Sustainable Social Impact Business Models
Soft brownie bits mixed with velvety chocolate ice cream—this sinful confection is the Ben & Jerry's Chocolate Fudge Brownie ice cream. The luxurious mix is not just a sweet melt-in-your-mouth treat on a warm summer day; it also represents how businesses can successfully scale social impact.
The origin of this flavor goes like this: Ben Cohen (of Ben & Jerry's) ordered some brownies from Bernie Glassman, founder of Greyston Bakery, for their ice-cream sandwiches. However, the first shipment of brownies was stuck together and could not be used for the ice-cream sandwiches. So, the two teams experimented with the brownies—they broke up the brownies into small pieces and mixed them up with some chocolate ice cream. The result became a best seller flavor for Ben & Jerry's—and the rest was history. Impact Employment
That was the beginning of the long-term partnership between Ben & Jerry's and Greyston. The bakery's philosophy of Open Hiring was quite radical when it started in 1982. Glassman believed that gainful employment was a pathway out of poverty. Ex-prisoners, for example, often have trouble getting work upon release, which leads them back to a life of crime. So Glassman established Open Hiring, where the first person to apply gets the job. There are no questions asked, no resumes, no interviews, and no background checks. There is just a waitlist, where you put down your name for the next available position. Through Open Hiring, people like Dion Drew and Darren Peterson started their life anew and can provide a safe home for their children. But many social enterprises do not achieve the scale of Greyston. More than 80% of companies focused on creating a positive and sustainable impact fail within the first three years of operation. Compared to other businesses focused on profit, these companies fail because they lack funding support or cannot fund their operations. Unlike profit-first businesses, paying customers of social enterprises may not be the beneficiary or direct recipient of the intended benefit. In Greyston's case, the beneficiaries are the formerly incarcerated or others who face barriers to employment and Ben & Jerry's is their key paying customer. The funding gap—the cost of providing benefits to the beneficiary and who pays for the cost of providing such benefits—is a problem that some social enterprises face. At times it may be possible for beneficiaries to pay up a limited fee. But often, purpose-first companies must find the shortfall through other business stakeholders such as investors, donors, or paying customers. Glassman founded Greyston to address the poverty and homelessness in the local community through impact employment. Impact employment is a business model that intentionally hires the vulnerable or disadvantaged to impact the community positively. Greyston needed funding to provide stable income, housing, and other services to their target beneficiaries.
While a part of their customer base is the local community, securing the long-term relationship with Ben & Jerry's and later Whole Foods enabled Greyston to scale their operations and impact. The partnership with Ben & Jerry's led to knowledge exchange and innovation, resulting in more efficient operations. This helped Greyston meet Ben & Jerry's customer demand but also increase the number of people they could help in the community. Ben & Jerry's and Whole Foods are great partners because their values are aligned with Greyston's on radical inclusion within the workforce.
Buy One Give One
Buy One Give One (BOGO) is another business model that is common with purpose-first businesses. Popularized by TOMS and Warby Parker, this model subsidizes the giving of products to beneficiaries through the profits made on products sold to paying customers. Word of mouth spread quickly through visible products such as shoes and glasses, leading to these direct-to-consumer brands' meteoric rise. Paying customers can tell their family and friends about the positive impact created from the purchase of the product. The concept is easy to understand and communicate: another product is donated to others in need for every product you buy.
Similar to BOGO, donating 1% of sales or profits (Patagonia and Salesforce) to specific social or environmental causes is another business model that purpose-focused companies use. Like BOGO, this model also creates awareness for the causes that the businesses support. But the companies do not solve the problems themselves. The value comes from the spotlight that the companies shine on their chosen causes.
Some skeptics criticized the BOGO model for not addressing the cause of the problem. In TOMS case, they even argued that TOMS disrupted the local economy where TOMS gave free shoes. Second, aligning sales and donation demand under the BOGO model can be tricky, not just for brands like TOMS and Warby Parker, but also MADI Apparel featured on The Altruistic Capitalist recently.
Getting the pricing right for BOGO is crucial for the purpose-first business to ensure financial sustainability and growth. There are a few ways to look fund the donation side of the model. The donated product may not be the same as the purchased product; it could be a lower-cost product or service, or it could be money donated instead (which removes the cost of distribution). To subsidize the donation, the company could also charge a premium to the paying customer or create operational efficiencies. At Warby Parker, for instance, the cost of not operating retail stores at the start of their business enabled them to achieve a higher margin than other eyeglasses retailers. The company could then use the cost savings and additional margin to fund the donation. Cross-Subsidization
Aravind Eye Care operates on a cross-subsidization business model, leveraging different customer segments to fund their business operations. Dr. Venkataswamy (Dr. V) founded the hospital in 1976 to eradicate blindness in India. He focused on cataracts, which were the primary cause of blindness, particularly in the population that was below the poverty line. Many Indians ended up blind because they could not afford cataract surgery. Around half of Aravind's customers are non-paying or paying a subsidized amount for cataract surgery, funded by paying clients seeking specialized eye surgery. Both customer segments receive high-quality service from the same group of doctors and nurses. Doctors and nurses rotate between the cataract and specialized eye surgery, which also serves to attract talent to train with Aravind.
In addition to the higher margin paid on the specialized services, the hospital also improved the operational model to perform cataract surgery. In comparison to other eye hospitals or clinics, Aravind performs more surgeries at lower cost. The model has often been called the McDonaldization of Eye-Care. From minimizing downtime between surgeries to training and hiring local women in the communities, the incremental efficiencies and cost savings enabled Aravind to treat more patients at their eye camps. To lower the cost further, Dr. V decided to pursue vertical integration by acquiring the technology, building the facility, and producing the lens needed for cataract surgery. This meant that Aravind would have a sustainable supply of quality lens at an affordable cost compared to what was available in the market. Lessons Learned
Finding the right partner, such as what Greyston did, can solve the funding gap to create a scalable social enterprise. Who are other stakeholders who have an interest in actualizing the impact or supporting the beneficiaries? Leverage existing networks to get to scale faster. But communication and open collaboration are essential to avoid inequality in the partnership and differences that become too big to be resolved further down the road. BOGO helps the business get to scale because the concept is easily understood and communicated. The viral growth of TOMS and Warby Parker demonstrated the power of word of mouth to create a positive impact. With the proper pricing and conditions, this business model can help social enterprises get to scale quickly. Aravind demonstrated how cross-subsidization could plug the funding gap by leveraging on different customer segments. Alternatively, using tiered or scaled pricing and charging the beneficiary an affordable price can make the beneficiary less dependent and more appreciative of the value received. When the beneficiary becomes a paying customer, the business also becomes more customer-centric and innovative.
But as with profit-first businesses, purpose-driven businesses need to develop a good product that the customer wants. Financial discipline and a healthy operational model are essential to the survival of social enterprises. What innovations can you bring to the business model? Where can you add value instead of outsourcing to an external partner? Is there a unique and essential role that you can play? Should you consider external funding such as grants, or loans? Whether you are bridging the funding gap through cross-subsidization or grants, the company still needs a clear and unique value proposition—deliver that at the correct pricing and cost, and you have a sustainable business model. I will feature Jen Baughan, CEO of Solutions for the Planet, and her experience in scaling up her education-focused social enterprise next--what approach she used in pricing her services and how did she create a revenue model. What is more important--scaling fast or growing more sustainably? Stay tuned!