Operational ModelsOperational Models
The following section elaborates possible operational models of social enterprises.
The operational models should not be confused with depictions of organizational or legal structures. Rather, they illustrate configurations used to create social value (measurable impact) and economic value (income), and can be applied equally to institutions, programs, or service delivery.
Operational models are designed in accordance with the social enterprise's financial and social objectives, mission, marketplace dynamics, client needs or capabilities, and legal environment.
Fundamental ModelsFundamental Models
Entrepreneur Support ModelEntrepreneur Support Model
The entrepreneur support model of social enterprise sells business support and financial services to its target population or "clients," self-employed individuals or firms. Social enterprise clients then sell their products and services in the open market.
The entrepreneur support model is usually embedded: the social program is the business, its mission centers on facilitating the financial security of its clients by supporting their entrepreneurial activities. The social enterprise achieves financial self sufficiency through the sales of its services to clients, and uses this income to cover costs associated with delivering entrepreneur support services as well as the business' operating expenses.
Economic development organizations, including microfinance institutions, small and medium enterprise (SME) and business development service (BDS) programs use the entrepreneur support model. Common types of businesses that apply this model are: financial institutions, management consulting, professional services (accounting, legal, and market information), technology and products that support entrepreneurs.
Theoretical example: a manufacturer and distributor of low-cost irrigation pumps sells its pumps and agriculture extension services to low-income rural farmers. The capital asset enables farmers to dramatically increase the productivity and profitability of their land. Income earned by the social enterprise is used to cover operating costs, including the high costs of marketing to rural, small scale farmers, investing in new product R&D, and educational marketing campaigns. (For the real story behind this example, see KickStart).
Pro Mujer, an example of Entrepreneur Support Model
Pro Mujer an international women's development organization, was founded in 1990 to empower women to improve their social and economic status. The organization accomplishes its mission by establishing microfinance institutions that provide small working capital loans ($50-$300) to low income women who invest the capital in productive activities such as retail trade or small-scale production then sell their products in the open marketplace. Due to the perceived risk and high transaction costs to serve Pro Mujer's target population, these poor women have no access to credit and saving services from formal financial institutions, and are consequently easy targets of money lenders' usury practices. Training in business development and management augments Pro Mujer's financial services by helping women to improve their small businesses and increase their incomes, thus economic security for their families. Pro Mujer also provides health education, and links women and their families to health services.
Pro Mujer operates in four countries: Bolivia, Nicaragua, Peru and Mexico. As of June 2002, the organization provided training and credit to over 66,000 clients, almost all of which are low income women, and had total loan portfolio of $5.3 million. The organization's financial model is similar to a bank's, interest is charged on each loan and savings deposits are leveraged for on-lending. The interest spread over significant volume creates a financially sustainable social enterprise model: income covers operating and financial costs, and loan loss (default). Interest rates are set by factoring operational and capital costs, regulations, and competitors' prices. Because its clients are so poor, Pro Mujer's goal is to provide financial services as inexpensively as possible without compromising its viability.
Results of an impact evaluation demonstrated that Pro Mujer's clients are able to double their income after two years in the program. They are also more likely to seek healthcare for themselves, and their children are more likely to go to school. Moreover, clients tend to increase their community leadership and participation and expand their decision-making abilities.
Market Intermediary ModelMarket Intermediary Model
The market intermediary model of social enterprise provides services to its target population or "clients," small producers (individuals, firm or cooperatives), to help them access markets. Social enterprise services add value to client-made products, typically these services include: product development; production and marketing assistance; and credit. The market intermediary either purchases the client-made products outright or takes them on consignment, and then sells the products in high margin markets at a mark-up.
The market intermediary model is usually embedded: the social program is the business, its mission centers on strengthening markets and facilitating clients' financial security by helping them develop and sell their products. The social enterprise achieves financial self-sufficiency through the sale of its client-made products. Income is used to pay the business' operating expenses and to cover program costs of rendering product development, marketing and credit services to clients.
Marketing supply cooperatives, as well as fair trade, agriculture, and handicraft organizations frequently use the market intermediary model of social enterprise. Common types of business that apply this model are: marketing organizations, consumer product firms, or those selling processed foods or agricultural products.
Theoretical example: a craft marketing cooperative creates economic opportunities for rural artisans by purchasing their handmade rugs, baskets, and sculptures and then marketing them overseas. The cooperative buys the products outright at fair prices then sells them at a mark-up to cover operating expenses and business growth. Earned income is also used by the cooperative for social activities tied to business success: helping artisans with product development and quality assurance, and providing working capital loans to clients to purchase raw materials and supplies to produce quality art.
TOPLA, an example of Market Intermediary Model
When Save the Children conducted a study of economic activities of poor women living in rural Haiti it found that many were engaged in food processing to support their families. Rural women purchased citrus fruit and peanuts from local producers and transformed them into peanut butter and jam, staple Haitian breakfast foods, which they sold in their communities. However, these women were unable to maximize profits because the market for their products was saturated (most rural families make their own peanut butter and jam) and purchasing power of their customers was very low. In the same study, Save the Children learned that in cities, such as Port-au-Prince, working moms and urbanites bought peanut butter and jam from supermarkets at prices much higher than those in the rural areas. Rural producers were not capable of selling their products in urban markets because they lacked transportation, marketing knowledge, and retail contacts. Save the Children concluded that it could substantially increase economic opportunities and income for poor rural women through a program aimed at bridging this market gap.
Together with a Haitian nonprofit partner, Save the Children helped establish TOPLA, a social enterprise that markets the women-made food products in urban areas. The social enterprise adds value to the women's existing food transformation activities by improving quality, productivity and enhancing product standardization with basic, semi-industrial processing equipment. TOPLA is able to realize economies of bulk purchase for raw materials, bringing down manufacturing costs and increasing profit margins, which are passed on to its clients. As a market intermediary, TOPLA manages marketing, sales, and distribution functions. In doing so, social enterprise managers found an attractive high margin niche in the "import imitator" market for the TOPLA brand. Import imitators are priced between cheap locally-produced brands and expensive US imports, like Skippy, and appeal to a market segment that is brand and quality conscious yet lacks the means to buy real imports. The products’ stylized packaging and labels add minimal cost and allows the enterprise to earn considerably more on each unit sold than if it had positioned its products in the overcrowded domestically-produced market. Since it was established in 1998, TOPLA has helped hundreds of poor Haitian women earn a livable wage and achieve economic security for their families.
