News / Economy

New Business Model Redefines Giving, Profit

Two children share food at a Buenos Aires soup kitchen after receiving shoes in TOMS "Shoe Drop 2006," which donated the company's first 10,000 pairs of shoes in soup kitchens, schools, and to homeless Guarani Indians in the Northern Argentine jungle (200
Two children share food at a Buenos Aires soup kitchen after receiving shoes in TOMS "Shoe Drop 2006," which donated the company's first 10,000 pairs of shoes in soup kitchens, schools, and to homeless Guarani Indians in the Northern Argentine jungle (200
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An increasingly popular business model lets participating companies give to charity while making a profit. But the approach is blurring the lines between for-profit and not-for-profit organizations and raising questions about the real drivers behind this business model.

One of the balloon rides offered by Great American Days of Atlanta, Georgia (File)
One of the balloon rides offered by Great American Days of Atlanta, Georgia (File)

TOMS Shoes of Santa Monica, California is one of the most prominent businesses to embrace this idea, known as social entrepreneurship.  The company has donated more than one million pairs of shoes for the equivalent sold since September 2010.

And Great American Days, an Atlanta, Georgia company that sells gift packages like hot air balloon rides and white water rafting, donates "as little as a few cents" to "as high as $6,000," depending on the project, said its Marketing Director Jan Stockbridge. “When someone buys an experience from our water category, we donate to projects that build wells and provide fresh water," she explained.

Many donations are made through Buy1Give1 (B1G1), a four-year-old Singapore company that offers more than 650 charitable projects in 29 countries to which members can link products or services. Buy1Give1 describes itself as “a social enterprise that supports, inspires and educates businesses globally.” Its Chairman Paul Dunn said B1G1 lets donors know the outcome of their charity.

The company includes B1G1 PTE LTD, or private limited, which deals with marketing and membership, and a separate entity called B1G1 Giving.  “A 100 percent of the funds that go into B1G1 Giving must go to the designated projects or causes … chosen by the members," said Dunn.

Once funding is available for a given project, the company partners with humanitarian and non-governmental organizations to implement it. The fruits of this labor can be seen in western Kenya’s Mama Ann Odede training complex, a project of World Youth International (WYI), a non-profit group that encourages young people to volunteer overseas.

B1G1 founder, Masami Sato (C) holds a goat donated through her company at the World Youth International Mama Ann Odede Complex in western Kenya (File)
B1G1 founder, Masami Sato (C) holds a goat donated through her company at the World Youth International Mama Ann Odede Complex in western Kenya (File)

Fred Mito, WYI In-Country Coordinator and CEO of the complex, said in an email interview that the buy one, give one model has allowed the community to buy goats and to move ahead with plans to upgrade to higher-quality goats. The goal, said Mito, is to create “a cottage industry to produce milk for direct consumption and goat milk by-products [for] sale," bringing "a sense of sustainability” to the community.

Hybrid firms are becoming more commonplace, matching an “enormous growth in the number of people who do both charitable work and business work in ways that are very different than the past,” said Eugene Steuerle of the Urban Institute. They include for-profit firms, non-profits operating a business that conducts charitable activities, non-profits operating private businesses related to their mission, and not for profit firms that are “not charitable in the sense that … they basically keep their profits to zero and do business activities,” Steuerle said.

Marketing charity can do some good in society, although Steuerle cautioned that some charities use charitable activity to advertise themselves. “They’ve obviously got a business model that works, so they’re making money, but they may also … want to give a fair amount of the money,” Steuerle said.

The University of Michigan’s Professor of Marketing Aradhna Krishna agreed that it is a good thing for companies to help charitable causes. But she said, "I don’t think that for many of these companies that is the primary purpose. The primary purpose is to increase market share and to get higher profit. Now, if in doing that they can help the charities - that is fantastic," said Krishna.

Bras hanging across the Hot Metal Bridge over the Monongahela River were part of an October breast Cancer awareness campaign. Aerie, a bra company, had the steel bridge draped in thousands of bras to heighten awareness of breast cancer. The company said i
Bras hanging across the Hot Metal Bridge over the Monongahela River were part of an October breast Cancer awareness campaign. Aerie, a bra company, had the steel bridge draped in thousands of bras to heighten awareness of breast cancer. The company said i

Reasons for donating goods vary. “Often they [i.e., firms] get a charitable deduction and, in some cases, a fairly generous charitable deduction for it,” said Steuerle. “So the net cost to the business can be … fairly small, depending on the size of that deduction.”

The cost of a single manufactured item drops once it is produced in bulk. So a factory that makes an item for $5 apiece for the first few thousand units can ultimately lower the cost per unit to $1 if it stays in business long enough, but continue to claim the larger amount on tax deductions. If the deduction is $5 but it only cost a dollar to produce an item, then Steuerle added that “they’re really giving away a cost and … often it’s somewhere in between."

