Many social and environmentally-oriented businesses seek to let us as consumers feel good about being socially responsible while going about our daily business of buying things.
With successful technology entrepreneurs like Sean Parker showing interest in the space, it’s worth a look at some of the business models at work.
The ways these businesses convince us to part with cash fall into two basic categories, those that try to harness our existing shopping patterns and those that seek to develop new habits. Here is a look at the pros and cons of each model.
Current Habits Businesses
Some companies seek to do good by capitalizing on our existing shopping patterns. I call these “current habits” businesses and the Fair Trade certification program and Ethos are good examples. Both use consumers’ existing buying patterns to support social and environmental causes. Consumers who buy coffee and other agricultural commodities can offer their support through Fair Trade to improved trade conditions, working conditions and other social criteria for agricultural producers in the developing world. Ethos donates five cents from every sale of bottled water to help improve water quality in the developing world. Both programs work by allocating a portion of the money we would have spent anyway toward social causes.
The New Habits Model
A different class of businesses encourages consumers to spend money in ways they would not otherwise in order to create a social and/or environmental impact. Terrapass sells carbon offsets that allow consumers to reduce their carbon footprints, helping to address growing concerns about global warming and climate change. Consumers buy offsets based on the amount of CO2 they produce according to Terrapass’s calculator. Funds are then used to support alternative energy projects and/or facilitate the purchase and retirement of carbon emission credits from the Chicago Climate Exchange.
Kiva.org allows individuals to make micro-loans to developing-world entrepreneurs in increments as low as a few dollars. Individual loans are aggregated until the minimum amount sought by a borrower is collected and the funds are distributed by local facilitators, who then monitor repayment and provide periodic updates. The program currently returns investors’ principal only, but CEO Matt Flannery told me they are working to pay interest in the future.
Harmonizing For-Profit Motives and Social Good While Driving Consumer Demand
The challenge of the current habits model is that its effect can be limited. An Ethos poster I saw the other day said the company hopes to contribute $10M to developing-world water projects by 2010. I was surprised at what an apparently small number it was until I did the math and realized they would need to sell 200M bottles of water to get there! At a retail price of $1.80 per bottle, this also means that only 2.7% of funds go toward the supported causes. The rest, presumably, goes toward expenses and the company’s bottom line.
If support of water quality was my primary concern, a direct donation to one of the causes Ethos supports would almost certainly make a bigger difference. My charitable contributions go elsewhere, though, so I probably won’t make that donation. From that perspective, Ethos falls into the “every bit helps” category, which is a fairly low barrier as purchasing decisions go.
Terrapass and Kiva face a higher hurdle as “new habits” businesses and they are attempting to address it in different ways. Ethos merely needs to convince consumers that buying their water is a better alternative than the competition. Terrapass needs to persuade consumers first that carbon offsets make sense, second that offsets make more sense than alternatives such as buying renewable energy directly from the power company (where available), and finally that its implementation of offsets is better than that of its competitors. Kiva must convince people that microfinance works and that it is a decent place to deposit money (no one else offers “retail” microfinance participation that I am aware of, so Kiva has no direct competition in that sense). Instead of merely being better than nothing, new habits companies such as Kiva and Terrapass need to convince consumers that they are better than many other things.
Kiva’s proposed solution is to make its product look like a new kind of investment vehicle. As CEO Flannery told me, it will probably always be a relatively risky, low-return investment, but may still be classed as an alternative to traditional investment vehicles such as money markets, and will have the added feature of offering a social benefit. The company remains a new habits business, but offers to generate a return to microloan investors.
Terrapass’s answer is to become both a new habits and an current habits company. Having built the concept of carbon offsets by selling the “product” and the “good” rolled into one, it is now seeking to bundle the good with other products. Travelers can click a button to add a Terrapass offset to airline ticket purchases on Expedia, which seems like a natural synergy. The company has also taken a step toward “automatic” bundling with Sam’s Club, where a portion of the retail cost of a pressure washer is used to fund offsets- whether or not the consumer cares about such things.
Synergies are the Key
This approach makes a lot of sense at first blush, but it also opens up a new world of complications. As a socially conscious consumer I’d love it- in principle- if everything I bought was carbon-neutral, Fair Trade certified and produced by businesses developed through micro-loans (not to mention AIDS-relief supporting, land-mine-removing, human rights-promoting, etc). In practice, though, I wouldn’t pay a premium for each of these goals. Focusing on products that have some natural affinity to the good, it seems to me, is the key. Fair Trade agricultural and handcraft products make intuitive sense because the products relate easily to the local producers Fair Trade is intended to help, and tend to get my vote (meaning my cash). Motorized travel of just about any kind produces a lot of CO2, so carbon-balanced airline tickets have a natural synergy with carbon offset businesses.
What this really refers to is the idea the software industry first started to call “bundling”. An effective bundle combines products that have natural synergies. I’d love to see the new habits companies take off based on pure altruism, but my real-world guess is that the social capitalists who are most successful will be the ones who figure out how to bundle most effectively.
[Jay’s blog is here]