The precise definition of what makes a social enterprise varies between opinions, sources and even countries. However, a fairly generalised summary of social enterprise would be any business who fundamentally incorporates social objectives into its business operations. Typically a social enterprise will fall under one of the following three business models.
1. Dependency Model
This is a traditional non-profit and social enterprise business model. It involves the business depending entirely or almost entirely on charitable contributions and public sector subsidies, and there will be little or no income earned in addition to this by the business itself.
Many businesses have survived for years by using this business model however it can place the business in quite a precarious position. By being totally reliant on funding and donations the business really is in the lap of the gods. If the funding is cut or if the donations go elsewhere the business will be left with nowhere else to turn. Dependency can be highly effective but the potential risks need to to be considered before adopting this model.
2. Sustainability Model
Sustainability can have a different meaning depending on the context in which it used, but it will be considered here in relation to business models and social enterprise. In this case the business generates income through a mix of revenue streams, using a combination of charitable donations, public sector subsidies and also earned income.
Is it the business’ ability to generate additional income through its own earnings that sets it apart from the dependency model. By selling products or providing services the business will be less reliant on donations and funding for survival.
3. Self-Sufficiency Model
A business can be classed as being self-sufficient if it has the ability to generate its own income without the need for donations and funding. This would be a standard business model for most profit making organisations and there is no reason why it should not be utilised by social enterprises as well.
Being totally self-sufficient can be a good position to be in as the business will never be negatively impacted by changes in funding or by unexpected withdrawals of donations. However, there is an increased pressure for the business to generate sufficient income for long-term survival.
Which social enterprise business model is best?
The simple answer is, none of them. A business should use the business model which best meets their needs as well as the needs of their stakeholders. Businesses need to understand what their purpose is, what social need they are trying to address and where their potential income will come from.
Although dependency can be a little risky, if a business has a strong track record of bidding for funds, utilising those funds and evidencing the impact of the funding they receive, they will be likely to continue to be in a favourable position when new funding is available in the future. Similarly, if the business has a solid base for donations they will be likely to maintain success over the long-term. Some businesses can become very specialised within the dependency model and can benefit greatly from it. However, if a business finds itself constantly chasing donations and struggling to obtain funding they may need to consider one of the other business models that are available to them.
The sustainability model is almost a best of both worlds: it benefits from funding and also maintains some independence through earned income. This is a fairly typical position for many social enterprises as when funding is lacking they can rely on their earned income to see them through, and vice versa. The main issue here is that a business can become a jack of all trades and master of none. By spreading their work efforts across two income streams they may not have the potential to maximise either as effectively as if they were only focused on one in isolation.
Self-sufficiency may seem like the ideal position as it allows the business to be completely independent and free from any external financial influence. While earning income through the sale of products and services is highly admirable, a business adopting this model may be missing out on available funding which would support their social mission. Being self-sufficient may also seem like a less risky approach but as any business owner will tell you, generating sufficient levels of income on a continuous basis is extremely hard work. Although the power is in your hands, and you are not relying on funding and donations, the risk and pressures associated with this business model are just are high.
Although this is in no way a comprehensive overview of social enterprise business models I still hope this article has provided you with some interesting and relevant ideas to consider. I would love to hear your thoughts on this topic so please post a comment if you have something of value to add.