This is an attempt to define how social enterprises can scale their businesses. This is not meant to be a comprehensive or exhaustive resource!
In a technology or for-profit setting, scalability is more obvious – the internet provides the perfect scalable platform due to small costs of good sold (COGS), approaching zero – but what does it mean to design a business model for social enterprise or non-profits, where profit and technology might not be the only considerations?
Instead social impact is what they should strive for, in a financially sustainable way.
What is scalability?
A buzz-term in the business world, but rather new to the non-profit world, scalability implies that the underlying business model of an organization has the potential for large growth in a cost-efficient manner. Scalability can be both a tangible concept, as well as a metaphor, so that is why it is sometimes hard to define.
Scalability can apply to a wide variety of business settings, but the concept is consistent; if a company can increase their “volume” (this could be selling more, increasing revenues, or expanding operations somehow), without impacting the contribution margin (= revenue – variable costs), then this is considered “scalable.” For a business to be scalable, incremental costs must be decreasing — ideally approaching zero (in the case of an internet distribution channel). This means that the cost of each incremental dollar in revenue must be going down.
Source 1: www.sacredcowdung.com
Other ways to say this include:
• Increased revenues cost less to deliver than current revenues
• The operating margin increases as the company’s revenue grows
• Small variable costs
The key to scalable business models is to have small Costs Of Goods Sold (COGS), and to get a demand driving revenues up.
There are limits to scalability and at a certain threshold revenue volume, an organization will not be scalable and will have to address infrastructure issues through investment in operations, new technologies, new distribution, etc. For example, a given piece of equipment may have capacity from 1-1000 users, and beyond 1000 users, additional equipment is needed or performance will decline (variable costs will increase and reduce contribution margin).
Top 10 Most Important Business Model Criteria for Social Enterprises and Non-Profits to Scale
You may still be wondering “what does that all mean for me in my social enterprise or non-profit”? Well, here are some simple general principles that all organizations should strive for:
1. Simplicity – Complex businesses MUST become simple before they can scale. If anyone in the chain of suppliers, employees, management, sales, customers, donors and investors can’t explain simply what the company does — IT DOES NOT SCALE!!! Ex. Think Kiva (featured below). Hint: it scales.
2. Find Your Champions – You need local people to see the value of your idea to their community. Foster and maintain relationships with these people and make sure that you have a plan for successful champions to become integrated into your organization somehow. They will recruit others and outsource a lot of the work that you won’t be able to do. Ex. The Green Belt Movement gave numerous opportunities for dedicated community members to plug into the organization, even providing paid positions to the most promising champions. The Green Belt Movement is responsible for planting over 40 million trees in Kenya!
3. Innovative Partnerships – tapping into an established network, such as partnering with an organization that has a great reach and credibility is a solid strategy for scaling up. This may be difficult, but it should be a part of your strategy if you want to expand beyond the local level. Also, look at cost-savings through public-private partnerships, such as working with the cities or local government. One side benefit is that this will increase your credibility too. Ex. Wangari Maathai, noble peace prize recipient, partnered with a national womens organization of Kenya in the early days of the Green Belt Movement, VisionSpring with BRAC.
4. Leverage Research & Science – base your programs on solid research. Engage sociologists, psychologists or scientists in your program design. You may also be able to use your programs as research in themselves; this can be a powerful way to show your program effectiveness.
5. Stack Functions & Create Systems – Stacking functions, a buzzword from the world of permaculture design, refers to designing your internal processes so that you can perform one action that will be indefinitely reproducible or serve numerous functions; make sure you keep this in mind from the get-go so that you have a system for reusing almost every piece of work that you do. For example, everything that you create internally should serve multiple uses (I learned this one from an innovative consultant) — blog it, make it into a video, have it syndicated, write a testimonial, etc.
6. Act Like a Private. Be nimble, find the “bright spots” and go with what’s working. – act like a private business, so that you are not just an idealistic bunch of people shooting in the dark. Be quick enough to change strategic direction, if necessary.
7. Get in touch with your customers – talk to them, interview those who you will be serving. Find out what concerns them and how things could be better. Often this essential step is overlooked as a social venture comes up with a “solution” and then launches it to the public, without intimately involving them from the beginning.
8. Tap into the support of microcontributors. CROWDSOURCE. – think about Kiva, MYC4, and DonorsChoose.
9. Train the trainers – the more that you can train others to thrive, the better. VisionSpring equips their women entrepreneurs with a “starter kit” for providing eyecare, trains them on how to use it, and lets them run with it.
10. Be Open Source and Transparent – share your findings and knowledge with others.