16.2 Business models for social enterprises
2 min read•august 9, 2024
blend business strategies with social impact goals. They range from nonprofits with income-generating activities to for-profit social businesses, each balancing financial sustainability and mission fulfillment differently.
Various models exist, including hybrids, benefit corporations, and cooperatives. These structures enable organizations to tackle social issues through microfinance, fair trade, job creation, and cross-subsidization, maximizing their positive impact on communities.
Types of Social Enterprises
Nonprofit and Social Business Models
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- generates revenue through sales of goods or services to support its social mission
- Incorporates commercial strategies to sustain operations and fund programs
- Revenue typically supplements traditional funding sources (grants, donations)
- Maintains tax-exempt status while engaging in business activities (Girl Scout cookie sales)
- operates as a for-profit entity with a primary focus on addressing social issues
- Reinvests profits back into the business to expand social impact
- Financially self-sustaining through commercial activities
- Balances profit-making with social objectives (Grameen Bank)
Hybrid and Alternative Legal Structures
- combines elements of nonprofit and for-profit structures
- Consists of separate nonprofit and for-profit entities working in tandem
- Allows for diverse funding streams and operational flexibility
- Leverages strengths of both sectors to maximize social impact (Mozilla Foundation and Mozilla Corporation)
- incorporates social and environmental considerations into its legal structure
- Legally required to consider impact on stakeholders beyond shareholders
- Provides protection for directors to prioritize social mission alongside financial returns
- Increases transparency through annual benefit reports (Patagonia)
- operates as a democratically controlled business owned by its members
- Members share in profits and decision-making
- Prioritizes member needs over maximizing returns
- Can address various social issues through collective action (REI, credit unions)
Social Enterprise Business Models
Financial Inclusion and Fair Trade
- provides small loans and financial services to underserved populations
- Enables access to credit for individuals excluded from traditional banking systems
- Supports entrepreneurship and economic development in low-income communities
- Combines financial sustainability with social impact (Kiva, Grameen Bank)
- ensures equitable compensation and working conditions for producers
- Establishes direct relationships between producers and consumers
- Sets standards for ethical production and environmental sustainability
- Promotes economic empowerment in developing countries (Ten Thousand Villages, Equal Exchange)
Employment-Focused and Cross-Subsidization Models
- (WISE) creates employment opportunities for marginalized groups
- Provides job training and support services to disadvantaged individuals
- Generates revenue through production of goods or services
- Addresses social exclusion and unemployment (Greyston Bakery, Goodwill Industries)
- uses profits from one product or service to fund social programs
- Offers both market-rate and subsidized products or services
- Allows for financial sustainability while serving diverse customer segments
- Balances profitability with accessibility (TOMS Shoes, Warby Parker)
Key Terms to Review (28)
B Corporation: A B Corporation, or Benefit Corporation, is a type of for-profit company that is legally obligated to pursue social and environmental goals alongside generating profits. This structure encourages businesses to consider the impact of their decisions on stakeholders, including workers, community, and the environment, rather than solely focusing on shareholder profits. The B Corporation designation is distinct from traditional corporations as it emphasizes accountability and transparency in addressing social issues.
Beneficiary Involvement: Beneficiary involvement refers to the active engagement of individuals or communities who benefit from a social enterprise’s programs or services in decision-making processes and the design of those initiatives. This concept emphasizes the importance of understanding beneficiaries' needs, preferences, and experiences to create effective and sustainable solutions that address social issues. By involving beneficiaries, social enterprises can foster greater accountability, transparency, and empowerment, leading to more impactful outcomes.
Benefit Corporation: A benefit corporation is a type of for-profit business that is legally obligated to consider the impact of its decisions on various stakeholders, including workers, customers, suppliers, community, and the environment, rather than solely focusing on profit maximization. This legal structure allows companies to pursue social and environmental goals alongside financial success, promoting a broader definition of corporate responsibility.
Bill Drayton: Bill Drayton is the founder and CEO of Ashoka, an organization that promotes social entrepreneurship around the world. He is recognized for popularizing the concept of social entrepreneurship and for his belief in the power of individuals to create systemic change in society through innovative solutions. His work has helped shape business models for social enterprises by emphasizing the importance of entrepreneurship in addressing social issues.
