Venture Deli

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Marginal Giving

The last few years have seen a proliferation of websites and business models that donate a percentage (typically 2-10%) of your purchase to charity. I call this model “marginal giving” because the donation is harvested out of the company’s margin on a sale. That is, if a shirt costs $20, and the seller makes $10 on it, they donate a percentage of that $10.

I’m not a big fan of this model, though I started out as one.

What Could Be

Originally I thought it made sense to integrate charitable giving into the background of every transaction we do – banking, retail consumption, etc. The 21stcentury brings us too much information and a bombardment of choices. If we have to make a conscious decision to donate each time, we won’t opt to do it nearly to the degree that we can. But if we can make one choice to give with each following swipe, we can have it running as a background process. I’d still like to realize this vision of charitable giving “in the water supply” so to speak, but there are problems.

Why It Doesn’t Work

So why shouldn’t all businesses do this? After all, it would be great for marketing, and they would get a tax receipt for every donation. Well, there are a few reasons:

• Karmic Fatigue: I have yet to see many businesses derive long-term benefit from the marketing karma of marginal giving. It is certainly useful for customer acquisition at the start-up stage, but I can’t think of examples that have gotten to scale and stayed there for years on this model. A once novel marketing proposition runs out of karmic fuel, and benefit tapers off.

• Lower Margins: If you’re giving away part of your margin, you have, well, lower margins than you would otherwise. Or most critically, you have lower margins than competitors. So if both you and your competitor make $10 off a shirt, but they have $10 to reinvest in the business and you have $8, you have 20% less to work with competitively. That means strains on hiring, building up cash reserves, spending on marketing, etc. This may force you to take on more debt than the norm to keep up, and servicing that debt becomes a burden in itself.

• Niche Appeal: Geoffrey Moore’s Crossing the Chasm (http://en NULL.wikipedia NULL.org/wiki/Crossing_the_Chasm_%28book%29) illustrates how new products have an early pick-up from the already-converted, and then need to make a critical jump into the mainstream marketplace. The problem tends to be that the mainstream is pragmatic, not emotionally drawn to products. They want the best products, period. Charitable giving is not the central decision making factor – functionality and price tend to be. A business that stakes its image on marginal giving may therefore stay marginal.

•Dresses and Cancer: What does shopping for dresses have to do with cancer? Many marginal giving campaigns mismatch pairings of products with causes. This is fixable though. Perhaps with the sale of every car, you give 5% to reforestation efforts. But in that case the question is why you would buy the product you know does harm to the cause you care about. Cognitive dissonance at work.

When It Might Work

It’s not all bad. Some business models can accommodate these challenges:

• Products Dependent on Economies of Scale: New product companies are envious of the economies of scale enjoyed by established companies in their supply chain. Think about a young company like TOMS Shoes, which gives away a pair of shoes for every identical pair you buy. TOMS is getting twice the purchasing power for each pair ordered. As a young company, this might actually help to build the leverage needed in negotiating with suppliers. Notice though, that the marginal give here is an actual product, not cash.

• Software as a Service (SaaS): IT companies that service new customers by simply opening up a new account or new ‘online real estate’ can often afford to give a free/subsidized space away for every paid one. Why? Because the actual cost of that space is virtually zero. The cost of servicing a new customer (IT support, customized service) is dependent on the business, but the real estate itself is extremely cheap. So if they have a pretty much hands-off (automated) way to serve customers, giving away accounts or spaces doesn’t really eat into their margins. Notice though, that the marginal give here is still in-kind, not cash.

• Temporary campaigns or niche markets: If a company is launching a temporary campaign (think (RED)), then they can effectively budget and control the lost margin as a marketing cost. Likewise, if your target market makes their decision based upon giving, then it would be a smart choice – but that target market is likely not a large one.

To be sure, I’m not arguing against giving, I’m examining why this approach doesn’t work as a sustainable model. The ultimate goal, in my view, is not to ‘give’ but to ‘build’, such that the product you are selling and the way you run your business are, in and of themselves, good for a cause. I find those business models much more appealing.

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