MFG Archive

Your Business Model Shouldn’t Be Just an Assumption

This post is the last in our series on Nonprofit Decision-Making. And we’re closing out with a critical look at viability…  Every mission has underlying assumptions that either inform or strictly define the business model. It’s time to bring those assumptions to the front and test them to ensure that the way you go about your mission is financially sound. Mari Kuraishi takes you backstage with examples from GlobalGiving and Avon.

When people ask me, “What’s Markets for Good about?” I usually answer that it’s a group of organizations dedicated to finding a way to ensure that information and resources in the philanthropic sector flow in the most efficient way possible for the greatest possible good.

I talk about how this requires better tools for collaboration between organizations, as no one organization can hope to have the vertical or the horizontal reach to be able to serve the diverse and numerous constituents, nonprofits, funders, and volunteers–let alone evaluators, analysts, and policy wonks–on its own.

But I rarely talk about the fundamental assumption behind Markets for Good: that markets provisioned with ample information can arrive at the most efficient outcomes, by allowing for and freely entering into exchanges of value.

Markets presume that the players in the space have figured out how to generate value in the space. Because, if you don’t generate value in a marketplace, you don’t last long. Customers abandon you, capital funders don’t see much upside in investing in you, and you find it hard to pay your suppliers.

What that means in practical terms is that every organization in this social-sector space has to have a viable business model, which is what I want to talk about today.

Now when I usually talk or write, it’s about impact or innovation or uplifting stories about what our organizations have made possible. I rarely talk about our business model. It’s not remotely uplifting or redemptive, but the truth is that I obsess over our business model.

Because business models matter.

Take, for example, GlobalGiving‘s business model. We charge a fee on every donation that covers the cost of providing everything from the basic product to training to access to generous CSR programs to thousands of nonprofits and social enterprises worldwide. The fee happens to be percentage based, which has certain knock-on effects. It means that the more donations we process, the more revenue we retain. So it aligns our parochial institutional interest with the goal of getting more resources out to the organizations we serve.

It also means that the fee feels larger, the larger the donation. When we net $1.30 from a $10 donation, that feels quite reasonable. But it also means we net $1,300 from a $10,000 donation, which sometimes strikes donors as being high. So that pushes us, subtly, to a mass market orientation. We could have chosen–indeed, can still choose–to graduate our fees, but that could have led to the mass market “subsidizing” larger donors. We also could have chosen to charge different fees depending whether the recipient organization was based in the US or whether they were based outside the US. Or we can think about flat fees. Or a model where our revenues are completely independent of the flow of donations through our site. These choices matter.

Another example is contained in this piece USAID – Direct Sales Models In Health. There, Michael Kubzansky clearly lays out the dilemma for an enterprise dedicated to serving the last mile of health product and information delivery in the hardest to reach areas of the developing world.

It borrows heavily from the Avon salesperson model in that it leverages the incentives of individual sales people to make a living selling a high value product. But as the article lays out, a seemingly small decision to have the salespeople also be the primary conveyors of health information to the constituents leads to high recurring costs for the social enterprise.

The author goes on to suggest that separating the delivery mechanisms of health products from health information might allow the enterprise to reach break-even a little faster.

So seemingly small decisions can have large impacts on financial outcomes, and in the long term, the difference is between being a going concern, or not.

So there you have it. The stuff we obsess over, but rarely talk about. But perhaps we should talk about it more, because it matters; not just because it determines whether we become sustainable or not, but because it inclines us to pay attention to certain things and not others. For example, it can make the difference on whether we make information open, or not. Who’s up for a conversation about business models?

Comments

3
  1. Ami Dar says:

    Thanks Mari! And hello 🙂 This definitely resonates with our work at Idealist. Our business model is also pretty simple, and completely aligned with our mission and our values. Any organization in the world can use Idealist to post jobs, internships, vol opps, etc. Everything is free for everyone, with one narrow exception: orgs based in the US pay $70 when they post a full-time job. This is very low by US standards, but enough to keep us going (it adds up to $4M this year). This model satisfies us because helping people find work in the sector is completely aligned with out mission. But yes, we obsess 🙂

  2. Jeff Mowatt says:

    Over the years, there have been quite a few conversations about business models. One memorable example was the Skoll conversation on Profit for a Purpose, which is the term we used to describe our social business approach. I describe it by means of extracts from proposals which have advocated it:

    http://www.p-ced.com/1/node/80

  3. Beth Sirull says:

    Yes, we, too, obsess about our business model here at PCV–in fact, part of the obsession is that we have business models, plural, that all have to fit together to maximize impact while maintaining sustainability. PCV’s comprehensive effort to ensure that the economy works for everyone–and that everyone works–entails four different but integrated approaches with four different revenue models: 1. Providing capital to small businesses where fees and the interest spread are covering a greater proportion of costs every day, but a subsidy, philanthropic or from another business line, is still needed; 2. Capacity building services for small business, fee-based with philanthropic subsidy; 3. Policy analysis, education and advocacy which is funded by almost exclusively by foundations and whose high visibility is leveraged to generate support for the other lines of business; and finally, 4. our Impact Evaluation consulting practice, which assess the social impact of impact investments for pension funds, impact investing fund managers, foundations and corporations. Proceeds from our consulting offset our need to raise philanthropic dollars to support our other lines of business.

    As you can see, our model–both in revenue generation and in delivery of aggregate impact, is complex! All the parts have to fit together to sustain the organization and further efforts to ensure that the economy works for everyone–and everyone has work! So, far it’s working!

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