Customers shop at the Food Project's Farmer's Market in Boston's neighborhood of Dorchester, Massachusetts. Each year, The Food Project hires 60 youths to grow food on their farms, during which these teens harvest and distribute over 60,000 pounds of prod
Customers shop at the Food Project's Farmer's Market in Boston's neighborhood of Dorchester, Massachusetts. Each year, The Food Project hires 60 youths to grow food on their farms, during which these teens harvest and distribute over 60,000 pounds of prod

Consumers should first research the charities they want to help and understand what they’re buying and why they’re buying it, advised Rachel Hutchisson, Director of Corporate Citizenship and Philanthropy at Blackbaud, a software vendor that partners with non-profit groups. “It’s important because there are companies out there that do mislead their customers using [a] charitable kind of messaging, where when you look under the hood a little bit, you can see that the percentage of money going to charity is very, very small,” she said.

“When you’re a consumer, you buy something, you get a product. When you’re a donor, you give money and you get what we call “psychic benefit” – the knowledge that you’re doing good or you’re helping to do something," Hutchisson said. "So these companies are definitely using that charitable part as an incentive to make you purchase and as a differentiator. You know you could go buy shoes from someone else, but if you buy them from TOMS, you know that you’re also going to have a pair of shoes donated. So that makes it a differentiator.”

A 2010 Edelman goodpurpose global study showed that most consumers were more likely to buy a product that supports a charity. Up to 87 percent of Americans surveyed said businesses should put at least equal weight on society’s interests as on their own. And consumers in Brazil, China, India, and Mexico were more likely than Americans to purchase and promote brands that support good causes. South African Nausheena Mahomed echoed this sentiment. “I'm a quick shopper - buy what I like and what I need and if somewhere along the line it’s for a good charitable cause then that's great,” she said in an email interview.

A lot of people give “on an instantaneous type of emotion,” said Steuerle, and might not mind paying a little more for an item attached to a charitable cause. Saundra Schimmelpfennig, Director of Good Intentions are Not Enough, a corporation that helps donors make informed funding decisions agreed that giving back through purchases “helps us with both our cultural needs to have things and also a cultural need to give back.”

But companies that make charity a core part of their business model blur the line between consumer and donor behavior, warned Hutchisson. And Steuerle cautioned that businesspeople often find it hard to separate in their minds profit-making from non-profit activities.

This is one reason why Schimmelpfennig opposed the buy one, give one approach. She said “donated goods are always a questionable form of helping and one that can have lots of unintended consequences,” such as potentially harming local economies, taking away decision-making from recipients or giving goods that are unsuitable for local climates. A better alternative in her mind is to create local jobs or produce and procure materials locally.

But Schimmelpfennig added that in the U.S. in particular, non-profit organizations like World Vision, a Christian humanitarian organization, “use donated goods as a way to increase their administration-to-programs cost ratio,” meaning that the “estimated value” of the goods in the U.S. gets claimed as a program cost, even though the same product could be purchased cheaper locally, Schimmelpfennig explained.

“This inflated value makes the [organization] appear to have a far higher percentage of their costs going to programs. The benefits of this to the non-profit can outweigh questions of the actual impact of the program,” Schimmelpfennig said.

Members of Nicaragua's Buena Vista soccer team, a local soccer team, train after receiving T-shirts with graphics depicting the New England Patriots NFL team as the winners of Super Bowl XLII, in San Gregorio village, south of Managua. The NFL donated the
Members of Nicaragua's Buena Vista soccer team, a local soccer team, train after receiving T-shirts with graphics depicting the New England Patriots NFL team as the winners of Super Bowl XLII, in San Gregorio village, south of Managua. The NFL donated the

It’s not that simple, World Vision responded.  Its Director of Gifts in Kind Carol Wylie said in an email interview that while the value of donated goods, cash and public grants are a factor in calculating overhead rates, that "is not the only or primary measure of effectiveness or efficiency of the organization." World Vision's finance team added in an email interview that Charity Navigator, for example, "has a rating system that uses 7 differen[t] financial performance metrics and 17 accountability and transparency performance metrics.”

It is okay for companies to engage in charitable work, said Hutchisson, so long as it is ethical. As the world changes, she said companies are becoming more marketing-savvy either because consumers like and expect companies to give back or because of what she calls a “generational shift.”

Hutchisson said that her children are hearing from everyone to their priest to the president that they need to give back. “My 13-year old is talking about when he goes to school whether he wants to study so that he can run a non-profit,” she said. “There are kids studying social entrepreneurship … People didn’t get Masters in Philanthropy when I was, you know, going to school. That’s a newer thing. So I think the generational shift is making us more socially-minded.”

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