Blended finance: Blended finance is a financing approach that combines public or philanthropic funds with private sector investments to support projects with social, environmental, and developmental impact. This strategy aims to attract additional capital by mitigating risks and enhancing the financial viability of projects, ultimately fostering sustainable development and addressing social challenges.
Community Development: Community development is a process that engages individuals and organizations in creating solutions to enhance the social, economic, and environmental conditions of their communities. It involves building collective capacity, fostering collaboration, and empowering residents to participate in decision-making that affects their lives. This process connects deeply with the roles of nonprofits and social enterprises as they strive to create lasting change and improve overall quality of life for community members.
Community Interest Company: A Community Interest Company (CIC) is a type of social enterprise in the UK specifically designed to benefit the community rather than private shareholders. CICs are incorporated under special regulations that ensure profits are reinvested for community purposes, allowing them to operate in a manner similar to traditional businesses while prioritizing social objectives over profit maximization. This model allows CICs to attract funding, as they can provide a clear social mission and accountability mechanisms.
Cooperative: A cooperative is a member-owned organization that operates for the mutual benefit of its members, often working together to achieve common goals. These organizations can be found in various sectors, including agriculture, retail, and finance, and they promote democratic governance by allowing members to have a say in decision-making processes. The focus of cooperatives is typically on community well-being and social responsibility rather than solely on profit maximization.
Cross-subsidization model: The cross-subsidization model is a strategy used by social enterprises where profits generated from one activity or product are used to subsidize another activity or product that may not be profitable but serves a social purpose. This approach allows organizations to balance financial sustainability while achieving their social missions, enabling them to provide services or goods to underserved populations. It’s a way for enterprises to innovate and address complex social issues without relying solely on external funding.
Crowdfunding: Crowdfunding is a method of raising money from a large number of people, typically via the internet, where each contributor gives a small amount to support a project or cause. This approach democratizes fundraising, allowing individuals and organizations to tap into collective resources for various needs, from creative projects to social initiatives.
Earned income: Earned income refers to the revenue generated by nonprofits and social enterprises through the sale of goods and services, rather than through donations or grants. This income stream is crucial for financial sustainability, as it allows organizations to diversify their funding sources, enhance their business models, and support their social missions while remaining financially viable.
Fair trade organization: A fair trade organization is an entity that promotes fair trade practices, ensuring that producers in developing countries receive fair compensation for their products, sustainable working conditions, and environmental stewardship. These organizations often focus on agricultural goods and handicrafts, establishing direct trading partnerships that empower marginalized producers while fostering social and economic development in their communities.
Hybrid model: A hybrid model is a business framework that combines elements of both nonprofit and for-profit organizations to create social value while also generating revenue. This model allows social enterprises to leverage the strengths of each sector, balancing mission-driven goals with sustainable financial practices. It often involves innovative approaches to funding, service delivery, and stakeholder engagement.
Impact investing: Impact investing refers to investments made with the intention to generate positive social and environmental impacts alongside a financial return. This approach integrates purpose and profit, connecting investors with organizations and enterprises that address pressing social issues while also aiming for financial viability. It represents a shift in how investors assess value, moving beyond traditional financial metrics to include the broader effects of their investments on communities and the planet.
Microfinance institution: A microfinance institution (MFI) is a financial organization that provides small loans, savings accounts, and other financial services to low-income individuals or communities who typically lack access to traditional banking. MFIs play a crucial role in promoting financial inclusion by empowering underserved populations, enabling them to start businesses, improve their livelihoods, and achieve economic independence.
Muhammad Yunus: Muhammad Yunus is a Bangladeshi social entrepreneur, banker, and Nobel Peace Prize laureate known for founding the Grameen Bank and pioneering the concept of microfinance. His work aimed to provide small loans to impoverished individuals, particularly women, enabling them to start their own businesses and break the cycle of poverty. Yunus's approach has significantly influenced the historical evolution of the social enterprise sector and the development of sustainable business models for social change.
