Earn (Some of) Your Income

Earning income can be a powerful tool to fuel the scaling journey. Money gained through earned income is unrestricted, not subject to changing priorities of funders, and can often help to drive quality by ensuring direct connection with customers and other stakeholders. It can also be empowering for customers to be actively engaged decision-makers in the process, rather than more passive aid recipients.

Photo courtesy of Fundación Capital

If I am an aid recipient, I have to take whatever is given to me. And I have to smile and accept that. But if I am someone that pays for services, I become a customer all of a sudden. And as the saying goes, I become the king, Actually, a revenue model charging people for what you do really dignifies them… and it really helps us listen to them and learn from them.
— Andrew Youn, Co-Founder, One Acre Fund in Skoll Foundation interview

For these reasons — alongside the increasing competitiveness of philanthropic and government funding — earned income is an attractive option for social enterprises to pursue.¹ However, while a powerful tool, it is not a panacea.

Earned income strategies require significant time and resources to assess and implement. They require staff with specific skill sets, such as the ability to test product/market fit and pricing, conduct accurate financial projections, and simply determine which core assets — from content to goods and services to data — might be sellable while still aligned with mission objectives.

There are great resources that include step by step frameworks for developing earned income strategies,² so our focus here is on sharing the nuances our sample illuminated with respect to earned revenue to scale impact, such as:

• How can they temper earned income expectations driven by pressure from funders or by nonprofits’ “unwarranted optimism” that often exaggerates the potential financial returns? [Read more on this topic in Foster & Bradach’s Should Nonprofits Seek Profits?]
• How are they grappling with “measuring what matters” including the trend of enterprises shifting from cost per unit or percentage of earned revenue to more custom value per dollar measures?
• What have they learned about how enterprises can resist the temptation to prioritize profitability over impact goals?
• What tools or structures can be used to make earned revenue more sustainable?

Lesson 1: Be realistic about revenue goals

B Lab on 100% financial sustainability goal. B Lab Co-Founder Bart Houlahan stated, “We started out with the ambition to be an organization that would sustain itself on revenues. Given our co-founders’ backgrounds as for- profit entrepreneurs, this was not that surprising. Our goal was 100%.” Over the course of its first 10 years, B Lab achieved 60% earned income from certification fees, subscription fees for B Lab’s data, and event and sponsorship revenue. However, B Lab has since changed its goal to 80%, recognizing that 100% would potentially preclude B Lab from being “market builders” — pushing into new areas where profitability may be unclear and where for- profit alternatives will not take the risk. The 80% goal allows for B Lab to prioritize this work which can lead to great impact but needs to be supported by philanthropic funds.

One Acre Fund on rethinking cost recovery targets. One Acre Fund (1AF) initially targeted 100% cost recovery in its core program, through which it provides a bundle of services to smallholder farmers, including financing to purchase necessary inputs. As of 2018, 1AF had successfully financed its core program with 75% earned income and 25% grants. Yet the organization has come to the realization that reaching a 100% target is infeasible (1AF notes that it may be possible in specific countries or regions, but not as a target for the entire core program) and articulated the following reasons why:
— Target population: Serving the ‘extreme poor’ is expensive and 1AF is also careful to avoid cost savings that would impact quality (e.g., increasing the number of farmers assigned to a field officer past a certain threshold could result in decreased impact).
— Macro-environment: Uncontrollable factors, such as the 2015 Burundian political crisis, a maize virus, or weather (e.g., drought in Kenya) can greatly impact costs but would not lead to 1AF abandoning its efforts there.
— Replication: 1AF states that replication “serves as a temporary headwind against efforts to reach full financial sustainability.” New locations (or new customers in existing ones) have higher start-up costs and newer clients take on smaller transaction sizes.
— Variation: Each country in which 1AF operates has a different environment and farmers facing different levels of need. In some countries, 100% sustainability of the core program might be feasible (e.g., Zambia, due to larger land sizes and therefore larger loans per farmer), but in others (e.g., Burundi and Rwanda, where farmers are poorer), a donor subsidy might always be required.

1AF still actively works to increase sustainability across its program but recognizes that different levels of sustainability may be feasible for different countries/markets.(To learn more about One Acre Fund’s approach to scaling, read their scaling snapshot.)

Lesson 2: Use a metric that measures value or impact per dollar spent

Several of our sample group are creating new metrics to guide their pursuit of financial sustainability balanced with impact:

One Acre Fund | Social Return on Investment (SROI)
“Most importantly, we are clearer that financial sustainability should be a means to an end, not an end in and of itself.” SROI allows them to prioritize what are sometimes more costly programs but that provide greater impact, and allows for comparison to other organizations/programs.
[Read more about 1AF’s SROI in Forti and Calhoun’s How Nonprofits Can Drive Health Growth Using SROI.]

One Acre Fund’s SROI ratio

VisionSpring | Philanthropic Investment per Pair (PIPP)
VisionSpring CEO Ella Gudwin: “There is not a single, magic PIPP target. Taking a portfolio approach, we need to drive it down, but not necessarily to zero; if we were, we would do wholesale all day long. But we also want to undertake more resource-intensive initiatives, like school-based eye screenings for children, which drive PIPP up. By focusing on PIPP, we can make decisions that allow us to reach the most people with a sustainable level of donated revenue that we can raise year after year.” [Read more about PIPP in VisionSpring: Business Model: Iteration in Pursuit of Vision for All.]

