Better vs Cheaper In Social Enterprise
One of the big strategic choices facing every entrepreneur is:
Do we want to be better than the competition, or cheaper than the competition?
It’s really hard when you’re neither, and it’s almost impossible to be both.
That won’t stop a lot of entrepreneurs declaring that they’ll do both, but as their business grows, better and cheaper pull them in two opposing directions.
And when it comes to social enterprise and meaningful businesses, this decision becomes particularly important.
Better How?
The first big question is “If we’re going to be better than the competition, who is the judge of what better actually means?”.
As they say, if we don’t know who the customer is, we don’t know what quality is.
Better doesn’t mean “superior in every way”, but rather “superior in the most important areas”.
Therefore, it’s the job of the entrepreneur to learn what their customers consider to be the most important areas, and then learn how these people measure and assess quality.
e.g. if someone was looking at hotels in your city, how might they determine which one is the best?
Features?
Proximity to landmarks?
Proximity to services?
Exclusivity?
We won’t know until we run a proper customer interview or observe their buying behaviour, but realistically it will be for one big reason that gets backed up by a series of supporting reasons.
Cheaper How?
The second question is “If we’re going to be cheaper than the competition, who is the judge of what cheaper actually means?”.
We need to understand who is our customer and who is our end user – sometimes they’re the same, but sometimes the person who uses the product/service isn’t the one paying for it.
Cheaper can mean “smallest cash commitment at the start” or “smallest cash outlay overall” or “smallest cash outlay per person/per unit”.
e.g. if someone was looking at hotels in your city, how might they determine which one is the cheapest?
Price per room?
Price per person?
Total spend for the stay?
Total spend for the trip?
The cheapest room might involve much longer Uber fares to and from the airport or places you’re visiting each day, they might have daily Wifi charges, they might only have one restaurant for meals, etc.
People also view “cheaper” differently when spending company money versus their own money.
Again, we won’t know until we run a proper customer interview or observe their purchase habits.
Pressure Creates Compromises
Competition and growth creates pressure on a business – staving off rivals, hiring and training new staff, adding features, creeping costs, running sales and promotions, launching new products and services, etc.
This puts some strain on the entrepreneur’s initial vision for better or cheaper.
It’s hard to enforce “better” as the business gets bigger, and it’s hard to control “cheaper” as your operations
become more complex.
e.g. your business might start with 1-2 team members, who might be rockstars with special talents.
This gets hard to scale, since you have to either pay for more rockstars (who are expensive) or you have to try and create new rockstars (which is time consuming and unpredictable).
That puts pressure on the business to accept slightly lower standards, which over time erodes your advantage of being better.
The same goes for your target audience – as your market diversifies, you have to meet different sets of needs.
The temptation is to go for the “lowest common denominator” to accommodate everyone with a limited menu, further eroding the specialisations that made you better than the competition.
You also see costs increase as a business matures – the scrappy tactics used by the founders made for low costs, but it’s hard to expect new team members to make the same sacrifices, especially when they don’t have “skin in the game”.
Resisting Compromise Pushes You To Extremes
As you might guess, a lot of business owners despise these compromises, and will take drastic action to avoid them.
They are willing to go to extremes to keep their better/cheaper advantage, and that usually takes them down two controversial paths.
If they decide to go hard on being better, then they err on the side of pretention, ego and indulgence.
They adopt incredibly high standards, set strict quality rules on their team, make absurd demands, and make their prices borderline inaccessible.
e.g. There is no Apple store in Melbourne’s CBD, since none of the buildings meet Apple’s strict showroom requirements.
If they decide to go hard on being cheaper, then they err on the side of exploitation, dehumanisation and murky ethics.
Managers are incentivised to cut costs wherever possible, and that often comes at the expense of either the consumer, the staff or the planet.
This is how we get things like planned obsolescence, declining quality and shrinkage in products/services.
It’s also how we get underpaid staff, unpaid overtime, sweatshops and exploitation of international students.
A manager can make impressive savings by cutting corners and turning a blind eye to the consequences of their choices.
But when every contract goes to the lowest bidder, you become vulnerable to painful errors and mistakes.
The killer here is the assumption of continuous growth – the in-built pressure of needing to beat last year’s numbers.
It leads business owners and managers to make more and more extreme choices.
What About Social Enterprises?
Social enterprises are businesses with a specific mission at heart, using their trade to solve important problems for people and the planet.
They might do that by selling a product/service that is good for the world, or through their payroll and suppliers, or by creating wealth and assets for good causes.
As the business grows, so does their impact, since they distribute good products/services, or employ more marginalised people, or distribute more money to worthwhile projects.
Social enterprises are fantastic, but there is an ugly reality that we don’t like to admit: it’s much harder to run a social enterprise than a normal company.
We have added complexities to consider, fewer trade-offs that we’re willing to make, and competing priorities for the funds available to us.
Traditional businesses have thrived on ruthless behaviours and practices, which we’re not willing to perpetuate.
