Competitive dynamics in the social sector — Part 2
Understanding market forces is absolutely crucial for strategy — and for business modelling, which is the backbone of strategy. Recognising this, extensive research has been conducted on the topic in the for profit sector. However, similar thinking was only sporadically done to date with regards to social sector market forces. Part 1 of this article was my first — but not the last — attempt to fill that gap. This second half deals with the “so what” question.
Selecting the approach
There are three distinct customer types in the social sector. Identifying which type the majority of your customers fall into helps deciding if a competitive or a collaborative business model is more practical. The three types are:
- Governmental agencies
- Consumers
- Donors
In this context, consumers are individuals or businesses purchasing a product or service that they are the end users (consumers) of. Most social enterprises, like thankyou mainly serve consumers. Donors on the other hand are individuals or businesses who donate voluntary capital to fundraising charity organisations.
Depending on which type your customers fall into, you can predict the prevailing market forces your organisation is likely to face and build the most appropriate strategy.
Highly competitive, highly regulated: the custom of governmental agencies
Government grants aimed at financing charitable activities* are a scarce resource, as only a small portion of tax payments is redistributed for such purposes. What’s more, purchasing power is concentrated in the hands of a few customers (central and local government bodies). This combination makes the market highly competitive. Not only there are limited funds to go around, but those funds are also handed out in a very limited number of purchases. If a small charity misses out on local government funding for a year, it might put them out of business.
To ensure fairness in such a taunt situation, government grants are generally allocated through a regulated tendering process. Collaboration of bidders might also be monitored more closely than usual in the social sector to prevent unlawful collusion.
[*not the same as government contracts; this article focuses on grants]
Moderately competitive, somewhat regulated: the custom of consumers
Those serving consumers compete in a regular for-profit market, according to roughly the same rules and regulations as any other company trying to gain income from selling products or services. This dynamic is more conductive to competitive than collaborative dynamics as organisations need to build sustainable and visible differentiators to survive**. From the perspective of the consumer, the service provider donating their profits is like any other product differentiator, which they might or might not value. If the purchasing power of the customer segment valuing this differentiator over others is significant enough, the business will survive. If it survives, having this hard to imitate value proposition will mean higher switching costs to the customer. This combined with the common practice of tax breaks for NFPs elevates barriers of entry and thus moderates competition.
[**It makes even less sense for NFPs than for-profit companies to enter in a price competition, which leaves differentiation as the main vehicle of competition.]
Collaborative, loosely regulated: the custom of donors
Voluntary capital works quite different from the other two markets. As discussed in Part 1, demand is highly elastic, and price, if set at all, is set on the basis of cost, which is not how competitive markets work.
Instead of financial gain, the value exchange is determined in terms of impact. The expectation of customers is that the social organisation will do everything in their power to achieve the highest social impact possible with every dollar they get. If increased impact can be achieved with collaboration — arguably, this is often the case — then the ability and eagerness of charity organisations to cooperate becomes a strong selling point.
Given that collaboration in these cases is for social good, not for selfish gain, these markets are significantly less restricted by competition law — after all, it would be hard to call a coordinated disaster response a cartel.
Building the appropriate business model
Organisations that do not notice how dynamics differ in the case of the three customer groups and try to serve all three will usually find that they stretch themselves too thin***. Each segment requires a different strategic approach; therefore the ideal internal configuration of the organisation — processes, systems, skills and capabilities — will be different for each.
Unless your organisation is very well-resourced, has a clear and highly visible value proposition and a truly agile operational structure, I would recommend selecting only one of the business models below, one the basis of the main customer type targeted.
[***Although larger charity organisations may diversify successfully if they have both the resources and a balanced portfolio strategy.]
Model 1: Getting good at tendering
Frequently, the government is criticised for the complexity of tendering processes. Whilst governments indeed tend to be overly fond of red tape that’s not the real problem. Rather, organisations tend to see grants as “free money”. Quite the contrary is true: because the government is a reliable and loyal customer that pays well, organisations have to invest in wooing it. Lack of success in this market usually means that the contender was underprepared compared to its rivals. To win the custom of governments, an organisation has to focus a large proportion of its resources at building out tendering skills and capabilities.
A successful business model in this market segment will be very similar to the structure of a for-profit B2B model. The sales team of such organisations consists of account managers tuned in on the needs of their customers, consistently seeking to provide them value in new ways. Great NFP tender writers have the same skills: they understand the rules, regulations and objectives and know how to demonstrate the value of the project they are proposing. They know which bid is worth applying for and which one to let go. But great tendering teams with copywriters, researchers and subject matter experts who also know the strengths and weaknesses of your organisation are not built overnight.
If the majority of your income is from government grants, or you wish it to be, invest in building out great tendering skills within your organisation.
Model 2: Focusing on the needs of the consumer
With the line constantly getting blurred between charity and social enterprise, many of the latter forget that their main focus has to be serving the consumer. If you can’t win the custom of consumers, you won’t have a viable business model and you won’t have profits to donate from.
Therefore the first step for those targeting consumers is to make sure they have a robust, viable product or service that satisfies consumer needs. Private market strategy tools and frameworks work very well in this context (such as the Business Model Canvas, value chain mapping, Porter’s competitive analysis and many more). As much as you are impatient to start helping others, you can’t if you are broke.
Model 3: Partnership-based value proposition
While the two previous customer types are (respectively) similar to the B2B and B2C customers of the for-profit markets, the game changes completely when targeting donors. This is a type of customer that the for-profit sector never encounters and therefore does not understand. The donor and the consumer customer persona have completely different needs and objectives, despite the fact that they are practically the same group of people.
Donors care about the impact of their contribution; they donate to organisations because they believe that said organisation is better positioned for reaching those in need and therefore can achieve a higher impact for the same dollar. The practice of making donations to charities is in fact a loosely structured and trust-based scaling model.
One of the most efficient ways of scaling impact is through partnerships. If the majority of your target customers are donors, consider this five-step process for building a partnership based business model, designed exclusively for the social sector context.