VisionSpring’s PIPP ratio

Root Capital | Efficient Impact Frontier
Using this graph, Root Capital can determine the level of return that it might expect for a given level of expected impact. This can be done at the individual loan level or at the aggregate to track progress and set goals for the portfolio as a whole. The efficient impact frontier is the line where Root Capital can have the most impact without losing money. This data-driven concept allows Root Capital to be ambitious in their goals around “additionality,” so that they can help funders understand why they are funding BELOW the most efficient impact frontier, or as Foote stated, “deliberately using philanthropic capital to invest in areas where other market players cannot afford to invest.” [See McCreless’s Toward the Efficient Impact Frontier for more.]

Root Capital’s Efficient Impact Frontier ratio

Read more about these metrics, and others like them, in Taking Control of the Value for Money Narrative: How Innovative Metrics Are Making Impact Part of the Financial Equation.

Lesson 3: Avoid mission creep as you seek sustained revenues

VisionSpring on creeping up-market. When VisionSpring attempted to scale its hub-and-spoke model, selling eyeglasses to base of the pyramid consumers in Central America, it ran into challenges. As VisionSpring drove towards increased financial sustainability through earned income strategies, it began to creep up-market toward consumers with a greater ability to pay. This diversion from mission led VisionSpring to shut down the program and clarify and refine its target customer definition, prioritizing first-time wearers (to align with the vision of awakening latent demand), and narrowing customer income level targets to aim for 80% who earn less than $4 per day.

Lesson 4: Explore ways to cross-subsidize within mission

One Acre Fund on targeting Tier 3 customers to fund scale. One Acre Fund has carefully segmented its target markets into three tiers: Tier 1 (ultra-poor markets — chronically hungry and unlikely to ever break-even), Tier 2 (extreme poor markets — chronically hungry and possible to come close to break-even), and Tier 3 (pre- commercial — still poor with issue of malnutrition and possible to break-even or operate with a profit). 1AF is thinking carefully about whether Tier 3 countries/areas could cross-subsidize Tier 1 and Tier 2 markets, and have begun experimenting in Zambia as a Tier 3 market. With a lower population density and larger plot size, 1AF has been able to offer Zambians the largest loans to-date ($300+ per hectare of land) which has made for a promising start towards profitability and cross-subsidy.

Advice from the Field on Earning Income

If you’re just considering…

• Evaluate and test before diving in to earned income: what are the risks, challenges, and market demand for the good or service you want to sell? What is realistic to expect in terms of returns?
• Make sure you are ready to pursue earned income — effective systems in place to track financials, staff skills and capacity to evaluate and implement business related endeavors, and staff and board risk appetite and clarity on mission objectives.

If you’re getting started…

• Carefully and narrowly define your target customer. Ensure everyone selling in your organization can articulate the core customer’s characteristics.
• Avoid mission creep by clearly understanding the drivers of impact in your model, measuring them routinely, and having go/no go checklists to hold your team accountable.
• Pilot test changes to your intervention to ensure that the increases in financial sustainability do not have unwanted consequences on impact.

If you’re digging deeper…

• Find a metric that allows you to balance impact and effective use of funds and lets you compare across programs (your own programs to guide decision-making, as well as external programs to make the case to funders). [See Taking Control of the Value for Money Narrative and its appendices for detailed examples.]
• Getting to economies of scale takes time and you must first invest in scaling. [See page 27 of VisionSpring: Business Model: Iteration in Pursuit of Vision for All for example and discussion.]
• Consider different cross-subsidy models, e.g., differentiated pricing, and differentiated products. [Read more at Jahani and West’s Investing in Cross-Subsidy for Greater Impact.]
• When cross-subsidizing, carefully balance your core customers against your up-market customers to ensure that you are staying on mission.

Notes

1. A commonly cited statistic is that from 1977 to 1997, fees and charges accounted for nearly half (47%) of the growth in nonprofit revenue, which was more than any other source [The State of Nonprofit America, ed. Lester Salamon (Washington, D.C.: Brookings Institutional Press, 2012)]. Notably, nearly 70 percent of that total was from educational and health care institutions. Another statistic notes that 50 percent of applicants to the prestigious Echoing Green fellowship pursued earned revenue in 2010 and 2011, as opposed to just 37 percent in 2006 (Julie Battilana, Matthew Lee, John Walker, and Cheryl Dorsey, “In Search of the Hybrid Ideal,” Stanford Social Innovation Review 10, no. 3 (2012): https://ssir.org/articles/ entry/in_search_of_the_hybrid_ideal
2. Our favorites include: J. Gregory Dees, Jed Emerson, and Peter Economy, Enterprising Nonprofits: A Toolkit for Social Entrepreneurship (New York: Wiley, 2001) as well as Beth Battle Anderson, J. Gregory Dees, and Jed Emerson, “Developing Viable Earned Income Strategies,” Strategic Tools for Social Entrepreneurs: Enhancing the Performance of Your Enterprising Nonprofit, ed. J. Gregory Dees, Jed Emerson, and Peter Economy, (New York: Wiley, 2002).

Read next: Leverage Hybrid Forms, Taking Control of the Value for Money Metric, or return to see all articles in Money Matters.

This article was written by Catherine Clark, Erin Worsham, Kimberly Langsam, and Ellen Martin and released in March 2018.