[note: Excerpted from: Alter, Sutia Kim, Managing the Double Bottom Line, Pact 2000]
Pumice Marketing Cooperative, an example of Market Intermediary Model
The Aetas, indigenous people of Luzon, Philippines once lived simply on abundant fish and wildlife, and subsidence farming. The plight of these poor mountain people began when a volcano on Mount Pinatubo erupted in the early 1990s and buried their community and its natural resources under volcanic ash and stone. Threatened with starvation, many Aetas migrated to cities to find jobs. Unskilled, poorly educated, and lacking urban savvy, they were exploited for labor and left to live in urban squalor. Those that stayed stripped the mountain of its few remaining natural resources to survive. Meanwhile, entrepreneurs in Manila discovered the benefits of the acres and acres of stone and rock left behind by the volcano--Pumice, which is used in garment factories to produce “stone washed” denim fashions.
With help from the Asian Institute for technology, Aeta people formed a marketing social enterprise to gather, market and sell the stones to the thousands of garment makers in the Philippines. The marketing cooperative commercializes the informal process of selling pumice to middlemen who pay the Aeta very low prices then realize large profits by selling products to the private sector. As a result of the social enterprise, the Aeta are able earn a livable, rather than a marginal income. The work is appropriate and encourages them to say in their community rather than migrating to cities where their economic prospects are bleak. As well, the alternative livelihood reduces reliance on environmentally destructive activities. This market intermediary model is an example of "small is beautiful"; startup costs were $38,000 in 2003, yielding a return of economic security for hundreds of indigenous people.
[source: Information provided by World Bank Development Marketplace 2003]
Employment ModelEmployment Model
The employment model of social enterprise provides employment opportunities and job training to its target populations or "clients," people with high barriers to employment such as disabled, homeless, at-risk youth, and ex-offenders. The organization operates an enterprise employing its clients, and sells its products or services in the open market. The type of business is predicated on the appropriateness of jobs it creates for its clients, regarding skills development, and consistency with clients' capabilities and limitations, as well as its commercial viability.
The employment model is usually embedded: the social program is the business, its mission centers on creating employment opportunities for clients. Social support services for employees such as "job coaches," soft skill training, physical therapy, mental health counseling, or transitional housing are built into the enterprise model and create an enabling work environment for clients. The social enterprise achieves financial self-sufficiency through the sales of its products and services. Income is used to pay standard operating expenses associated with the business and additional social costs incurred by employing its clients.
The employment model is widely used by disabilities and youth organizations, as well as social service organizations serving low-income women, recovering addicts, formerly homeless people, and welfare to work recipients. Popular types of employment businesses are janitorial and landscape companies, cafes, bookstores, thrift shops, messenger services, bakeries, woodworking, and mechanical repair.
Theoretical example: a wheelchair manufacturing social enterprise is run by clients--victims of landmine accidents--who face discrimination and marginalization in the open market. Workstations are specially fitted to accommodate clients' handicaps. Clients learn marketable skills such as welding, casting, and assembly. The social enterprise sells wheelchairs to hospitals and medical supply companies. Income is used to reinvest in the business, to fund public education campaigns on landmines, and cover the social services costs of physical therapy and counseling for clients.
Mazunte Natural Cosmetics Factory, an example of Employment Model
The Mazunte Natural Cosmetics Factory is situated in the village of its namesake on Mexico's Pacific Coast. Until a few years ago, Mazunte was an obscure village of 1,000, most of whom were employed in the sea turtle trade. When the Mexican government first banned the slaughter of sea turtles, this closed the town's sole employer--Mexico's largest sea turtle slaughterhouse--Mazunte's population was devastated.
Today, the cosmetics factory is known as the "Miracle of Mazunte," because it replaced jobs lost by the slaughterhouse. The small, cooperatively-owned social enterprise produces and distributes environmentally friendly products, and in doing so, provides dozens of manufacturing jobs, sales, and management jobs in the community. The impact, or miracle, proved greater than first expected: the Cosmetics Factory has become the cornerstone of the region's economy. The cute, palm-shaped adobe factory is a tourist magnet, and has sparked the development of a numerous tourist related eco-businesses in the area.
[Source: Information provided by Ashoka's Changemakers ]
Digital Divide Data, an example of Employment Model
Cambodia's long history of war and devastation left a large number of disabled, disenfranchised and displaced people who face barriers to employment. Many Cambodian women have few economic choices other than to enter the sex trade. The poor become trapped in low-income jobs because their families could not afford to send them to school. Rural immigrants, who came to urban areas hoping to find a better life, instead wind up in squatter settlements scratching out a subsistence living picking through garbage heaps. Large numbers of Cambodians physically maimed or disabled in the war are completely marginalized from the workforce as a result of overt discrimination. The situation has created a huge surplus of labor in Cambodia, yet few institutions provide vocational training for this target population to secure relevant jobs.
Technology avails an opportunity for poor and marginalized people to start entry level jobs and gain high value workplace experience and marketable skills while earning a livable wage. Digital Divide Data is a technology-based employment social enterprise that provides vocational training to disadvantaged people in Cambodia. Its clients are landmine victims, abused women, rural immigrants and orphans. Through Digital Divide Data, they receive computer literacy and technology training to qualify for basic and low-skilled jobs in the technology sector. Clients are then placed in data entry jobs within Digital Divide Data whereby they receive paid on-the-job training in a supportive environment.
Digital Divide Data secures contracts for data entry work outsourced by universities and businesses, which provides employment for its clients and generates income for its operating costs, including fair wages and social costs related to education and training. The combination of paid work experience and computer literacy, coupled with education prepares clients for higher-paying skilled work opportunities.
[Source: Information provided by World Bank Development Marketplace 2003]
Fee-for-Service ModelFee-for-Service Model
The fee-for-service model of social enterprise commercializes its social services, and then sells them directly to the target populations or "clients," individuals, firms, communities, or to a third party payer.