Nonprofit with income-generating activities: A nonprofit with income-generating activities refers to an organization that primarily operates for a social purpose but also engages in commercial activities to generate revenue. This model allows nonprofits to diversify their funding sources, enhance sustainability, and potentially reduce dependence on donations or grants. By integrating income-generating strategies, these organizations can better achieve their mission while maintaining their nonprofit status.
Outcome measurement: Outcome measurement is the process of assessing the changes or impacts resulting from a program, intervention, or service, providing a clear picture of effectiveness. It allows organizations to evaluate whether they are achieving their goals and making a positive difference in the communities they serve. By collecting and analyzing data on outcomes, nonprofits can enhance accountability, improve decision-making, and communicate their success to stakeholders.
Partnerships: Partnerships are collaborative relationships between two or more organizations or individuals aimed at achieving common goals, sharing resources, and leveraging strengths. They can enhance the effectiveness of nonprofit initiatives by pooling expertise and resources, thus leading to greater social impact and innovation. These collaborations often involve shared decision-making, aligned objectives, and mutual benefit, making them vital in various contexts like grant proposals, policy influence, social enterprise models, fostering innovation, and scaling social impact.
Scalability: Scalability refers to the capacity of a program, initiative, or organization to grow and expand its impact without being hindered by available resources when facing increased demand. This concept is crucial for nonprofits and social enterprises, as it ensures that successful strategies can be amplified to reach more beneficiaries, thereby enhancing overall effectiveness. Scalability involves not only expanding operations but also adapting business models and approaches to maintain quality and sustainability as growth occurs.
Social business: A social business is a type of enterprise that prioritizes solving social problems while operating with a sustainable business model. Unlike traditional businesses that focus solely on profit maximization, social businesses aim to achieve social objectives and reinvest their profits back into the mission to enhance social impact. This unique approach allows them to create positive change while maintaining financial viability.
Social Enterprises: Social enterprises are organizations that apply commercial strategies to maximize improvements in social, cultural, or environmental well-being. They operate with the dual goal of achieving social impact while generating revenue, often blending aspects of nonprofit and for-profit sectors. This unique approach allows them to create sustainable solutions to social issues while also maintaining financial viability.
Social franchising: Social franchising is a business model that allows social enterprises to replicate their successful social missions and practices by licensing their brand, processes, and support systems to local entrepreneurs or organizations. This model enables the scaling of social impact by leveraging established frameworks, resources, and training while ensuring that local adaptations can be made to meet community needs. Social franchising combines elements of traditional franchising with a focus on achieving social goals rather than solely profit generation.
Social innovation: Social innovation refers to the development and implementation of new ideas, strategies, or approaches that address social needs and improve the well-being of individuals and communities. It encompasses innovative solutions that create positive social change, often leveraging collaboration among various sectors such as nonprofits, businesses, and government to achieve sustainable impact.
Social Return on Investment: Social Return on Investment (SROI) is a framework for measuring and accounting for the social, environmental, and economic value generated by an organization’s activities, beyond just financial returns. This concept helps organizations understand the broader impact of their work and evaluate their effectiveness in achieving social goals, making it essential for decision-making processes that involve assessing sustainability, resource allocation, and stakeholder engagement.
Stakeholder engagement: Stakeholder engagement is the process of actively involving individuals, groups, or organizations that have an interest in or are affected by the actions and decisions of a nonprofit. This engagement helps to build relationships, gain insights, and foster collaboration, ensuring that the needs and perspectives of stakeholders are taken into account in the organization's operations.
Triple Bottom Line: The triple bottom line is a framework that encourages organizations to focus on three key areas: social, environmental, and economic impacts of their activities. It emphasizes that success should be measured not only by financial profit but also by how well an organization contributes to social equity and environmental sustainability, creating a holistic approach to accountability in both nonprofits and social enterprises.
Work integration social enterprise: A work integration social enterprise (WISE) is a type of organization that aims to support marginalized individuals by providing them with employment opportunities and skills training, enabling them to integrate into the workforce. WISEs typically operate with a dual mission of generating revenue while also creating social impact, often focusing on individuals facing barriers to employment such as disabilities, long-term unemployment, or social exclusion. They strive to balance financial sustainability with their commitment to social objectives.