Love the idea that business should play a bigger role in improving society? You’re not alone! The concept of a company that generates revenue for the main purpose of advancing a social change mission – also known as social entrepreneurship – has been gaining major traction in recent years. 80% of Millennials believe business should contribute in a significant way to the good of society and, at the very least, not harm it. This theory of change entails that an enterprise be able to sustain itself through steady cash flow.
But did you know the social entrepreneurship model can be applied to nonprofits as well? Social enterprises structured as nonprofits differ from their for-profit counterparts in that they can actively solicit tax-deductible donations from individual donors. Tax-deductibility is a major incentive for the billions in charitable giving by Americans each year ($416 billion in 2013, to be exact). But donating can become confusing when an organization’s nonprofit tax status is mixed with the premise of social enterprise as a business that turns a profit. At this intersection, should an organization still collect unrestricted donations from the general public – many of which are low-dollar amounts from average donors? Are donations going toward the programs side or the overhead of a nonprofit? How can a donor be sure their money is making a real difference on the cause?
To take a crack at clearing the confusion, here’s an in-depth profile of four different business models of nonprofit social enterprises – and what each model means for the impact of your giving dollar.
1. Dollar-for-Dollar: The “one-for-one” business model is powerful in its simplicity – these enterprises give away one product for every one sold. TOMS Shoes, a for-profit and pioneer of this model, fulfills its social change mission of “improving the health, education and well-being of a child” by giving one shoe per shoe bought to children in underdeveloped countries. Since the success of similar for-profits such as One World Futbol and Roma Boots, the nonprofit sector has developed its own spin-off concept of “a dollar-for-dollar”. Consider the perennial-favorite, nonprofit du-jour, charity: water. Charity: water guarantees every dollar given will be a dollar that goes toward a water project providing access to safe drinking water. This nonprofit generates revenue and covers operation costs through sustained funding from angel investors, private foundations, and sponsors. The dollar-for-dollar model acts almost as a market intermediary, giving donors access to a “market” of needy people and the power to “purchase” direct impact. It helps donors make the correlation between dollar and impact – you can be sure your tax-deductible donation is going straight to a cause and won’t be cut into for overhead.
2. Selling a Product/Service: The classic business model – selling something of value to earn a profit. Nonprofits employing this method offer a product or service to the mass market and funnel the resulting funds into a social impact project of their choice. Often times, these nonprofits sell items that don’t have a direct association to their mission – such as selling hand-made bags for poverty or bracelets for malaria prevention. When you buy a product from such enterprises, be aware that a percentage will be taken to cover the associated production and marketing costs. However, a good nonprofit will be able to expound the incentive to purchase by guaranteeing a certain amount of impact per dollar. Take Three Avocados, a nonprofit coffee company: they guarantee that 100% of net proceeds from a bag of coffee will go to provide clean water in Uganda. For Three Avocados, 100% of proceeds after all expenses calculates to $2.52 per $12 bag of coffee. This traditional business model may not promise the fullest impact of a donor’s dollar – and their purchase will not be tax-deductible – but it’s a fun way to support a cause while receiving something in return.
3. Service Subsidization: Need some maintenance done around your home? Take this chore as a great opportunity to frequent a socially conscientious business! Service subsidization usually takes form in organizations with a specialized skill, which they market for a price in order to generate recurring income. A great example of this is Catholic Charities Hawaii – a member of “the largest private network of social service organizations in the United States.” Catholic Charities Hawaii’s main cause is to deliver a variety of social services and programs to children, families, and seniors, all free of charge. At the same time, they utilize their already-established staff of social workers and care providers to offer fee-based services to seniors who are able to afford them, such as in-home assistance and transportation. In the case of Catholic Charities Hawaii and many other such nonprofits, their free programs are subsidized largely by private foundation grants and their infrastructure is supported by profits funneled from their business. You can contribute to this organization by purchasing a service; and while your dollar will usually go more for overhead and is not tax-deductible, it helps support the capacity and viability of the enterprise.
An off-shoot of the service subsidization model is employment-based enterprise – organizations that focus strategically on the “business of creating jobs.” Their main mission is to sell a product or service that provides the revenue necessary to maintain employment opportunities within the same organization. These job are geared toward employing a targeted demographic, such as the formerly incarcerated. Rebuild Resources of Minnesota delivers contract manufacturing performed by those recovering from drug and alcohol abuse. Purchasing this service provides the demand to meet supply, ensuring these men and women will remain steadily employed.
4. Low-Income Client: So far, we’ve discussed business models that generate revenue by offering something of value to the mass economy. However, consider those businesses which are bypassing this market completely to provide much needed goods and services directly to the underserved. Enterprises that sell to the very constituents they’re trying to help are considered the business of serving low-income clients. They provide basic necessities such as electricity, mobile phones, and even loans at a drastically reduced price – all of which the consumer couldn’t afford at traditional market rates. VisionSpring is a nonprofit that sells low-cost glasses to communities with limited access to eye care. By serving those with scarce disposable income, VisionSpring is able to reach new swaths of customers and make a significant impact on their health. Your tax-deductible donation to VisionSpring and other organizations helps sustain the business and provides a low-income customer with the opportunity to access markets. The key here is to look for guarantee of a certain dollar amount that will directly benefit programmatic work; for example, a $5 contribution to VisionSpring will provide someone in the developing world with access to glasses.
Social entrepreneurship is the most exciting innovation to sweep the charity world of late, offering a fresh take on what it means to “do good” and how to accomplish it. Whether that means purchasing a bag of coffee or employing disadvantaged youth, donors can be sure their dollar will power a cycle of sustainable enterprise.
About the Author
Chloe Hwang is the creator of The New Nonprofit, a blog on the intersection of nonprofits, social entrepreneurship, and philanthropy. The New Nonprofit explores impactful social enterprises and the investors who believe in their social ROI. Chloe is a nonprofit fundraiser and currently resides in Washington, D.C. Follow Chloe on Twitter @thenewnonprofit.