The fee-for-service model is usually embedded: the social program is the business, its mission centers on rendering social services in the sector it works in, such as health or education. The social enterprise achieves financial self-sufficiency through fees charged for services. This income is used as a cost-recovery mechanism for the organization to pay the expenses to deliver the service and business expenses such as marketing associated with commercializing the social service. Surpluses (net revenue) may be used to subsidize social programs that do not have a built-in cost-recovery component.
Fee-for-service is one of the most commonly used social enterprise models among nonprofits. Membership organizations and trade associations, schools, museums, hospitals, and clinics are typical examples of fee-for-service social enterprises.
Theoretical example: a university charges tuition fees for its educational services, reimbursing costs such as professors' salaries, and building and ground maintenance. However, fees from students are insufficient to fund new facilities or academic research. Therefore, the university supplements tuition income with a second fee-for-service enterprise: commercial scientific and engineering research and development contracts are secured with pharmaceutical and technology companies.
Bookshare.org, an example of Fee-for-Service Model
Fewer than 5% of books are available for people with "print disabilities," blind or learning disabled, posing a significant barrier to literacy. The only way for most people with print disabilities to enjoy books is to scan them into computers with adaptive technology capable of converting the text into speech or Braille formats. Benetech Initiative, a Silicon Valley based-nonprofit organization, that develops adaptive technology saw this gap in the education market as an opportunity to launch its new social enterprise--Bookshare.org.
Bookshare.org is a subscription service providing an extensive online library of digital books for blind and low vision adults, many of whom already use Benetech's computer reading machine technology; and students and adults with learning disabilities. Exempt from US copyright laws, Bookshare.org is allowed to distribute its materials to people with certain disabilities. Bookshare.org's technology enables the tens of thousands of people who scan books to share them, while eliminating duplication of efforts and producing accessible books much faster than other providers at a fraction of the cost. Subscribers download books using Bookshare.org's proprietary software in two formats: digital Braille or talking books. Within a year of its 2002 launch, Bookshare.org already had 12,100 books available to its customers.
Bookshare.org's is a fee-for-service model of social enterprise. Paying customers are also the organization's target population--blind and learning disabled people. A one time fee of $25 is charged to register 1
, and then customers pay an annual subscription fee of $50. Income generated from fees is used to cover cost to render services to its users. In 2002 Bookshare.org's membership was 628; this figure was projected to grow to 2,100 in 2003 and 5,329 in 2004. Bookshare.org is expected to reach breakeven at the end of 2005.
[Source: Information provided by Yale School of Management and Goldman Sachs Foundation: Partnership on Nonprofit Ventures 2003]
- 1Customers must submit proof of a qualifying disability
Low-Income Client as Market ModelLow-Income Client as Market Model
The Low Income Client as Market model 1 of social enterprise is a variation on the Fee-for-Service model, which recognizes the target population or "clients" a market to sell goods or services. The emphasis of this model is providing poor and low-income clients access to products and services whereby price, distribution, product features, etc. bar access for this market. Examples of products and services may include: healthcare (vaccinations, prescription drugs, eye surgery) and health and hygiene products (iodize salt, soap, eyeglasses, earring aids, sanitary napkins), utility services, (electricity, biomass, and water), etc. for which they pay.
The Low Income Client as Market Model target population has also been described as those living at the "base of the pyramid." This is a socioeconomic designation of the 4 billion people who live primarily in developing countries and whose annual per capita income fall below $1500 purchasing power parity (PPP) 2 ; and earn less than $5 a day 3 . People in this income bracket cannot realize economies of bulk purchase, and ironically may pay up to 30% more for products and services than middle income consumers. 4
The social program is embedded in the activity by providing access to products and services that increase clients' health, education, quality of life, and opportunities. Income is earned from product sales and is used to cover operating costs and marketing and distribution costs. However, due to the low incomes of target population in the "low income client as market model" achieving financial viability can be challenging. The social enterprise must relies on developing creative distribution systems, lowering production and marketing costs, achieving high operating efficiencies, cross-subsidizing creative revenue markets to markets that require subsidy. Health, education, technology, utility frequently use this.
Theoretical example: a nonprofit hospital provides access to high quality healthcare regardless of ability to pay. The hospital focused a few specialized services, which would provide substantial benefits to clients; that could be standardized for high efficiency service delivery; and finally in which they compete on quality in the open market. Pricing is based on ability to pay, whereby clients who can pay full price, yet come for quality care, subsidize those that can't pay or can pay only a portion of full cost. To remove additional access barriers for poor clients, the hospital provides transportation services bringing clients from rural villages to the hospital or conversely, setting up temporary clinics in the villages.
Scojo India, an example of Low-Income Client Model
Scojo Foundation is health social enterprise specialized in eye care. Scojo's work is premised on the statistic that globally 80% of all people above the age of 35 suffer from presbyopia--blurry up close vision. In developing countries where optometry is a privilege of the middle income and wealthy, presbyopia can have a devastating affect on the productive activities of the poor, who typically have little access to eye care. Seamstresses, rug makers, weavers, mechanics, bookkeepers, automobile or bicycle repair people, hairdressers, and others with occupations that require up close vision can loose their livelihoods and their incomes if they suffer from presbyopia. Simple low-cost readymade reading glasses, or simple magnifiers, enable these people to continue to work.
Scojo Foundation founders began their program activities using a traditional nonprofit approach: distributing free readymade reading glasses to the target population in greatest need, the rural poor, but quickly learned that this model was not sustainable. In 2003, they launched Scojo India, an integrated social enterprise that operates in two distinct markets in Andhra Pradesh state: urban centers, targeting working and middle class customers; and rural markets, targeting poor and low income people. Although greater social need exists in India’s rural areas, and subsequently an opportunity to effect deeper social impact than in urban areas, Scojo’s business could not operate exclusively in rural markets without ongoing subsidy.
Characteristics of Scojo's urban market such as high population density, existing retail distribution, coupled with local purchasing power and product price elasticity indicate suitable conditions for a profitable ready-made eyeglass business. Scojo's rural market, on the other hand, has notoriously high costs to sell and distribute eyeglasses in sparsely populated areas to customers (target population) who lack the ability to pay. Therefore, Scojo India created a social enterprise that integrates its business activities. The urban market is the commercial side of the social enterprise's operations while the rural market is the social program side of the social enterprise.
