About 10 million social enterprises exist globally and — in addition to creating social good — they generate $2 trillion in revenue each year. That makes this sector larger than the apparel industry ($1.57 trillion) and twice the size of the advertising industry ($875 billion).
But not every venture that pursues both commercial and social value creation are the same, and little research has explored the varying frameworks. Now, a new study published in Strategic Entrepreneurship Journal better defines four distinct types of social ventures. By using a business model lens on these social good ventures, the study offers insight on how the model choices impact a firm’s value creation and value capture potential.
“Despite the popularity of the term ‘social entrepreneurship,’ not much was known about the business model of such companies yet,” says study co-author Lien De Cuyper of the University of Amsterdam. De Cuyper, along with fellow authors Bart Clarysse of ETH Zürich and Mike Wright of Imperial College Business School, London, sought to better understand the strategic business model choices that entrepreneurs make in the social entrepreneurship sector. “We also thought that the business model choices entrepreneurs in such a context make are significantly different from the choices entrepreneurs in general make.”
The team began by defining three choices entrepreneurs need to make. These included the scope of target beneficiaries of the venture, the degree of overlap between customers and beneficiaries, and how the venture communicates its social mission through its value proposition.
The team then combined these choices in different ways to identify four distinct types of social business models:
- Social Stimulators: These firms aim to stimulate awareness about a social and/or environmental issue. They have a broad definition of beneficiaries, with customers as the main beneficiaries. Their social values are conveyed in the products/services sold. Example: Patagonia, a U.S. clothing retailer that commits 1% of its total sales to environmental groups and has used advertising campaigns to draw attention to environmental causes.
- Social Providers: Such ventures target a clearly defined community of beneficiaries and provide them with products or services, which focus on the functional benefits of their value offering. Typically, the customers are the beneficiaries. Example: Aravind Eye Hospital, a provider of affordable and accessible eye care in India.
- Social Producers: These firms have a specific focus on a beneficiary group, and the beneficiaries are both the customers of the product and the suppliers. The social values of the business are conveyed through the sourcing of the product. Example: Tony Chocolonely, a Dutch chocolate brand that raises awareness about the inequality in the chocolate industry and makes their value chain free of enslaved labor.
- Social Intermediaries: Such firms have a broad definition of beneficiaries, but customers are different from the beneficiaries. These firms’ focus is on the functionality of the product. To fulfill their social mission and be financially self-sustainable, they sell services or products to a separate group of customers. Example: Work integration social enterprises, which help disadvantaged groups, including the long-term unemployed, back into the labor market through a productive activity.
The researchers were also able to determine how these different models affected the venture’s value creation and value capture: “You can say that customers of companies like Patagonia, i.e. Social Stimulators, are likely to have a higher willingness to pay compared to customers of a Social Provider, like Aravind Eye Hospital,” De Cuyper explains. Then considering costs: When comparing Social Intermediaries with Social Stimulators and Social providers, Social Intermediaries will have higher operating costs because they act as the go-between with their customers and their beneficiaries.
“Rather than just taking a one-size-fits-all approach to looking at social enterprises, we believe it’s important to have a more structured understanding of their heterogeneity,” De Cuyper says. “Looking at the three business model choices we identified helps you understand what type of social enterprise you’re leaning toward. This can have important implications for your cost structure, your revenue structure, but also your way of organizing.”