The inherent challenge of operating a social enterprise is managing to its dual objectives. In practice, the business of generating social and economic value means decisions and actions are in frequent opposition. This translates into calculated trade-offs: decisions to forsake social impact to gain market share or increase profit margins; or conversely, expanding the scope of social good at a financial cost. Problems occur when an organization's enthusiasm to meet its financial goals begins to overwhelm its social mandate. Nonprofits' long history of struggling to secure funding can, in the advent of earned income, threaten to swing the pendulum too far in the other direction. In the early days of microfinance, donors and practitioners toiled to set parameters on "how far is too far" on the mission-money spectrum by quantifying loan sizes, duration of client relationships, and interest rates before arriving at a model that was both viable and scaleable.
The concern many nonprofit practitioners and donors face is that incorporating commercial approaches into a nonprofit will compromise the organization's mission or social services by causing a "drift" too far into the for-profit camp.
The feared results of the "drift" (real or perceived) are:
- drift may damage the reputation of the organization among stakeholders and the public;
- the social enterprise may jeopardize funding because donors either misunderstand its dual-intention social enterprise or believe donations are now unnecessary;
- it may threaten organizational culture by applying market-based approaches and bringing in business professionals and industry experts; and
- finally, some fear that the organization will lose focus, and stray too far into the commercial realm, neglecting its social mission.
Running a social enterprise is a balancing act, which requires vigilance and a clear understanding of the organization's purpose and priorities: what is the social impact that the organization is trying to achieve, and how much money does it need to make? It means strong market discipline coupled with an equally strong sense of ethics and integrity--and leadership consensus about limits on "how far is too far" in any direction. Generating economic value, or making money, is not an evil act; on the contrary, it's a tool for generating social value in a way that is more sustainable than relying on donor funds.
The social enterprise model and design will largely inform how its dual purposes are achieved; it is up to the leadership to manage the tensions. The following exhibit shows this relationship in the product and market mix.
Existing Product; Existing Market
Income directly from social programs
Income is earned directly from nonprofit program activities. Nonprofit sells existing social service and products to its target market or to a third party payer on behalf of target market. Income covers the cost of service delivery and may fund all or a portion of overhead.
A microfinance institution sells micro-loans to low income microentrepreneurs. Income from interest and fees is used to cover the service delivery costs as well as the operating and financial costs of the microfinance institution.
Highest mission relevance; lowest risk
New Product; Existing Market
Income from extension of social program
Income is earned by enhancing nonprofit program activities. Nonprofit sells new products and services to its existing target population or constituents. Income covers the cost of service delivery and may fund all or a portion of overhead.
In addition to its educational and advocacy programs, a biodiversity organization adds an exhibit hall to its offices. Visitors pay admission fees, which fund the operating costs of the exhibit as well as a portion of the organization's overhead.
High mission relevance; medium risk
Existing Product, New Market
Income related to social program
A nonprofit commercializes its existing social services or products and sells them in the open market to the general public or businesses (other than to clients/constituents). Income subsidizes social programs and parent organization overhead.
A senior services organization provides grant-subsidized care management services to poor seniors, and sells the same services in its eldercare business to a private pay market. Income generated from the private eldercare business is used to subsidize social program costs and a portion of the parent organization's overhead.
Medium mission relevance; medium risk
New Market, New Product
Income not related to social program
A nonprofit sells new products or services in a market other than to its target population or constituents. The decision to use this mix is financially motivated. This type of social enterprise most often takes the shape of auxiliary or unrelated businesses, and its income is used to fund social programs and the parent organization at-large.
A youth organization owns a real estate holding company with several commercial rental properties. Space is rented to tenants that have no relationship with the commercial activities of the youth organization. Profit from the real estate business is used to fund the youth organization's overhead and programs.
Low mission relevance; high risk