Manufacturing--Products for both markets are manufactured in the same local nonprofit facility, and though style is differentiated in urban markets according to preferences, there is no difference in quality. Scojo transfers modern spectacle frame- and lens-making technology to its Indian partner, building local capacity to enable production of higher quality readymade glasses than are currently available in India. The production facility creates employment opportunities for local people.
Distribution and sales--Integration occurs at the level of the marketing function, but not in the sales activities. Scojo India set a total sales target of 266,760 low-cost readymade reading glasses in the first three years of operation (2003-2006); urban markets represent 75.4% of sales or 201,060 units and rural markets 19.6% or 52,200 units (government sales make up the remaining 5.1%). In urban areas Scojo uses teams of sales agents to sell readymade glasses to non-optical retail stores such as pharmacies, general stores, and bookstores. Sales agents are also dispatched in innovative mobile sales units, vans stocked with glasses, to bring reading glasses to local factories. Scojo India sells reading glasses to hospitals, health and microcredit NGOs, who channel the glasses through their existing network of community-based vision health workers or microentrepreneurs, making it possible for Scojo to penetrate the rural market. Scojo also sells reading glasses to the State Government for re-sale to their employees.
Financial strategy and viability--Scojo India uses a cross-subsidization strategy to achieve social objectives while achieving financial viability. Profits generated from urban sales subsidize price and distribution costs in rural areas where the need for affordable reading glasses is greatest. Glasses are priced at $2.50 for customers in rural areas and $5-$6 for customers in urban areas. Total projected revenue earned in urban markets in the first three years is $460,800 as opposed to $59,805 in rural markets (government represents $10,028). Scojo India projects annual net revenue of $74,532 for business expansion and social program subsidies, and 27.3% ending return on equity in FY 2006.
Social Impact--By year end 2006, more than 266,760 Indians who obtained reading glasses will have improved their productivity and functionality. In three years Scojo India will have created 356 employment opportunities, 327 of which for very low income individuals. As well, micro-entrepreneurs distributing reading glasses in rural areas will earn an average supplemental income of $144 per year, substantial in rural India. The inclusion of moderate income urban customers permits Scojo to expand its target population and reach more people who can benefit from reading glasses, while providing additional funding to serve rural clients sustainably.
Market development and exit strategy--distribution of reading glasses in India is controlled by eye care professionals who lack the financial motivation to sell readymade reading glasses to people from low economic classes. Scojo's aim is to develop the market for readymade reading glasses and replicate the channel shift that took place in the West over a decade ago during which readymade reading glasses became available without prescription in mass-market retail outlets, creating a $1 billion industry. Market development inevitably brings competition. Rather than a threat, this is an opportunity for Scojo to achieve sustainability by transferring its interests to a local social enterprise and to exit the market, and then invest in new markets where the need for readymade reading glasses still exists.
As with other models, the integrated social enterprise model is not straightforward, the degree of integration between the program and business activity in the operational model depends on its purpose--the extent to which the enterprise is used as a funding mechanism or program mechanism. Unlike many integrated social enterprises, Scojo India is a mission-centric example: "to create a sustainable eyeglass manufacturing and distribution operation that makes affordable, quality readymade reading glasses readily available to all low to moderate income individuals in India." Thus, integration of Scojo India's social program and business activities is high. IONA Senior Services is and example of a mission-related social enterprise where less integration occurs between business and social activities.
[Source: Information provided by Yale School of Management and Goldman Sachs Foundation: Partnership on Nonprofit Ventures 2003; Scojo Business Plan Executive Summary]
- 1In most literature, popularized by authors C.K. Prahalad and Stuart Hart, Base of the Pyramid (BoP) Strategies view the BoP as a latent market for multinational corporations and for-profit companies to sell goods and services, and thus the BoP can provide new growth opportunities and innovative selling approaches. For the private sector, the BoP strategy is a subset of corporate strategy, a business first approach which recognizes profit potential of untapped markets and unrealized business opportunities which may also create social or environmental impact as a byproduct. It's important to note that BoP strategy is not social enterprise, although social enterprises may use some of the BoP techniques to serve its low income clients.
- 2Purchasing power parity (PPP) equates the price of a basket of identical goods and services in two countries. PPP provides a standard comparison of real prices between countries.
- 3Prahalad and Hart 2002
- 4Prahalad 2005
Cooperative ModelCooperative Model
The cooperative model of social enterprise provides direct benefit to its target population or "clients," cooperative members, through member services: market information, technical assistance/extension services, collective bargaining power, economies of bulk purchase, access to products and services, access to external markets for member-produced products and services, etc. The cooperative membership is often comprised of small-scale producers in the same product group or a community with common needs--i.e. access to capital or healthcare. Cooperative members are the primary stakeholders in the cooperative, reaping benefits of income, employment, or services, as well as investing in the cooperative with their own resources of time, money, products, labor, etc.
The cooperative model is embedded: the social program is the business. The cooperative's mission centers on providing members services. Financial self sufficiency is achieved through the sales of its products and services to its members (clients) as well as in commercial markets. Cooperatives use revenues to cover costs associated with rendering services to its members and surpluses may be used to subsidize member services.
Cooperatives social enterprises include agricultural marketing cooperatives, which market and sell its members' products, while agricultural supply cooperatives, provide inputs into the agricultural process. Fair trade organizations frequently work with agriculture and commodity producer-owned cooperatives--i.e. coffee, cocoa, wine tea, as well as nonagricultural products--i.e. handicrafts.
Self-Help Groups (SHGs) comprised of low income-women, and popular in South Asia, are frequently organized into cooperatives to support a variety of their members' interests related to commerce, health and education.
Credit Unions are another example of a cooperative tied to economic development and financial service programs, popular across West Africa, Latin America, and Balkans.
In the UK a slight variation on the cooperative, called "mutuals" or "societies" are commonly associated with social enterprise. Unlike a true cooperative, mutual members usually do not contribute to the capital of the social enterprise company by direct investment, instead mutuals are frequently funded by philanthropic sources or the government.
Theoretical example: cooperatively owned and run community savings and credit systems, "Rotating Savings and Credit Associations" (Latin America), Tontins (West Africa), Zadrugas (Balkans) are a form of indigenous credit union long implemented around the world to provide access to financial services. Self-organized community savings and credit systems are capitalized through member investments and savings, which are then mobilized as interest bearing loans also to members. Ownership is communal and equitable with all members owning a stake in the organization. Community savings and credit systems are democratically governed by an elected board of members responsible for financial oversight and loan approval and administration. Community savings and credit systems are self-sufficient through earned interest income from loans.
