How do social enterprises make money?

Image - How do social enterprises make money?

You asked, so I’ll answer – How do social enterprises make money?

First, let’s start with a quick definition of a social enterprise – as this will help to answer the question about how social enterprises make money. A social enterprise is a business that has a social purpose, and reinvest its surpluses to support the achievement of its social purpose.

The key thing in this definition is “business” – so a social enterprise is expected to trade/sell products or services like any other business – and that is how it makes money. Social enterprises can sell anything that a typical business offers. Like any other business it will only make money if its product or service is of good quality, in demand (i.e. you have researched your customers and know exactly what they need), professionally delivered and priced so you can make a profit/surplus.

This last point is fundamental because if you can’t achieve a profit on the sale of your products or services then you will always be at break-even or making a loss.

The profit/surplus that you generate from selling your products or services can be used to:

  • Invest in delivering more of your social purpose
  • To pay bonuses/dividends to employees, shareholders or investors (depending on your legal structure – paying dividends is only possible via a limited by share structure and paying bonuses may not be possible if there are restrictions regarding this)
  • To pilot or test new projects/products/services
  • To invest in developing the business (such as buying assets, equipment, creating new job roles etc)

If you don’t make a profit/surplus, there are a number of reasons why you might not make sufficient money from directly selling your products or services including:

  • Your customers cannot afford the full price (due to their personal circumstances – particularly if you are working with individuals on low incomes)
  • Your competitors charge lower prices and you are not able to detail the additional value/benefits you offer in order to be able to charge a higher price
  • You are targeting the wrong customers for your product/service who cannot afford it
  • You priced your items too low and this doesn’t cover costs or generate a surplus

If this is the case for your social enterprise, you may need to subsidise the sale of your products or services with additional sources of money. This could include obtaining grant funding, sponsorship, fundraising and donations. This additional income then enables you to continue to exist, sell your products or services, and deliver your social purpose.

The other option is reviewing your pricing and increasing it so you do make money. Just as with a commercial business, if your product or service is not viable then you will struggle to make any money. That is why it is crucial to do your market research before launching your social enterprise.

If your social enterprise doesn’t have a product or service it can sell that directly relates to its social purpose, then you have two options – either sell something unrelated e.g. run a café and use the profits from this to provide educational activities for school children. Or you can decide that you won’t have any products or services, and will be entirely dependent on grant funding and donations.

This is likely to mean that initially you may secure grant funding as your idea/project is new and innovative but after around two years, funders will be less likely to give you funding as you have no way of making your organisation sustainable and avoiding your dependency on grants. Even if you only generate a small amount from trading, it is best to try and do this, as it shows you are looking at how you can make money independent of grants. If, however, you don’t wish to, or cannot sell products or services, then it is probably better to choose a charity structure for your organisation – as this will give you the most options for securing funding.