We have all the same challenges that they had, plus the additional challenges of treating people and planet with great respect.
This makes the better vs cheaper decision even spicier – a lot of social entrepreneurs tell themselves that the way to be ethical is to be accessible to everyone.
It’s a good story – to democratise their work and remove barriers that exclude people, the first of which is high price tags.
They tell themselves that they can run this business ultra-lean, so that they can be affordable and accessible, removing all excuses for anyone not shopping with them.
My concern is that it doesn’t match reality.
Social enterprises need buffers and some leniency, especially in the early days.
That leniency is really hard when you choose the cheaper path – since there are fewer team members, lower margins and increased production expectations.
Worse still, customers don’t actually accept or tolerate lower quality from the business, so you still need to perform to a high standard.
The path of being better is still difficult, but it brings more margins and more resources.
You can take a bit longer to make your products/services, you can pay proper wages throughout your supply chain, you can make a larger surplus and either donate it or reinvest it as you see fit.
But best of all, if you’re worried that being better will exclude some customers, you can always give them discounts and deals to lower the financial barrier.
You’re essentially setting two prices instead of one compromised price – a higher sticker price, and a discounted rate for those with lower budgets.
You get to make a proper margin from the customers who want “better”, then can quietly lower the bar to meet the lovely people who want “cheaper”.
I don’t think you want the mean-spirited people who want “cheaper”, they bring 80% of the headaches and don’t say thank you after you’ve served them well.
Building In The Margins
I only ever hear the words “razor thin” in the context of “hospitality is such a hard business, because the margins are razor thin”.
And yet, so many social enterprises choose hospitality as their game.
I’ve seen it work, and I’ve seen it fall over, and there are two common threads:
1. A business like this is built on the back of a formidable individual
2. It’s easier to create impact with a $10 toasted sandwich than a $5 toasted sandwich
High margin products/services give you some buffer, some leniency, the time to train people properly and the budget to hire good staff.
Low margin products/services require you to be a bit ruthless – squeezing suppliers, paying staff as little as possible, running with as few people as you can get away with.
When every part of the business has to compete for resources, the danger is that the impact side of the work gets pushed to the back of the queue.
Affordability can be a “when” not an “if” – you can make yourself affordable and accessible, but once you have a solid financial base.
A great example is Tesla, who want to democratise and normalise electric cars and trucks.
Eventually they want affordable models, but to start they sold high end sports cars and luxury models.
This was because the higher margins gave them the funds to build their Gigafactory, expanding their capacity and increasing their economies of scale.
They needed to become a big company before they could create cheaper cars, and the higher end of the market gave them the margin to get big.
Tactical Sugar Hits
The other solution that sometimes works is to use “free money” like grants, subsidies and donations to fund you in the early years.
I’ve covered the dangers of grant dependency before, as this money can be a mixed blessing.
Grants are wonderful, but they’re temporary.
When they dry up, it can pull the rug out from underneath you.
I’ve seen grant-funded social enterprises work under two different circumstances:
1. You dedicate yourself to be a full-time grant writer and philanthropy chaser (difficult but possible).
2. You use the grant-funded years to build a money machine for the business, which can then run for years to come.
If you’re thinking of pursuing the philanthropy-chasing path, my advice is to talk to someone who is currently doing that and get their perspective.
If you can’t find anyone who is doing that, then that might be your answer.
Personally, I prefer the money machine path, it is difficult but it’s within your control.
It requires the social entrepreneur to be highly intentional with how they spend their time and energy while being funded, knowing that this is a limited time offer.
You’d want to ask yourself “How can we turn this temporary advantage/gift into a sustained advantage for the business?”.
And generally, that comes down to using your time to get much better than the competition, or creating so many assets that you can grow and become cheaper than the competition.
I feel strongly about this because it’s literally what we had to do at The Difference Incubator, a social enterprise that is still running after nine years, making it somewhat of a rarity.
We had five years of grants and subsidies in our early days, mostly in the form of free rent in a beautiful office and subsidised time of our co-founder.
After five years, that runway ended in dramatic fashion, and the business nearly folded.
Nearly.
It survived because of a huge effort by the entire team, some painful cost cutting, the move to a co-working space, but most of all because we’d spent years trying to be better than the competition in the eyes of our customers.
These weren’t our initial customers, but we’d grown these relationships while we had financial backing, and could then depend on these customers for our income once we were truly independent.
We couldn’t have known it at the time, but the same cycle repeated with the COVID shutdowns – more painful cuts, but our customers stuck with us because they thought we were their best choice of provider, not just because we were friendly people.
If we hadn’t intentionally “made hay while the sun shines”, we would not be around today.
That’s why I encourage others to look at these questions, so that they have time to assess their options and take action before things get urgent.
It is possible to run a great social enterprise, but you won’t be able to avoid trade-offs.
The choice of “better vs cheaper” is coming for you, and you’ll want to have a sophisticated opinion on your options, plus the courage to be unapologetically better or cheaper than the competition.