Equal Exchange, an example of Cooperative Model
Equal Exchange (EE) is a US-based fair trade coffee company legally structured as an employee-owned cooperative and an example of embedded social enterprise. Equal Exchange purchases coffee beans and cocoa directly from small democratically-run farmer cooperatives in developing countries at fair trade prices--a guaranteed minimum price regardless of how low commodities markets fall. Equal Exchange pays a fixed rate of $1.26 and $1.41 per pound for organic certified coffee in contrast to $0.45 and $0.60 per pound that buyers pay on the commodities market1
. The embedded nature of Equal Exchange's social programs is evidenced in its business activities.
Marketing strategy--the company uses educational marketing campaigns to raise awareness of the positive social impact purchasing fair trade coffee has on low income farmers. Equal Exchange's coffee packaging contains information regarding the social benefits of fair-trade purchasing.
Distribution channels--in addition to retail outlets, products are sold through interfaith organizations and nonprofits that educate their constituents about fair trade coffee; then retain a margin on each sale to support their social activities.
Quality products--Equal Exchange assists farmers with sustainable techniques to promote ecological-friendly cultivation of coffee. The results yield higher product quality, environmental conservation, and 85% certified organic fair trade coffee for consumers.
Social Impact--EE works with twenty-five trade partners, farmer cooperatives, in twelve countries, and achieves social impact in two significant ways: supplier credit and fair trade premiums.
- Supplier credit--Most cooperative farmers in developing countries do not have access to bank financing, and those that do pay 25%-35% interest. The more available option is moneylenders, who charge up to 100% of the price of the loan. EE offers pre-harvest credit at interest rates of 8% to 9%, which enables farmers to produce high quality crops without losing margins on the sale of their products. In 2001 EE extended $700,000 in pre-harvest credit to 75% of farmers who requested loans.
- Fair trade premiums have substantial impact on the economic security of farmers and their families, increasing disposable income for food, education, healthcare, housing, etc. EE pays farmers more than twice the going rate on the commodities markets. In 2002, EE paid $1.2 million in fair trade premiums to cooperative farmers. In a protracted commodity price slump, which has occurred in recent years, these premiums literally save thousands of lives by warding off starvation occurring in many coffee growing regions.
Financial strategy and viability--Its for-profit legal status notwithstanding, Equal Exchange's financial motives are viability, not profit; in 2002 the company had $10.4 million in sales, which translated into $1.2 million in above market premiums for cooperative farmers, and funded marketing activities that raised the awareness of tens of thousands of consumers who bought fair trade products. The dollar figures are a monetary representation of Equal Exchange's sustainable mission accomplishment.
Equal Exchange is a mission-centric social enterprise; its business decisions and activities are central to accomplishing its mission: "To build long-term trade partnerships that are economically just and environmentally sound, to foster mutually beneficial relations between farmers and consumers and to demonstrate through our success the viability of worker-owned cooperatives and fair trade."
- 1Statistics from 2002
Market Linkage ModelMarket Linkage Model
The market linkage model of social enterprise facilitates trade relationships between the target population or “clients,” small producers, local firms and cooperatives, and the external market. The social enterprise functions as a broker connecting buyers to producers and vice versa, and charging fees for this service. Selling market information and research services is a second type of business common in the market linkage model. Unlike the market intermediary model, this type of social enterprise does not sell or market clients' products; rather it connects clients to markets.
If the enterprise is stand-alone; its mission revolving around linking markets, and its social programs support this objective, the model is embedded. In this case, the social program is the business, income generated from enterprise activities is used as a self-financing mechanism for its social programs.
Market linkage social enterprises are also created by commercializing an organization's social services or leveraging its intangible assets, such as trade relationships, and income is used to subsidize its other client services. In this second example, social program and business activities overlap, hence follows the integrated model.
Many trade associations, cooperatives, private sector partnership and business development programs use the market linkage model of social enterprise. Types of social enterprises include, import-export, market research and broker service.
Theoretical example: an agricultural cooperative grows fruits, vegetables and horticulture products, which it sells in domestic, and export markets, saw a business opportunity to leverage its exclusive database of agricultural market data. Until this time only cooperative members had access to the comprehensive information market, however, producers and buyers alike could benefit from this valuable information. Therefore, the cooperative launched a market data and research social enterprise as a means to augment its social programs by extending services to nonmembers. The market linkage social enterprise sells information on local and export market for types of agricultural products, including buyers and producers, prices, export duties, shipping, and chemical and fertilizer regulations, storage, etc. The enterprise has two main services: database search and market information updates that can be purchased individually or by subscription; and market research services such as feasibility analyses and market studies. Most of the social enterprise's clients are farmers, other cooperatives, trade unions, producer groups, small agricultural firms and food processors. The cooperative uses the income generated by its social enterprise to subsidize member services concerning crop improvement, sustainable farming, animal husbandry and agricultural loans.
PhytoTrade, an example of Market Linkage Model
In Southern Africa few economic opportunities exist for the rural poor, many of whom live on annual incomes below $100. An emphasis has been placed on cash-cropping for employment, though 65% of the region is arid and agricultural cash crops are risky for vulnerable populations, ecologically inappropriate and financially unproductive. Employment alternatives residing in the $45 billion global market for natural products have been largely inaccessible for rural African producers. Natural products made from African plant species have a multitude of applications: beverages, cosmetic oils, health care products, herbal teas, jams, nutritional supplements and medicinal products. Because natural products are grown in the wild, their collection and cultivation can easily be managed by rural producers.
PhytoTrade Africa is a non-profit trade association social enterprise that promotes sustainable production and fair trade, contributing to the economic development of southern Africa. PhytoTrade's main aim is to develop business partnerships between rural producers and buyers, major European natural products companies. In doing so, the social enterprise links rural producers in six southern African countries directly to source suppliers, buyers, quality control evaluators, product development specialists; additionally it helps its clients secure export contracts, and provides a clearinghouse for research and development information on African natural products.
