Ask These 3 Questions Before Building Your Social Venture’s Revenue Model

Any number of variables influence a business model, and social ventures are no different. In fact, a study published in Organization Science pointed to one potentially surprising factor affecting these structures: gender.

The results suggest that men tend to incorporate revenue-based strategies into their models while women usually pursue techniques associated with nonprofits. These findings — granular as they may seem — prove revenue models are susceptible to any influence.

When structuring my own, we factored in how collaborative trust across different departments affected our business model. Sales mattered, but we dug deeper. For 30 years, our product has been our bread and butter; it has helped us develop our own domestic and international microecology — it’s who we are.

Social venture leaders that want to make sense of their own revenue models should start by figuring out who they want to be.

A New Synthesis of Business Models

One common problem current business models face is when they mix traditional for-profit strategies with traditional nonprofit tactics. In the past, for-profit organizations depended on revenue while nonprofits focused solely on charitable work. At this point, the opposite is sometimes true: Social entrepreneurs seek ways to make nonprofits more sustainable, and for-profits aim to be more socially responsible.

My nonprofit’s revenue model centers on a more holistic, environmentally focused approach. It considers how individual roles collaborate to meet and advance our business goals while maintaining sustainability.

Different organizations thrive under different business models, though. Philanthropic revenue, for example, can be just as valuable as earned revenue. Meanwhile, plenty of for-profit startups close within five years of opening. Each end of the spectrum illustrates the importance of understanding the business models (and the factors affecting them) that work best for your organization.

Deciding on a Model

Settling on a social venture business model isn’t easy, but there are a few concrete steps that can make it more manageable. Ask these questions to ensure your organization becomes profitable while benefiting your community.

1. Where will the revenue come from?
   There doesn’t need to be a church-and-state separation between nonprofits and for-profit businesses. Leaders from each type of organization can incorporate strategies from their counterparts to build a hybrid model.Take VisionSpring, for instance. Its hybrid social venture provides affordable reading glasses, but it accomplishes this noble goal with the financial finesse of a for-profit organization. Hybrid social ventures are unable to fall into one specific category, which means they aren’t always attractive to donors or venture capitalists. Leaders interested in a hybrid approach should keep that in mind.

2. What value are you providing to customers?
   Even a perfectly designed business model eventually fails if it isn’t customer-centric. It sounds like Business 101, but it’s easy to forget about the value your organization brings to consumers when you’re so focused on classifying your model as a for-profit or nonprofit strategy.No matter what product or service you offer, it needs to solve a problem for your target audience. For a typical business, that means a product that meets customers’ demands. For nonprofits, it means solving an important social issue for their beneficiaries.

   Hybrids, meanwhile, blur the line between customers and beneficiaries. They produce products that contribute to the well-being of their communities, which means that treating customers and beneficiaries similarly eliminates the need to label your base. Instead, it raises the more important question of how your offerings improve the lives of those who use them.

3. What are the tax implications?
   Because sustainability is the goal of any business, you’ll want to consider your tax options carefully. Corporations typically have several more choices than those available to partnerships and proprietorships, but they also encounter double taxation. S-corporations, a status offered to companies with fewer than 70 shareholder returns, can circumnavigate double taxation.Nonprofits, on the other hand, can sometimes deduct taxes for donors and even receive grants and government funding. This luxury, though, is limited to nonprofits under 501(c)(3), leaving other types of nonprofits to question their sustainability without a generous amount of funding.

   That’s why you should avoid pursuing nonprofit status simply for a tax deduction. Generating a certain amount of revenue could put you in the “enterprise” column, but paying taxes might be a more viable option depending on the potential of your goods and services.

   Ultimately, there are myriad factors that will affect your social revenue model. They can be blatantly obvious or obscure, but it’s up to your leadership team to identify them and mitigate any harmful influence they might have.

Asking the three questions above is a good start to weighing your options. By carefully considering the value you bring to your base, your organization will be more likely to turn a profit and do social good for years to come.

Written by Kevin Xu, CEO of MEBO International.

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