What happens if my social enterprise’s product or service costs more to produce than my competitors?

Question

What happens if my social enterprise’s product or service costs more to produce than my competitors?

Answer 1

For a social enterprise, determining costs is not always straightforward – it is important to account for both “social” costs incurred (e.g., extra training needed for employees for an on-the-job-training program, using environmentally friendly materials, etc.), as well as conventional “business” costs (e.g., salaries, raw materials, etc.).

At the end of the day, this means that a social enterprise’s product or service might cost more than a conventional business’s product or service. This is not necessarily a bad thing – it all depends on the dynamics of the market and how customers (or funders) value your service or product. It might be that funders value your social impact, and therefore are willing to pay for your “social” costs, whereas customers only value your product for its conventional features, so you can only charge them enough to cover your “business” costs. Some social enterprises follow a hybrid model where consumers value the mission and are willing to pay a premium to cover some of the “social” costs, with funders covering the rest.   It depends on the market of the product/service you are offering – Is it highly competitive? Do you have a monopoly? Etc.

A strong implication is that you are able to understand, delineate and manage your costs along “social” and “business” lines.  Clarity around “social” costs is especially important in communicating with your funding community – many funders may believe that your nonprofit does not need the funding because you are earning income.  At the same time, managing your “business” costs is critical for success in a competitive market.  If your social enterprise’s “business” costs are in line with those of your competitors, you avoid a situation where your competitors have a competitive advantage over you.