In partnership with another nonprofit, Southern African Marula Oil Producers Network (SAMOPN), PhytoTrade Africa embarked on a new venture designed to promote a biodiversity-friendly rural production system. Marula oil is derived from an indigenous plant species that is critical to the maintenance of ecosystem integrity in dryland areas. Commercialization of a range of new marula products is projected to earn between 8,000 and 10,000 rural producers as much as $8-12 million per year, giving rural communities faced with growing economic pressure to convert natural woodlands into arable cropland incentives to invest in sustainable management of dryland ecosystems. SAMOPN helps rural producers with sustainable production and extraction of quality marula oil while PhytoTrade Africa facilitates market linkages and the commercialization process.
In another example, PhytoTrade Africa signed an agreement with Aldivia S.A, a French lipids company. Aldivia is specialized in the sourcing, design, manufacture and commercialization of lipids of plant or vegetable origin for cosmetic and industrial use. PhytoTrade works collaboratively with Aldivia to develop and market a range of biologically active lipid ingredients fabricated by rural producers from a variety of botanical resources indigenous to Southern African. 1
[Source: Information provided by World Bank Development Marketplace 2003]
- 1PhytoTrade Africa website
Service Subsidization ModelService Subsidization Model
The service subsidization model of social enterprise sells products or services to an external market and uses the income it generates to fund its social programs.
The service subsidization model is usually integrated: business activities and social programs overlap, sharing costs, assets, operations, income and often program attributes. Although the service subsidization model is employed primarily as a financing mechanism--the business mandate is separate from its social mission--the business activities may enlarge or enhance the organization's mission.
Nonprofits that implement service subsidization social enterprises operate many different types of businesses, however, most leverage their tangible assets (building, land, or equipment) or intangible assets (methodology, know-how, relationships, or brand) as the basis of their enterprise activities. Commercialization of core social services leads to enterprise activities that are close in nature to the organization's social programs and may enhance the mission; whereas leveraging physical assets to sell to the public may result in an enterprise that is very different from the organization's social programs. In financial terms the business benefits from leveraging and cost sharing relationships, and provides a stream of unrestricted revenue to "subsidize" or wholly fund one or more social services. Service subsidization is one of the most common types of social enterprises because it can be applied to virtually any nonprofit. The service subsidization model may conceivably grow into an organizational support model if it becomes profitable enough to throw off revenue to the parent organization.
Service subsidization model social enterprises can be any type of business. Those that leverage intangible assets such as expertise, propriety content or methodologies, or exclusive relationships tend toward service businesses that commercialize these assets: consulting, counseling, logistics, employment training or marketing. Those that leverage tangible assets such as buildings, equipment, land, employees, computers, etc. may launch any number of enterprises that utilize infrastructure and capital assets: leasing, property management, product-based retail businesses; copying, transportation or printing services, etc.
Theoretical example: a senior service organization has two social enterprises that generate revenue to subsidize its social programs serving frail indigent seniors. The organization's "eldercare business" commercializes case management services it renders free of charge to its clients. This social enterprise sells "premium eldercare" services, using the organization's expertise in nursing, therapy, and elder wellness in markets where either seniors (or their adult children) have the financial means to pay full fee, or are insured by a company that covers the service. In this case, the enterprise enhances the organization's mission by reaching a larger number of seniors, though not identified as the organization's clients. The organization's second enterprise leverages its 10 passenger van that carries clients on outings, to doctors' appointments, and shopping. The organization leases the vans at night to another nonprofit organization that works to reduce drunk driving accidents by contracting with bars and driving intoxicated customers home after last call. Though the second enterprise provides a social purpose, it is >a href="seum">unrelated to the mission of the senior-services parent organization. The two businesses combined generate 45% of the organization's budget, covering a large portion of its program costs.
ANCA, an example of Service Subsidization Model
Associacao Nacional de Cooperacao Agricola (ANCA) works in areas of Brazil where illiteracy rates are as high as 80% of the population. This education nonprofit provides literacy training and educational services to children, adults, and community activists.
While operating its programs, ANCA recognized a gap in the education market for pertinent leadership and organizing resources for the community activists it serves. In response to this need, ANCA developed training and educational materials for labor movement leaders, and found there was also high demand for these products outside their target population. ANCA saw an opportunity to sell its materials and generate supplemental income for its literacy programs. Thus, ANCA created a social enterprise, Editora Expressao Popular (Popular Expression Press), a publisher and clearinghouse for educational materials for nonprofit leaders and community activists.
Editora Expressao Popular sells periodicals, audiotapes, and publications within Brazil and export markets. The social enterprise enlarges ANCA's mission beyond teaching literacy to also facilitating social change. Editora Expressao Popular is integrated into ANCA as a division of the organization. In 2002 the enterprise sold 7,000 books, up from 4,500 the year before. Income is used to cover start up and operating costs of the press, and to subsidize programs aimed at ANCA's clients overcoming illiteracy.
Organizational Support ModelOrganizational Support Model
The organizational support model of social enterprise sells products and services to an external market, businesses or general public. In some cases the target population or "client" is the customer.
The organizational support model is usually external: Business activities are separate from social programs, net revenues from the social enterprise provide a funding stream to cover social program costs and operating expenses of the nonprofit parent organization. Although organizational support models may have social attributes, profit not social impact is the perquisite for this type of social enterprise. This model of social enterprise is created as a funding mechanism for the organization and is often structured as a subsidiary business (a nonprofit or for-profit entity) owned by the nonprofit parent. Successful examples of this model cover all or a major portion of the parent organization's budget.
Similar to service subsidization model, the organizational support model may implement virtually any type of business that leverages its assets. This model is commonplace among western nonprofit organizations across sectors.
Theoretical example: an environmental organization created a separate for-profit subsidiary that contracts with the government to conduct environmental monitoring and compliance evaluations of private companies. Profits after tax and business reinvestment are funneled to the nonprofit parent, an environmental education organization. This income represents a major source of unrestricted funding, allocated to the nonprofit's operating expenses as well as environmental advocacy programs for which the organization is unable to obtain donor funding.
Para la Salud, an example of Organizational Support Model
In many rural areas in Guatemala, residents lack access to basic health services, inputs, and medicines. Barriers include: mountainous topography with few roads, poor distribution systems for health inputs, urban flight of medical professionals, and few sources of stable funding for community clinics.
