Is Philanthropic Capitalism a Business Model that is Here to Stay?

Philanthropic Capitalism

For the uninitiated, philanthropic capitalism is a not so new way of adding a philanthropy side to business models. There are numerous structures such as having a portion of sales going to a charity, buy one – give one, or a good deed done on your behalf.

Blake Mycoskie, the unofficial father of philanthropic capitalism, brought the idea to light when he started TOMS as an online store in 2006. Taking inspiration from shoeless children in Argentina, he began what not only would be a profitable business, but one that can give back and help the children as well.

His business model was simple: one for one. For every pair of the unique shoes that were bought, one pair would be donated around the world to people in need. The idea took off. People not only loved the shoes, they loved that with their purchase they would be helping someone as well.

Even as competitors began to copy Mycoskies’ style, shoppers were still willing to pay TOMS premium price to support the company and their initiatives.

Many companies have started to use social impact to drive business success and it is being a more commonly known way to start a business. But the question that is mulling about now is with almost 10 years of changing how some people purchase, is this a sustainable business model for new companies or will it no longer bring the competitive advantage it once did?

Philanthropic Business Models

Businesses have been making philanthropic contributions since long before my time, but adding it directly into business models is what is being evaluated. There are numerous business models that have rose since the initial “Buy one; Give one” model became mainstream.

TOMS Shoe

One for One

TOMS started the trend with this one and numerous other companies like Everything Happy and SoapBox have followed suit.

As mentioned, the concept of this is giving an equivalent of the product you have purchased to someone in need of it, whether it be shoes like TOMS or blankets and soap like Everything Happy and SoapBox.

There are different pricing strategies that can be taken along with the one-to-one concept.

  1. Charging a premium

Charging a premium is always risky. Shoppers need to be able to see the value in what they are purchasing and in this model the chance is being taken that consumers will see the value in providing another person with this item as well.

TOMS has succeeded well with this, charging $50-$160 for canvas shoes. This initially wasn’t a premium in the everyday shoe market, but with some competitors that have followed this shoe type charging as low as $5, it has become a premium. However, TOMS, who was the first to create this style in North America has made the shoe associated with the act of giving and has proven the value of helping others as a differentiating factor.

  1. Everything HappyCompetitive pricing

While Everything Happy’s blankets are on the high end of blanket costs, they are all different shapes and patterns, with the capability to be personalized. So being priced at $30-$50 per blanket is on par with other children’s blankets.

Their approach of selling blankets with equivalent pricing makes it easy for shoppers to choose Everything Happy’s blankets over a competitors, but they may struggle more with their profit margins. This is not necessarily a bad thing, depending on how they are wanting the company to be run, but analyzing the profit margin when giving away an additional product is necessary to ensure you are hitting what your company deems business success.

Setting up Communities for Success

Warby ParkerWhile Warby Parker somewhat follows the one-for-one model, they have taken a slightly different approach. While they do give a pair of glasses for every pair of glasses that they sell, they don’t just take them and give them to people who are needing them. They have a non-profit organization that trains individuals in communities without the knowledge and equipment to do basic eye exams how to and then they sell the glasses within their community at very affordable prices.

This creates a lasting solution for the community to have proper eye wear and individuals with the skills to administer the tests, making them less dependent.

They also charge less than market price for glasses, while staying stylish

Home T

Portion of Profits

An alternative is to simply donate a portion of the businesses profit to a good cause.

The Home T sells unique apparel for wearers to showcase their home state or country. What could be just another online apparel retailer, takes it up a notch and has added a philanthropic element. A minimum of 10% of their profits will be donated to Multiple Sclerosis research.

Deed on the Customer’s Behalf

Performing a good deed on behalf of the purchaser is the approach that TenTree takes with philanthropic capitalism.

For every item purchased TenTree plants ten trees in areas they have identified need reforestation or areas that would benefit from the planting. To date, they have planted millions of trees, leaving a large scale impact.

TenTree lets customers uniquely feel the impact of their purchase. With each order, buyers are provided with a tracking code to see where their trees are being planted and the change they are making.

TenTree Map

With so many successful companies implementing this business model, what kind of benefits are they seeing?

Benefits of a Philanthropic Business Model

To fully understand how this model works we need to ask, why do companies choose to go this route, what are the benefits?

  1. Being a changemaker and giving back

If you ask any social entrepreneur why they chose to give back in their business model, I can take a good guess that their number one reason is to make a change and have a positive impact in the world. Most want to give back in any way they can.

  1. Competitive edge

When TOM’s emerged, along with some of the other first companies taking this initiative, consumers were excited about it because the concept was new. Getting to give back with a purchase made had shoppers eagerly waiting to buy more.

But a main question to ask with more and more companies taking this approach, is it still the differentiator it once was?

  1. Marketing

As the model becomes more and more popular it becomes difficult to use this as a differentiating factor, but brands typically have seen good publicity and great marketing opportunities through this operational choice.

  1. Brand resonation

As years go on, consumers are becoming more and more economically conscious and their ecological footprint or the environmental choices they make are very important to them. They expect brands they purchase from to feel the same.

The key benefits are fairly straightforward, but with all good things there are always a few criticisms.

How Credible Is this Business Model?

Potentially the largest criticism that has surfaced since the introduction and growth of the concept. Sadly, due to the large number of charity scams or deceiving numbers, most of us have grown somewhat skeptical.

As a concept becomes more and more mainstream it opens the gate for potential fraudulent claims or stretching the truth a little too much.

I am not claiming by any means that the companies mentioned in this post are making false claims, I have vetted to the best of my ability to ensure that they aren’t. But, there are others who may not be doing the same.

With so many companies joining this trend it may no longer be the distinguishing factor it once was and with brands not being transparent about the activities they are doing, it may be harming the others. While most of these entrepreneurs are focused on the social aspect and giving back, others may be more focused on the marketing potential and the chance for customer loyalty.

Others in the New York Times and Fast Company argue that these charitable donations are harming the economy in these developing areas instead of helping it.

So is the business model credible? It’s hard to make that generalization. I truly believe TOM’s, TenTree, Warby Parker, Home T, SoapBox and Everything Happy are credible businesses and are taking great strides to make a bigger impact. But are there others in this space who aren’t? Potentially.

Is this Business Model Here to Stay?

Fans and critics both have valuable points.

The fans seem to agree with Phillip Haid who states in The Financial Post “This is not a passing fad, but rather, proof that a social impact imperative combined with a great story can be a key driver to business success.” From looking at companies like TOM’s and Warby Parker, it is clear there is room for success with this model.

Where the critics err on the side of believing that the social impact is not enough. With so many companies continuing to emerge in this market, using it as a competitive advantage is no longer the mass benefit that it once was.

Are we going to continue seeing store shelves stocking up with products tied to philanthropic endeavours or are they going to fall flat? Only time will tell, but personally I think the general consumer community wants to find a way to give back and these companies are offering them that chance, making their business models one we will continue to see.

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