The Rise of the “Buy One, Give One” Business Model and Why Consumer-Facing SaaS Companies Should Embrace It
In the mid-2000’s, Toms Shoes blazed the trail in uniting a for-profit business model with a charitable giving model, in which the company donates one pair of shoes for each pair that is purchased retail. The economic viability of the charitable arm of the company rests squarely on the success of the for-profit arm.
The successful shoe company was founded in 2006 after founder Blake Mycoskie traveled to Argentina and encountered children and adults who were too poor to afford even a basic pair of shoes. Rather than simply donate shoes in bulk, Mycoskie decided to engineer a longer-term solution.
And thus was born the “buy one, give one” business model -- a for-profit model of charitable giving that has become synonymous with the Toms Shoes brand. At its core, the business model focuses on lowering production costs in order to generate the revenue required to maintain the charitable giving program.
Other players in the consumer products industry, including apparel companies Warby Parker and Kno Clothing, have also been early adopters of the model. It’s possible that apparel companies see the model as a way of fostering brand loyalty, especially among millennials.
Companies adopting the buy one, give one model typically form a nonprofit arm, or partner with an established nonprofit. The latter is true of Warby Parker. Their nonprofit partner, Vision Spring, has been able to provide eyewear to low-income people with vision problems in more than two dozen countries around the world.
MyloWrites was founded for the purpose of providing students access to high quality writing instruction. Our charitable arm, MyloGivesBack, uses a buy-one, give-one model to ensure that socioeconomics do not exclude students from the benefits offered by the platform. Unlike Toms Shoes and Warby Parker, which sell physical consumer products, MyloWrites is a subscription-based, consumer-facing SaaS company (software-as-a-service).
SaaS companies are designed to allow users access to the service anywhere, provided they have a computer and internet connection. The economics of SaaS businesses can be quite scalable, as long as the product is well-designed and can adapt over time to meet the evolving needs of its users. SaaS companies have a unique ability to be flexible to the needs of the customer and make continuous improvements to the product based on customer feedback.
Easier said than done, of course.
SaaS companies must have a detailed understanding of the unit economics governing customer acquisition cost (CAC) and customer lifetime value (LTV). They must also have a clear picture of their customer acquisition and activation funnel, and actively find ways to promote high retention and low churn.
In addition to staffing, the primary costs in a SaaS business are product development and maintenance, infrastructure, and sales and marketing. As long as the aforementioned metrics and unit economics are watched closely, it is possible to scale a phenomenally profitable business.
Given the potential for profitability, consumer-facing SaaS companies are a perfect match for the buy-one give-one model. So why aren’t more SaaS companies embracing this?
Potential Social Impact
Questions have arisen as to the actual impact of donating consumer products to people in developing nations, suggesting perhaps that these donations may alleviate the symptoms of a problem, without actually addressing the source of the problem. This is certainly a valid point.
However, SaaS companies could have a big social impact by providing services like education, job training, access to government services, and support of private agencies which do not otherwise exist. Provision of in-demand services, as supported by the private sector and their customer base, can address poverty at the source, and make a profound difference in the lives of many.
Using a buy-one give-one model, companies that serve the education market have the opportunity to take proactive steps to bring children out of poverty by providing access to high quality education services. These services could level the playing field with students from higher socioeconomic brackets. We’ll explore examples and ideas for how this can be done in the next part of this series of blog posts.
Furthermore, the buy-one give-one model isn’t strictly limited to the donation of physical products or software services -- in many cases the donations are made in cash, and a nonprofit recipient can decide how to allocate those funds. For example, the apparel company Out of Print donates a portion of its profits to Books for Africa, which in turn connects publishers with local agencies in Africa.
There are enormous benefits to companies that implement buy one, give one business models. Christopher Marquis & Andrew Park sum it up beautifully:
A combination of factors centered on customer loyalty, customer retention, low churn, and high lifetime value are essential to the success of any SaaS company. This is achieved through ongoing customer development, user experience design, and responsive customer service that can address issues quickly. Once those are in place, there’s another powerful way to lower customer acquisition costs, increase customer loyalty, and increase the lifetime value of customers: earned media attention that centers on social impact.
The Growth Potential of Buy One, Give One Models
Customers who are thrilled with the services they purchase create more customers through word-of-mouth. This is one of the core drivers of viral growth in early stage technology startups. Beyond that, happy customers who feel that they are contributing to the greater good while having their needs met are more likely to remain loyal to the company even if the quality of service diminishes. However, companies which engage in social causes are more likely to be the subject of public scrutiny, and are therefore more likely to invest in higher quality delivery of service.
Public relations has traditionally been a paid marketing strategy. However, the buy one, give one model allows for a different media strategy that highlights the value of the SaaS product itself at the same time that it illuminates its potential social impact. This dual narrative lends itself well to growth.
With all the potential benefits of applying the buy one, give one model to SaaS companies, the question remains: Why is the consumer products industry monopolizing the buy one, give one business model? Why aren’t there more SaaS companies in the buy one, give one space, given the favorable economics of doing so? And why don’t SaaS companies see it as a valuable way of generating word-of-mouth growth for their businesses?
We’ll explore these questions and more in a subsequent series of blog posts on SaaS business models and the value of buy one, give one.