Para la Salud, a national health organization, started a chain of village pharmacies to address this problem. The pharmacy social enterprise was designed as a sustainable distribution model for health inputs in rural areas as well as a means to generate funds to subsidize rural clinics. Para la Salud purchasing is centralized, medicines and supplies are ordered in bulk and shipped to Para la Salud's headquarters in Guatemala City before being sent to rural pharmacies.
The organization has also worked hard to counter the effects of brand marketing by US pharmaceutical companies through educational campaigns that promote lower cost generic drugs. The business model uses streamlined systems, centralized purchasing, inventory management, order fulfillment, and delivery to lower the high transaction costs associated with serving rural areas.
The pharmacies have an average profit margin of 20% to 25%, and profits are used to cover the costs of rural community health clinics. To date, this village pharmacy social enterprise enables a community to self-fund its local clinic without external subsidy in four to five years. Currently, Para la Salud operates 43 village pharmacies serving poor communities in 13 departments in Guatemala.
Combining ModelsCombining Models
Social enterprises combine operational models to capture opportunities in both commercial markets and social sectors. Combining is a strategy to maximize social impact as well as diversify income by reaching new markets or creating new enterprises. In practice, most experienced social enterprises combine models--few social enterprise operational models exist in their pure form. Operational models are like building blocks that can be arranged to best achieve an organization’s financial and social objectives.
Social enterprise models are combined to:
- facilitate enterprise or social program growth;
- increase revenues by entering new markets or businesses;
- augment breath or depth of social impact by reaching more people in need or new target populations.
Complex ModelComplex Model
A complex model of social enterprise combines two or more operational models. Complex models are flexible; virtually any number or type of operational models can be combined into one social enterprise.
Models are combined to achieve desired impact and revenue objectives. For example, operational models that fall into integrated or external social enterprise categories may yield greater financial benefit, whereas embedded social enterprises offer higher social return, thus models are combined to achieve the dual objectives of the social enterprise. If appropriate for an organization's target population, the employment model is often combined with one of the other models to add social value--i.e. employment and organizational support model (as illustrated). Operational models are often combined as part of a natural diversification and growth strategy as the social enterprise matures.
Theoretical example: an African horticulture cooperative runs a social enterprise that links local growers to buyers in European markets. The services it provides to small producer clients include: horticulture technical assistance, quality control, contractual relations with flower importers and freight. This social enterprise earns income by charging European companies a commission on each sale, thereby covering the costs of its client services. After some years of operating their market linkage social enterprise, cooperative managers saw a lucrative opportunity to expand their business by entering the horticulture industry as a producer. To avoid competing with their clients, they choose to grow hybrid roses, a market whose infrastructure and costs bar small producers from entering. Hybrid roses are fickle, requiring constant care, which provided the cooperative an opportunity to create employment for a large number of low-income and unskilled people in the community. Profits from the rose business support the parent organization’s hard-to-fund operating costs, as well as funding the startup of a new social enterprise, a horticulture school. This example of a complex model combines: market linkage, organizational support and employment operating models.
Cambiando Vidas, an example of Complex Model
In 1999 a new paved highway opened along Mexico's formally isolated coastal fishing villages in Nayarit State to tourists, and consequently, to large developers. The result was a dramatic shift in the local economy from fishing and agriculture to tourism and infrastructure development. The shift displaced local residents, most of whom are poorly educated peasants and lack the know-how and capital to capture the changing market.
In response, Cambiando Vidas--"Changing Lives," an educational organization, launched a comprehensive, multifaceted rural development program with complementary enterprise and social service components to preserve the local community and provide new livelihoods for its residents.
Cambiando Vidas built a "tool lending library" where residents can borrow hand and power tools and use them as implements in economic activities tied to tourism and construction. The second social component is a vocational training program that teaches construction skills--masonry, electric, plumbing, and carpentry--to unemployed youth and adults in the community. The library supplies tools for the vocational training program.
On the enterprise side, Cambiando Vidas has initiated a B&B project and built (so far) six comfortable tourist rooms above residents' homes. Income from room rental is divided between owners as family income and a revolving loan fund to build more B&B rooms. Apprentices from the vocational training program provide the labor to build the B&Bs and gain work experience in the process.
Next, Cambiando Vidas will create local employment by launching a construction business and bidding directly on small building contracts, where it has identified a viable niche, as well as subcontracting to large developers. Profit from the construction business will be used to fund the secondary education and vocational training program.
Mixed ModelMixed Model
Many nonprofit organizations run multi-unit (mixed) operations, each with different social programs, financial objectives, market opportunities and funding structures. Each unit within the mixed model may be related vis-à-vis target population, social sector, mission, markets, or core competencies. A museum for example, in addition to educational art exhibits, might have both a for-profit catalogue business and highly subsidized research and acquisition operation.1
Nonprofits employing a mixed model combine social and business entities; subsidiaries owned by the parent organization or departments (cost or profit centers) within it to diversify their social services and capitalize on new business and social market opportunities. Like all social enterprises, mixed models come in a variety of forms depending on the organization's age, sector, social and financial objectives and opportunities. The diagram is representative of complexity, not conformity of organizational form.
Mixed models are often a product of an organization’s maturity and social enterprise experience. This model is common among large multi-sector organizations that establish separate departments or subsidiaries for each technical area--i.e. education, health, economic development, etc. and new business ventures. In nonprofits with mature social enterprises, mixed models are the convention, not the exception, a result of expansion and diversification.
Council of Community Clinics, an example of Mixed Model
Council of Community Clinics (CCC) is a San Diego-based nonprofit membership organization comprised of community clinics serving the uninsured and underinsured poor through three linked but separate entities.
The first entity is a nonprofit advocacy organization, Council of Community Clinics (CCC) that lobbies to change legislation to strengthen the health safety net for at-risk populations. The second entity, Community Clinic Health Network (CCHN), is a nonprofit subsidiary of CCC that provides technical assistance services to build capacity of community clinics in several areas of healthcare and management. The third structure is a for-profit, Council Connections is a wholly owned subsidiary of CCC.
Council Connections is a group purchasing business that buys bulk pharmaceuticals, office supplies, medical surgical supplies, and laboratory services at a discounted volume-based prices, then sells them to community clinics at a mark-up, but at substantially cheaper prices than retail.
