Photo by Mario Mancuso, Used under Creative Commons license
If you’ve read this blog for a while, you are probably somewhat familiar with the principles in the excellent When Helping Hurts, by Brian Fikkert and Steve Corbett. In summary, this book reminds us that we are to serve the poor with an attitude of mutual dependency, coming alongside as friends versus giving a handout from a position of superiority. We are to focus on development versus relief, looking at long-term solutions instead of just immediate needs.
The above is, of course, a limited summary, and if you haven’t read this book, we highly recommend it. It contains many principles upon which our social enterprise is founded. The book gave us a great foundation for how to approach poverty alleviation and community development.
Recently though, we’ve discovered that even in development work, there are unexpected pitfalls that we never saw coming. It would take a very long blog post to detail all we’ve learned in this venture (and are still learning), but here’s a big one: paying above market value for products is harmful in long-term business sustainability. We’ve seen this principle played out in the last few months and in some interesting ways.
Here’s the backstory of the first incident: We’ve developed a new brand, PersonaGrataGoods, which focuses on enabling skilled artisans (both in the US and abroad) to build a business creating practical yet stylish Global Chic products for American women. As a part of that, we work with these artisans to design products and develop business plans.
We recently started working with a refugee woman here who is very skilled at sewing. Before we met her, she’d been producing things and selling them to volunteers at an ESL class. These sales opportunities were very off and on, and so this lady was interested in working with an established business. We met with her to begin to talk about business and product development, and immediately hit a pretty big roadblock: product pricing.
It turned out that the volunteers who’d been buying her items had been paying 3 to 4 times the market value of what the items were really worth. For example, these customers were paying $120 for items that would retail for no more than $30-40 at your higher end stores. This has given her an extremely inflated view of what she could sell her products for. Of course these customers were being generous and were looking for ways to invest in this lady. But she didn’t realize that, and we weren’t keen on being the ones to point such things out. Awkward conversations…
Photo by Bruce Turner, Used under Creative Commons license
Through this consulting experience, our eyes were opened to the first part of the “overly generous” problem: paying above market prices can have the effect of skewing viewpoint in sustainable business development. Based on her experiences, this artisan was led to believe it would be easy to make lots of money with selling these relatively simple products. Rich Americans, right? Yet the reality was that when you’re sewing products that are competing with goods made in third world countries, you’re going to receive way less from regular customers than those kind volunteers were able to pay.
The second example that we’ve seen play out over the last several business quarters is entirely based on our own mistakes! As a social enterprise, our goal was to deliver as much profit as possible to our artisans, paying the lion’s share of the profit to them. After all, we exist to serve our refugee friends! None of our designers or staff receive any salary. We swallow the cost of taxes, of materials, of advertising, etc. But as the business has gotten more complicated and experienced growing pains, this lack of putting profits back into the business has hindered us from being able to make needed the needed investments that will help fuel growth.
We’re now at the point where we’ve realized we need to restructure! We are taking a step back and figuring out how to price and sell things with enough overhead built in to make our venture a sustainable one. We’ve seen several social enterprises recently either fold or have to dramatically scale back operations. And it’s likely that they’ve been in the same boat as us!
So the second principle is this: If not tempered with business sense, generosity can eventually undercut the foundations of a sustainable economic development program. Long-term viability is important! Otherwise, all your work is simply a flash in the pan and doesn’t do much to ultimately benefit those you were trying to help.
I’ve heard many people railing against greedy business owners, but the longer I’m involved in this work, the longer I realize it’s likely many small business owners are not greedy. They’re just trying to be sustainable. You have to invest in business, you have to invest in the expenses, you have to have funds for when sales dip, or when you’re trying to expand into a new area. It’s just the way that business works. Sometimes you have to set prices really high and that excludes certain customer segments. Sometimes you can’t pay employees $20 an hour because if you did your business would collapse. Sometimes you can’t provide all the awesome benefits that you want to.
This isn’t to say we’re abandoning fairtrade principles and practices. Not at all! We never, ever want to be a sweat shop or an unfair employer. What we DO want is to create a business that will be there for our artisans – particularly refugee women – over the long haul. We’re right in the thick of this process and would love to hear from you! Any advice or thoughts from others involved in sustainable fair trade businesses is much appreciated.