Risks in Social Enterprise Business Models are Mitigated by Existing Resource Bases of Parents Orgs
Social enterprise businesses (SEB) emerge from industries like clean technology, health, education, finance and micro-finance, to name a few. No matter what the industry, innovative, non-traditional business models that capitalize on socially and/or environmentally beneficial opportunities have arisen.
A business model describes how the program or initiative will work and how it will sustain itself. Social enterprises and social purpose businesses have the added goal of generating social value (measurable impact) in addition to the economic value (revenue).
The key difference between social enterprise and traditional business models
In a SEB, the social mission is core to the business model. A viable SEB business model consists of a clearly defined social mission guiding the strategy, value proposition and best practices.
The business model makes the case that the SEB can achieve its intended social impact and sufficient profit simultaneously. A strong SEB business model will be built where these two goals intersect successfully—where both social and economic value creation result.
Social enterprise business model examples
The key commonality for social enterprises is that the company’s social and/or environmental goals are not add-ons or marketing ploys—they are part of the DNA of the business. Some examples include:
One company may focus on changing an industry by making it more sustainable, such as renewable energies.
One company may strive to have a targeted economic impact and be located in depressed areas or grant access to products to deprived populations (such as medicines in the developing world).
Some companies link their mission to their own sustainable internal processes and operations.
Specific examples like IceStone, a glass recycling company that produces consumer products, demonstrate endless ways social and economic goals work together.
How not to build a strong business model
The top reasons businesses fail (including social purpose businesses) are:
No viable market
You have a great idea for a service or product that you think will change the world, but you have to make sure that someone will pay for it.“Build it and they will come” has proven to be a failed business model. However, if the incubating, parent, NPO, operates and possess scale in, an established ecosystem, this risk can be mitigated.
Lack of Marketing Expertise
If your target customer does not know about you, they cannot buy from you. Determine what potential tactics work for your industry, whether they include advertising, direct marketing, trade shows, websites and blogs. Build demand for your product. However, if the parent organization has internal marketing expertise and budget to retain additional capabilities, this risk can also be reduced.
Out of touch with customers
Be as close to your customer as possible– focus on good quality products and services and try to satisfy your customer (both the economic buyer and the end user) with your offering. Again, if the parent NPO's constitute base is strong and can be converted, in a value-added relationship, this risk can also be minimized.
Ineffective or non-existing partnerships
Picking the right partners and leveraging them effectively is key to successfully implementing and scaling your business model. Finally - it's all about, the ecosystem.
Expert advice on how to create sustainable social businesses
Your primary goal is to create a business model with a product or service that people will want and an effective way to sell it.
“Just because you have a social mission doesn’t mean you have a right to exist in their marketplace. To earn that place, approach your social mission with the heart of a bean counter, refining it until you have a goal you can achieve.”—Jay Coen Gilbert, co-founder of B Lab.
Often social entrepreneurs choose a for-profit model to provide the capital to grow the business more rapidly.
“We could have done it as a non-profit over a hundred years, but if we wanted to do it in five or 10 years, then we believed it needed to be fueled by profit. That’s the way to grow.”—Sam Goldman, co-founder, D.Light design.
Choose a business model that fits your mission and covers your costs.
Better World Books collects textbooks donated by students and resells them online. Initially, the company gave 15% of its revenues to charities that combat illiteracy.
But after a period of time, the company began recording losses and could not contribute to the employee profit sharing plan. Management had to make a tough decision: keep more profits by cutting to 7.5% the share of revenues for its non-profit partners, fund the profit sharing plan and then split the remaining profits 50/50 with those partners.
As you grow, ask yourself if the economies of your business work in favour of your mission or against it?
Sometimes the bigger you get, the less expensive your product may become to produce based on the economies of scale.
Target customers who value the kind of social impact you intend to create.
A great example is Newman’s Own all-natural food products. The fact that all of the profits are donated to charity likely attracts customers who are deciding between products that are of equal quality and price.
Not all social problems respond well to the for-profit model—for example, childhood education.
“If you set it up as a business, you might be able to raise money more quickly and grow more quickly. But if you want to be profitable, you might find that you have to make choices that diminish the quality of your program and then children won’t learn to read as quickly,“—David Bornstein, author, How to Change the World
Like any entrepreneur, you should be willing to change your business model if necessary.
Consider which legal structure makes the most sense for your business.
Consider quantifying the impact of operating your social purpose business on a“social or environmental basis” rather than a“regular basis.”
For example, if you have extra training or support costs for your employees or if you have to buy more expensive product to meet your environmental goals, you can quantify the difference and use that input to manage the potential for lower returns when speaking with for-profit investors. You may also consider seeking non-repayable funding like grants from innovative non-profit funders as financing for the social or environmental differential for your business.
For more information about developing a business model, download the MaRS workbook, Business model design. The information and exercises will help you design a business model by working through the key variables in executing a market strategy—competition, partnership, distribution, pricing and positioning.
Interested in learning more about social innovation and social entrepreneurship? Contact: firstname.lastname@example.org
Links and sources:
Alboher, M. (2009, March 4). A Social Solution, Without Going the Nonprofit Route. The New York Times. Retrieved April 27, 2009, from http://www.nytimes.com/2009/03/05/business/smallbusiness/05sbiz.html?_r=2&ref=business Strategies: Mission Possible. (2007, December 14). BusinessWeek. Retrieved April 27, 2009, from 48.htm Dees, J. G.& Anderson, B.B. (2003). For-Profit Social Ventures. International Journal of Entrepreneurship Education (IJEE), Senate Hall Academic Publishing.