- 1Dees, Gregory, Enterprising Nonprofits, Harvard Business Review, January-February 1998
Enhancing ModelsEnhancing Models
This section introduces methods that enhance existing social enterprise operational models.
Franchise ModelFranchise Model
An organization can franchise its "proven social enterprise model" and sell it to other nonprofits to operate as their own business. Franchising enhances nonprofit organizations that have viable, yet non-scaleable social enterprises, through replication. For example, a café that employs disabled people may be profitable only when it employs 12 or fewer disabled people. However, if franchised, the café social enterprise can create employment for hundreds of disabled people. Goodwill Industries’ used clothing and furniture retail stores are a good example of an employment model social enterprise achieving scale through the franchise model.
Hence, the franchise model enhances scalability and social value creation through replication. Purchasers pay franchise fees to receive the social enterprise model, methodology, etc., and ongoing technical support from the franchiser. Buying a franchise enables nonprofit organizations to focus on running operations of a proven enterprise, rather than worrying about what type of business to start, which products to sell, or what markets to enter. Becoming a franchiser creates a new social enterprise for the organization that leverages the organization’s industry and business expertise, and in turn creates new social impact opportunities and another source of earned income.
The franchise itself can be any successful and replicable social enterprise. The social enterprise model may be any of those listed, depending on the type of business and objectives. Ben and Jerry’s Partner Scoop Shop is another good example of a social enterprise enhanced through the franchise model.
An integrated microfinance organization sells its trademarked methodology, which combines health and business education with financial services, to credit unions in developing countries. The US-based parent organization provides consulting and ongoing technical support to franchisees. This approach allows the franchiser to earn money, achieve greater social impact via scale, and keep costs low by leveraging its program methodology and credit unions' infrastructure.
Committee for Democracy in Information Technology (CDI), an example of Franchise Model
The Committee for Democracy in Information Technology (CDI) is a nonprofit organization with a two-fold mission: to promote digital inclusion and create awareness of citizen's rights principles through the use of information technology. CDI works in partnership with schools and community-based associations through a social franchise model providing free computer equipment, software, and educational strategies.
Each school is managed as an autonomous unit and is self-sustainable through contributions made by students, who provide the necessary funds to cover the maintenance costs and the instructors' salaries. Its methodology was developed by CDI in partnership with specialists from the Campinas State University in Brazil, which operates in 19 Brazilian states.
CDI is continuously expanding its national and international network and is presently located in Brazil, Colombia, Chile, Uruguay, Mexico, Guatemala, and Honduras. This educational approach to information technology has also been complemented with extensive job training and an internship program in high-tech related fields, catalyzing a powerful multiplying effect in improving the lives the students and their communities. An interesting example is a group of CDI students from the shantytowns of Rio de Janeiro who first interned with StarMedia Brazil and later went on to secure positions teaching technology and Internet skills to youth with Globo.com and elsewhere.
Private-Nonprofit Partnership ModelPrivate-Nonprofit Partnership Model
The private-nonprofit partnership model of social enterprise is a mutually beneficial business partnership or joint venture between a for-profit company and a nonprofit organization. The partnership may occur with an existing social enterprise, or may result in the creation of a new entity or a profit center. The social enterprise may or may not be mission-related and leverages the nonprofit organization's assets, such as relationships with their target population, community, brand, or expertise. For the for-profit, the partnership yields one or more of the following benefits: lowers costs (cheaper labor/lower R&D costs); reduces restrictions (no strict regulatory oversight); improves community relations or public image; enables new product development; penetrates new markets; or increases sales. Partnership benefits for the nonprofit are financial return, marketing and brand equity, and in cases where the activity is mission-related, social impact. The market is most often external--the public, but examples exist where the paying customer and the client are one. The private-nonprofit relationship may be structured as a joint venture, a licensing agreement, or formal partnership.
It is worth noting that nonprofits use the term "partnership" loosely to refer to corporate philanthropy or cause-related marketing. The private-nonprofit partnership model is a partnership based on active operational involvement in a social enterprise, not simply a business relationship, which could be a funder, customer or supplier represented in other social enterprise models.
Theoretical example: an environmental organization forms a partnership with a travel and touring company to create a new "Eco Enterprise." The nonprofit organization provides environmental education, consulting services, and access to land conservation trusts and indigenous people under its auspices. The touring company handles marketing, and manages tourists and the touring logistics. The two organizations share the return. The nonprofit uses the proceeds to fund its environmental programs and the company retains or distributes their profit. Benefits for the for-profit are: access to the eco-tourist market, conservation land and local people, and an "eco-friendly" public image. The nonprofit gains: a new vehicle to promote it social programs--the tourist market, a new source of fundraising (many tourists donate to the organization) and social impact vis-à-vis new economic opportunities for indigenous people to sell their environmental products (i.e. handcrafts) or services (boat excursions). Both make money.
Helados Bon, an example of Private-Nonprofit Partnership Model
Helados Bon is large progressive ice cream company based in the Dominican Republic, whose interest in diversifying its ice-cream led to the introduction of a new flavor, macadamia, and the opportunity to help the country's ecology. A partnership was forged between Helados Bon and an environmental nonprofit, Plan Sierra. The business idea leveraged each of the partners' knowledge and assets, marrying Helados Bon's ice cream industry expertise with Plan Sierra's conservation efforts. The social enterprise that emerged helps local farmers grow macadamia trees and reforest farmland through the sale of delicious ice cream.
Macadamia trees, which are capable of growing to a height of over 500 meters on infertile land, are ideal for reforestation and conservation of natural resources. In the partnership, Plan Sierra manages and coordinates local farmers growing macadamia nuts which are used to make the new ice cream flavor; Helados operates the production and sale of the macadamia ice cream. The social enterprise earns one peso for each double macadamia ice cream sold to fund macadamia conservation efforts and local farmers gain a steady customer for their macadamia nuts. Helados Bon also disseminates information about conservation and the importance of growing macadamia to its customers. Plan Sierra uses the revenue generated by the social enterprise to promote and develop its macadamia program.
The partnership is a win-win proposition for all of those involved: Helados Bon increased its sales; Plan Sierra achieved the reforestation of more than 140,000 hectares with macadamia trees; and farmers have benefited with higher paying jobs and marketable crops.