Add This Ingredient to Your Social Business: A Low Profit Margin

Add This Ingredient to Your Social Business: A Low Profit Margin

A woman cooking in her former home in Oaxaca, before she owned a MIA house

When you are tasting a dish for the first time, it’s a plus to discover new and varied ingredients that go well together. This diversity is found in the rich food of Oaxaca, in the south of Mexico, including “hoja santa” (a local green leaf), “pasilla chili,” chocolate, and chapulines (small grasshoppers). However, it is not easy to find one single ingredient that defines this cuisine.

The same is true of social enterprises in Latin America and the Caribbean: they have many characteristic elements, but it is not easy to choose the single one that defines them. The most obvious appears to be “improving the living conditions of clients with limited incomes.” But we have learned something else from the social enterprise Mejoramiento Integral Asistido SA de CV (MIA) of Mexico, which builds houses in Oaxaca and in a dozen other Mexican states: a social enterprise must have an additional aspect, equally necessary but not so obvious—a low profit margin.

In the years since its foundation in 2009, MIA has built and delivered 15,000 houses for families earning less than the equivalent of $625 a month. These families commonly lived in substandard housing before owning a house built by MIA. The MIA houses are mainly funded by a program for construction of low-cost housing run by Mexico’s national housing commission (CONAVI, by its Spanish acronym) and other local public and private stakeholders. The stakeholders also include the future owners, whose minimum contribution is labor: preparing the ground and transporting building materials. Every MIA house is made of climate-resilient materials, has an attractive design that is adapted to the local environment, and is built in a rural area where traditions such as Oaxacan food originated.

You can learn more about the houses and the areas where MIA works by watching this video.

Guillermo Jaime, founder and president of MIA, has said that a low profit margin is an essential element for an enterprise that seeks to create goods and services that benefit society as well as generate financial profits. According to Jaime, “a company is social when it is able to offer commercial solutions to satisfy social needs while obtaining a low margin.”

For Jaime and MIA employees, who number just a few more than 20, their profit margin that is often less than 8 percent—before interest, tax, depreciation and amortization—is what allows their housing solutions to be scaled up. The final price of houses offered by MIA is about $5,000, which allows many poor Mexican families to buy them, with the help of a combination of subsidies from the federal government and state governments. This business model has allowed MIA to increase the number of houses that it delivers annually from 1,000 initially, to about 3,500 today, while at the same time reducing the delivery time by one third and maintaining the same standards of quality. Achieving these volumes, at affordable prices, and providing quality service and efficient delivery, is also attractive for the stakeholders that co-finance the houses, which have limited funds and ambitious goals.

Efficiency not yet an emphasis for social enterprises

Evaluating the performance of a social enterprise is challenging. The U.K. bank NatWest has a ranking of social enterprises called NatWest SE100, and recently awarded prizes to the best social companies in that country. This ranking primarily emphasizes social impact—the positive impact on the socioeconomic conditions of the people receiving services. However, efficient management, which makes it possible to maintain low profit margins, and in the end, offer a more affordable product, is not an explicit variable in the ranking.

Following a philosophy of maximum efficiency, MIA defines itself as a logistics services business. Its services include
Negotiating and purchasing climate-resilient and low-cost materials in large quantities from technologically advanced suppliers, for example, fiber cement sheets and high-strength ceramic blocks;
Managing complex logistics to deliver materials to dispersed areas; and
Building different models of housing in a short period of time, by sending its construction crew to beneficiary communities.
These processes are only the final steps in MIA’s business model. Earlier on, MIA manages a multidimensional process with many players. In communities where the houses will be built, MIA leads a dialogue to identify and select beneficiaries, assess the financial needs of each household, and train the community in their contribution to construction of the houses. Separately, MIA manages a process of fundraising that involves coordination between public and private institutions and end users.

The low-profit-margin strategy is crucial to this model, as it allows MIA to take advantage of economies of scale and seek high sales volumes in order to be profitable and sustainable. This allows MIA to meet its ultimate goal: generating a greater social impact by making it possible for more Mexicans to say: “This house is MIA” (“mine” in Spanish).

MIA’s model addresses the need for better and safer homes for the most vulnerable populations in Mexico, many of whom live in rural areas. Among these families, 28 percent (almost 9 million) suffer some form of housing deficit: overcrowding, deterioration, or other suboptimal conditions. The annual demand for MIA’s type of low-cost housing solutions is estimated at 150,000 houses per year, and only 21 percent of that is being supplied. However, with more social enterprises like MIA, and the continued support of Mexican government agencies CONAVI and the federal institute for workers’ housing (INFONAVIT), by its Spanish acronym), the lives of many more families are expected to improve.

This solution can be replicated in other sectors and countries in Latin America and the Caribbean. If that happens, we recommend adding a new ingredient to the business model: a low profit margin.

From the Multilateral Investment Fund Trends blog