Diversify your sources of income
Social Impact Business Modelling Principles no. 6
Identifying potential sources of revenue and setting up a sustainable income strategy is another crucial, but challenging area of social organisation business models and therefore the focus of the last article in the series.
A foreword on moral responsibility
If a social impact business has to stop or suspend operations, the consequences are usually a lot darker than when a for-profit business folds. In a for-profit environment, investors and employees might have some legal protection or compensation they can push for, and customers just switch to a competitor’s product. But when the product that no one buys any more represents someone’s education, food, shelter or health, then we have a much more severe responsibility to be in the black.
Income sources of social impact organisations
Social sector organisations have the exact same sources of finance available as any other business or any individual:
- Capital
- Earned income
- Loans*
The difference between for-profit and NFP lies in the weight of each of these sources. Charities rely almost exclusively on grants and donations, which is a form of capital. The majority of individuals and for-profit businesses sell products and services, which is earned income. Social enterprises should ideally operate on earned income as well; but in reality, most of them sit somewhere in between. More about that later.
[*Less relevant for this article as loans are not a sustainable source. Non-repayable loans are considered as capital here for the sake of simplicity.]
The key to reliable & sustainable income
Every market keeps changing and all products have a life cycle. What works today, might not work tomorrow — organisations need to have at least one eye on the future at all times. If and when there is strong direct competition**, this race is accentuated: if you don’t respond to changing needs, someone else will. Those who survive in changing environments have one thing in common: they have multiple, independent sources of income from different market segments and product ranges. If one income channel is at loss, the rest can make up for it until the organisation works out a new strategy.
[**As mentioned elsewhere, direct competition is a strong motivator for developing innovation and strategic foresight. As the social sector has less of this pressure that would force them to look forward, but they are strongly pressured to look backwards (e.g. impact reporting requirements), there is a higher risk of them missing the boat.]
Diversification for charitable (capital reliant) organisations
Relying on voluntary capital is not an issue in itself. On the contrary, despite the recent social enterprise fad, it’s still the highest social impact business model. Efficient charity organisations are able to channel as much as 70–75% of funds donated to beneficiaries. For a social enterprise that also has to spend on creating an intermediary product/service, this percentage will always be lower (1). The problem lies in the lack of diversification of sources of capital. According to research done by the National Council of Voluntary Organisations (NCVO), just over half of social sector organisations receive more than 50% of their income from a single source in the UK. Such over-reliance is a risk to the survival of an organisation.
Many cite resource constraints as the source of this problem: building out new donor relations whilst maintaining existing ones can put a strain on teams. Whilst this is not false, the real underlying issue in the case of charities is the inflexibility of the value proposition. The value proposition of a charity is their social mission, which means that opportunities for diversification of the product are very limited. To give an example, it was perfectly fine for IBM that started out selling cheese slicers to move into computer hardware; but the Cancer Council could hardly diversify into HIV research.
Given this constraint, charities should focus on the other diversification strategy: expanding into new market segments. Here, on the other hand, there is plenty of opportunity. For charities that rely on donations from the public, the first step is to engage with their existing donor base to understand who donates to them and why. Once there is clarity on how the organisation’s mission is perceived by customers and what it means to them, there are a few options for diversification, depending on context:
- Use a targeted strategy to seek out other groups the message might resonate with if the organisation has a niche mission;
- Think of ways of making your mission more relatable for the general public and easier to engage with if you are working towards a broader goal;
- Change the messaging if the perceived and the actual mission are in misalignment, thus constraining the organisation from reaching those who resonate with its values.
For charities that rely on grants from statutory authorities, an excellent diversification option is corporate partnerships. The organisational capabilities required for grant applications are very similar to skills & capabilities needed for B2B sales, which corporate partnerships essentially are. As the extraordinarily rapid influx of corporate pledges showed for the recent fire damage at the Notre-Dame of Paris, there is a lot of money available in the private sector if the message is compelling enough for the audience.
Diversification for social enterprises
The key to diversification in a social enterprise is for the company to embrace its own business model. A social enterprise, as its name suggests, aims to sustain itself from the revenue it generates through the sales of products and/or services. The premise of the model is that the company is able to generate enough income from revenue to survive (this is discounting start-up or scale-up capital). This might all sound common sense, but in fact, most fail on the test. A report from the British Council on social enterprise reveals that most of these businesses rely on grants as their main source of income (2). Australia reports similar tendencies.
A social enterprise that relies on grants is not an enterprise, just a very inefficient charity, and that is an issue. It is an issue for the organisation itself: if they need continuous capital injection that means their business model is unstable and probably unsustainable. It is an issue for the sector as well as a whole, because they draw capital away from charities that could use that money more efficiently.
Social enterprises need to think about their value proposition like any for-profit venture. Their social mission is only a small part of the customer’s decision in buying the product or the service they offer. In this case, the customer is looking not to donate, but to obtain something they genuinely need or want, at a price that they consider fair. If the product does not meet their needs, they are not going to buy. And if they do, but they are dissatisfied with any part of their experience, they won’t return.
Social enterprises can diversify both their product range and their market reach, almost as freely as any for-profit organisation. This is a huge opportunity for bringing more resources to the social sector through new channels, and social enterprises should take full advantage of it.
(2) British Council: Social Enterprise in the UK, page 26 https://www.britishcouncil.org/sites/default/files/social_enterprise_in_the_uk_final_web_spreads.pdf
