The Best Business Model For Social Impact
“I want to make the world a better place but I don’t know which business model to use.”
The above problem is an incredibly common one.
Yes, we live in a time where more and more people are determined to ‘make a difference’.
However, what these people sometimes lack is the crucial first step in the right direction.
With so many options, it’s hugely beneficial that change makers take the right path and make the most of their ambitions.
This article will look at the pros and cons of 3 different business models, attempting to identifying if one of them can ever be ‘the best’.
Business Model #1 – The Non-Profit
Historically seen as the most effective way to tackle the world’s problems, charities and non-profits offer a tried and tested path towards social impact.
With non-profits, the main idea is that change makers can spend the vast majority of their time actually helping their chosen cause. They’re effectively ‘free’ to just focus on their social mission.
Perhaps more crucially though, non-profits are eligible for a bunch of tax savings, grants and subsidies. Considering the difficulties associated with starting a business, this could be a real deal breaker.
Obviously, the biggest problem with charities is funding. Without a self-sustaining income stream, charities and non-profits are reliant on donations. Not only is this pretty stressful, it can cause charities to alter or dilute their mission to appeal to their larger donors.
Secondly, charities and non-profits are facing an increasing amount of public scrutiny. Whilst a high percentage of the public donate, they expect the vast majority to go towards charitable activities, and it can quickly become a bit messy. Charities that spend too much on marketing or pay their senior staff too much could quickly lose public trust.
Business Model #2 – The For-Profit Social Enterprise
Due to the funding problems of non-profits, social enterprises have exploded into the mainstream. In the UK alone, they are rapidly growing and often outperforming traditional SMEs.
The fact that social enterprises generate the own income gives the entrepreneur a heightened sense of control. Unlike a charity, their revenue is far less volatile, and that can be useful when it comes to balancing risk.
On top of that, they’re also slightly more immune from public scrutiny. Consumers know that they make a profit, and are therefore not expecting 90% of every sale to somehow go to charity.
Finally, because they’re actually selling goods and services, for-profit social enterprises provide genuine ways for conscious consumers to make responsible changes in their everyday life. Because of this, they’ve become immensely popular and are more attractive to people who don’t wish to just give money to a charity.
While revenue is slightly less volatile, there is still the problem of finding initial capital. There are many investors that specialise in this area, but it certainly still represents a challenge.
Perhaps more crucially though, is the issue of scaling. Social entrepreneurs can have a great idea, but it’s no good if they can’t scale it. Sometimes, as the company grows, it becomes far harder to sustain a social mission, and that can be fatal.
Business Model #3 – The Cooperative
A cooperative is a business model where staff or members effectively own the company, aiming to deliver on both economic and social targets. In the UK, the John Lewis Partnership is probably the best example.
Because staff are personally invested in the company, cooperatives often enjoy extremely engaged workforces. This can be a huge help when it comes to creating social impact.
Another advantage is that, due to the ownership structure, cooperatives are innately democratic. Decisions are made in the best interests of the majority, and that can directly lead to the desired outcomes being achieved.
Unfortunately, the democratic advantage can also be a disadvantage due to the loss of flexibility. In competitive markets, it’s crucial to react quickly to market pressures. Cooperatives can sometimes be slow to do so, and that can derail their social progress.
However, more importantly is once again the problem of funding. Because of the structure, cooperatives are very undesirable to investors, as they will only receive one vote. This can make funding an uphill battle, and prevent a great idea from ever getting off the ground.
So Which Is Best?
It’s important to mention that all of these models can work very effectively. Whilst it’s a bit of a cop out, I’d say it all depends on the social ambition, and the type of entrepreneur in question.
As you may have noticed, the common problem across each of these three business models is funding. As with conventional businesses, gathering capital is often the hardest step.
Because of this, I think that more often that not, the charity route is the wrong one. Starting a charity is immensely demanding and risky, and it’s inability to self-sustain is a genuine problem when it comes to creating long lasting change.
As for choosing between a traditional social enterprise or a cooperative, I’d say change makers should be open minded.
Personally, I like the cooperative model. By creating the right incentives for employees, I think it provides a innovative approach to social impact, one that can be scaled without necessarily diluting the overarching mission.
Hi! I’m an author and blogger within the fields of social impact and responsible business. I believe that businesses can be a force for good in the world, and this website contains my thoughts on how that can work.