Drawbacks and Benefits of the Social Enterprise

2. The Social Enterprise

2.6. Drawbacks and Benefits of the Social Enterprise

The hallmark of a truly scalable social enterprise is that its product has crossover appeal to consumers outside of the core demographic. For every successful social enterprise described in this section there are a hundred that failed to get off the ground, thinking their purpose alone would sell a product people otherwise wouldn’t be interested in. This tendency for social entrepreneurs to overestimate how compelling their purpose is to consumers is one of the single biggest reasons we don’t see more venture scale social enterprises.

2.6. Drawbacks and Benefits of the Social Enterprise

Purpose carries with it a significant set of both drawbacks and benefits in the marketplace.

Crafting a compelling story to investors as social entrepreneurs requires us to understand the structure of these drawbacks and benefits - using the latter to neutralize the former and show improved scalability in the marketplace.

2.6.1. Drawbacks

The creation of added impact almost always has additional costs associated with it. Those costs depend largely on the social impact model, but can include everything from increased cost of goods (COGS), increased operating expenses (staff to administer impact program), direct impact model costs (donated margin, etc), to split focus between business and impact operations. Customers may be willing to pay a slight premium for social enterprise products but investors will look at a company with inferior unit economics to its competitors with some healthy skepticism.

2.6.1.1. Increased COGS

One of the most common drawbacks for any product-based social enterprise. The two most common sources of increased COGS are paying more for higher quality/environmentally friendly inputs or bearing additional production costs because of relatively low production scale.

Social enterprises can generally adopt two broad strategies for dealing with these: accepting initially decreased unit margins and selling at market rates or passing these costs through to customers and keeping unit margins intact. Ultimately which it can get away with is largely a function of its product’s position in the marketplace. Relatively standard good with a social

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strategy. Unique or significantly improved versions of current marketplace products (Beyond Meat)? Customers will be significantly more likely to accept reasonably premium pricing.

2.6.1.2. Increased OpEx

For “model” type social enterprises most additional costs are incurred in operating expenses instead of COGS - usually staff and capacity required to implement the impact model.

Toms Shoes, for example, has teams of employees at “origin” (producing or impact target countries) who administer its one-for-one shoe giving programs. Beyond Meat have a drastically expanded R&D team versus traditional meat producers who do little to no R&D.

2.6.1.3. Direct Model Costs

Many social enterprises create impact through the donation of some good, service, or monetary amount post-sale. These added costs are neither COGS nor OpEx and so fall into the category of direct model costs. The cost of the pair of shoes that Toms Shoes donates per sale is a straightforward example here. Many companies that bear this type of cost might rightfully look at these direct model costs as standing in for what otherwise might be direct marketing spend.

2.6.1.4 Inferior performance due to split focus

In the world of venture backed startups, focus is the operative requirement. VCs want to build hyper-focused companies that can scale quickly and come to dominate a market within a short time frame. Social enterprises often fall victim to a split in focus between their business operations and their impact operations depending on the nature and values of their founding team. Investors understand that over 75% (Inc.com, 2019) of laser-focused venture-backed startups fail and are extremely wary of any features that might be considered distractions to a company’s main mission of scaling sales.

As you’ll see in the impctcoffee case study this is one of our biggest recurring questions: can you effectively build a coffee and origin reinvestment company simultaneously?

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Drawbacks tend to organize themselves into cost and focus categories. A properly designed social enterprise should be able to make up for these drawbacks up leveraging one or more of the following benefits to make their impact model a strictly positive ROI proposition that increases, rather than hinders, their scalability.

2.6.2.1. Cost-reducing partnerships

From experience, the most potent competitive tool a social enterprise has is the ability to forge no/low-cost partnerships for nearly any operational purpose from production to marketing. Inasmuch as your purpose is compelling to potential customers it’s likely compelling to other firms/individuals who might help bring your product to market. They’re essentially serving the same end consumer and will be happy to share in the perception of being socially conscious by helping you do so.

This has been our biggest strength as impctcoffee. From production partners that enable industry-low COGS, to having major companies host rent-free cafes, to no-cost marketing partnerships with celebrities and influencers, we constantly wield our purpose to attain benefits traditional firms pay dearly for.

2.6.2.2. Customer loyalty

Once you’re demonstrated to customers the ability to bring a better, more socially conscious, version of the products they’re already consuming to market you’ll often be rewarded with increased loyalty. Customers, whether because of positive psychological feedback from purchasing your product or guilt associated with going back to a traditional alternative, will generally tend to keep purchasing the socially conscious alternative once they’ve made steps in that direction.

2.6.2.3. Creation of barriers to entry

The above phenomenon is powerful not only because it keeps customers coming back for your product, but because it forces competitors with traditional versions to adapt to the new marketplace reality and customer expectations. This can represent a powerful barrier to entry

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for new firms seeking to enter your marketplace. Widespread adoption of your product means that new competitors must be at least as socially conscious as you are to stand a chance at capturing any piece of this market.

One of the most interesting examples of this phenomenon in action is the ongoing rebranding of many of North America’s largest meat producers (in this case, Tyson Foods) as “protein companies” rather than meat producers (Bloomberg.com, 2019) in response to the widespread success of alternative proteins being developed by firms like Beyond Meat and Impossible Burger. These companies now find themselves on the back foot, required to change and make significant investments in response to a market that has been shown a viable (if not superior) alternative to their products.

2.6.2.4. Ability to price at a premium

Consumers, especially millenials and younger, are often willing to pay a significant premium for (or switch to) socially conscious products if they’re available (Ha- Brookshire and Norum, 2011). If their products are well-targeted social enterprises are able to leverage this into either an offsetting of their increased costs or a strict improvement on margins versus traditional competitors. It’s unlikely that this kind of premium pricing strategy is sustainable over the long-term as additional companies enter the market with competitive markets or products.

Long-term success as a social enterprise with a premium pricing model depends almost entirely on whether margin gained from that pricing model is used to build a defensible competitive position in the marketplace.

2.6.2.5. Talent acquisition and retention

Beyond all else, the team makes the company. Most familiar with the world of startup investing will tell you that founding team (or early hires, depending on stage) is the primary factor on which investment decisions are made. Attracting the kind of talent major VCs look for is extremely difficult in a market saturated with promising startups of every stripe.

In a competitive marketplace for talent, purpose is the biggest competitive advantage a company can have. The London Business School reports that a company’s purpose is actually

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the single biggest factor weighed by millenials in decisions about who to work for (London Business School, 2019). The same study reports that younger generations will often work harder for companies whose values are aligned with their own and accept lower total compensation.