great discussion of microfranchising recently (such as this Stanford Social Innovation Review article, co-authored by NextBillion ally David Lehr) and this series will add to it, providing an overview of different types of microfranchising, profiling enterprises that are adopting this model, and providing insights and information for both investors and those looking for funding.

On Microfranchising

Microfranchising is a way to distribute products and services through a business the size of a microenterprise. Microfranchises are demand driven and tend to have local buy in because they employ community members who sell these products/services to other community members.  The standardization built into microfranchise in terms of business processes and branding among others, is helpful for scaling purposes since it makes models replicable and adaptable to new locations.

However, growth and expansion is not guaranteed - while a solution may work in one location, expanding to other areas may test the limits of standardization, as operating in many locations can require a level of systematization that is difficult to achieve.  With microfranchising, local context is extremely important; there are many key ecosystem elements to the success of a business model, so transporting a model from one place to another requires not only standardization but also adaptation. 

Microfranchising is frequently compared with microfinance, but they actually fit in different baskets.  A microfinance institution is a stand-alone business whereas a microfranchise is part of a larger business (the 'franchisor') and is used as a distribution channel.  In this way microfranchising is more like group lending, a common tool used in microfinance.  Group lending is a way to address the challenges of making loans to people with no collateral.  Similarly, microfranchising is a way to solve the challenges of distributing products at the Base of the Pyramid. 

Actually, microfranchising can act as a link between social enterprises and microfinance institutions; community members often need loans to buy stock of beneficial products / services, or to start a microfranchise. Milaap and Frontier Markets are two startups working on making product loans happen.  Interestingly, microfranchising may actually help microfinance institutions overcome their own scaling challenges, which you can read more about in a Beyond Profit article by Ayllu.

Today, the social enterprise sector is still experimenting, confirming, and growing.  Microfranchising is so new that a lot of questions remain unanswered, which is allowing the concept to generate healthy debate.  Deborah Burand of CGAP recently provided a good overview of the existing gaps, including lack of knowledge sharing and issues with financing, regulation, and technology (her team at the William Davidson Institute also just completed an Omidyar-funded study on the topic).  In addition, it is not yet clear which kinds of social enterprises best fit with microfranchising: which products or services can easily and profitably be distributed by community members?  In which cases is another distribution strategy going to create more wide and deep impact?

Definitions and points of contention aside, what does microfranchising look like in action?  At Ayllu we stay in touch with social enterprises about how their business models are evolving.  We try and understand what's working and how it is structured, so we're digging deeper into the many forms microfranchising can take. We start below by briefly introducing the schemes we will discuss in more detail in the coming weeks.

Business in a bag: In the same way the cosmetic company Avon provides a full kit to equip any interested woman to sell makeup products, social enterprises can provide a standardized process and training to allow ordinary members of communities to act as direct-sales microentrepreneurs.  These entrepreneurs sell products within their community mainly through organizing sales events or going door to door.  VisionSpring, the popular affordable reading glasses provider, puts this in action through vision entrepreneurs who conduct basic screenings and sell glasses.  Living Goods involves community members who sell affordable health products door to door to low income households.  Armed with the proper training and equipment, community members are empowered to become the owners of their own microbusinesses.

Conversion franchising: Conversion franchising can be done in two ways: 1) absorbing existing businesses into a franchise network (CareShops, CDI  Lan), or 2) inserting a microfranchise strategy into an existing business, as Nuru Lights does by training shopkeepers to operate its pedal-powered light charger.  Building and managing a microfranchise network can be labor intensive, but distribution may be easier because it takes advantage of established microenterprises with established customer bases.  

Infrastructure based:  Social enterprises can also scale up by creating franchisees that use machinery or other forms of capital.  One example again is Nuru Lights, which sells solar lights in East Africa and trains local shopkeepers/microfranchisees to run rent-to-own pedal powered machines to charge them. Sarvajal is another example, selling purified water in India through microfranchisees who run rent-to-own purification machines.  By providing small infrastructure installments, social enterprises can provide services in all corners of a country.

Agent networks:  Using an agent network to expand a business model is especially common for sectors such as mobile banking.  Organizations like Mobile Transactions, a mobile based money transfer service, and Esoko, a mobile service that provides current agriculture market data via SMS, use agents as a key part of their model.  In these models, the size of the network is a key part of the businesses' value-add (market data collected from more locations; more potential locations to transfer money to).  Agents are existing community members that either sell products or provide information for a business.  Since agents are usually already involved in a business or industry, they are well placed to link with a social enterprise and extend their product offerings.

The next post in this series will go in depth about businesses in a bag, so be sure to look out for more insight on how that form of microfranchise works.  To learn more, you can find resources on microfranchising here

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