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Olson’s Observations

Technology. Innovation. Science. VC. Media. :: by Eric Olson

Zipcar vs. I-GO: The Battle of Profit Models

with 8 comments

I-GOFrank’s post today about I-GO, a not-for-profit car sharing company based in Chicago, got me thinking about profit models. Specifically, I began thinking about the not-for-profit model versus the for-profit model when it comes to socially based ventures like I-GO. What model is best for this type of venture? What model will create the most social change? What model is best for the customer? Do consumers look at the profit model before they buy and how much does it factor into their buying decision? These questions are even more intriguing when Zipcar is brought into the picture.

Zipcar is a car sharing company that was founded in Boston back in 2000. The major difference between Zipcar and I-GO are their profit models. Specifically, Zipcar is for-profit while I-GO is not-for-profit. Now that both of these companies are entering into the same markets we will be able to see which company prospers and I think the profit models will factor in.

I have written about this subject before in the context of microfinance and I have advocated for the for-profit model. I believe that for-profit models lead to businesses that are efficient and that efficiency will lead to a better, cheaper product for the consumer and a sustaining business that will drive more social good. Detractors of this idea will talk about the passion that can be found in non-profit organizations and how that passion can be lost when socially motivated businesses move toward a for-profit model. I would disagree with this notion.

ZipcarEntrepreneurs who are passionate about something will be passionate about it regardless of the profit model. The key is to bring the social mission to the forefront in the business and work hard to make sure it stays there. One thing that will keep the social mission at the forefront is hiring people who believe in that social mission but also want to run an efficient and profitable business. In the end of the day the for-profit model will lead to more reach for the social mission that is at the heart of the business. The for-profit model is already working very well for microfinance institutions like SKS and for companies like TerraCycle, Zipcar and TerraPass.

Judging by those companies it seems like consumers prioritize quality of product and social mission while not taking too much time to consider the profit model. If consumers can purchase a quality product that also makes the world a better place than they are more than happy. They don’t seem to care if the companies producing the products and changing the world for the better are doing it for-profit or not-for-profit (if they even know what the profit model is anyhow as it is usually not obvious) and I don’t think that it ultimately matters. If you are keeping the social mission at the core why shouldn’t you be able to make a buck at the same time? I am excited to see a lot of for-profit socially motivated businesses starting-up out there because it just means more good will be done and some great folks who wouldn’t normally take the plunge into socially motivated work due to the lack of pay will jump into the frey and put their minds to use changing the world for the better.

Side Note: I am encouraging the for-profit model specifically for product based social efforts (car sharing, fertilizer, financial instruments, etc.).  There still need to be not-for-profits out there to handle disease research, disaster recovery, bike advocacy, and a number of other things.  These organizations do not sell a product so there is really no “business” so-to-speak. Just wanted to clear that up as I am a strong supporter of many not-for-profits and do believe the not-for-profit structure is needed and very useful.

Written by Eric Olson

August 15th, 2006 at 10:29 pm

8 Responses to 'Zipcar vs. I-GO: The Battle of Profit Models'

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  1. I thought this was an interesting post. I think you’re absolutely right about consumers not really caring what kind of profit model a particular company uses. Consumers ultimately care only about the product and what they’re getting for their money. If the company is a non-profit that works tirelessly to improve the environment, great. If not — oh, well.

  2. Hi Eric,

    Interesting post. I’ve long thought that microfinance provides an interesting parallel for our industry, in which you have for-profits and non-profits competing directly.

    In the microfinance world, there’s an additional wrinkle, which is competition for capital. These banks need pools of money when they start, and the capital markets work very differently in the non-profit and for-profit world. For-profit investors expect to see a return. Non-profit “investors” are making a grant.

    This difference sounds great for non-profits and their customers, who theoretically benefit from the cheaper capital. But in reality, the dynamic can be bad for pretty much everybody. Competition for customers causes everyone to lower their prices. Non-profits, with their access to grant pools, drive the for-profits out of business. But relying on grants isn’t sustainable in the long run, so the non-profits either go out of business themselves or end up jacking up their prices.

    I don’t know to what extent this dynamic still plays out. The microfinance industry has matured quite a bit, and presumably everyone has gotten savvier about building for long-term success.

    But as a general point, I do believe it makes sense for organizations to sustain themselves via a for-profit structure in industries where such a model is viable. It’s better for the industry and better for customers in the long run.

    A final point in response to the issue of passion in for-profit and non-profit enterprises. Being for-profit vs. non-profit is an indication of tax status — nothing more, nothing less. Organizational behavior is driven by industry structure, not by tax status. And in our industry at least, for-profits and non-profits look and behave very much the same.

    Adam Stein

    18 Aug 06 at 9:43 am

  3. I disagree with the sentence “Being for-profit vs. non-profit is an indication of tax status - nothing more, nothing less.” While technically true, for-profit companies can (and, in the case of Zipcar, will) fight for tax breaks. The difference between a non-profit and a for-profit is also NOT in how the company makes money, but in how the company spends money. A for-profit is interested in investing in ways that benefit the top employees, and stockholders if publicly traded. Alternatively, a non-profit defines their stakeholders in a broader sense as those who are ultimately effected by the company’s dealings - these could be community members, children, employees on all levels and even the environment. Investments are made in ways that will benefit these stakeholders. A car sharing example might be that a for-profit will stick to affluent neighborhoods where a non-profit might take a risk on an underserved neighborhood. Whether non-profit or for-profit, business leaders must be savvy and make the right decisions for their interests to be able to invest it in the ways they see fit. It is up to the consumer to decide where they want their money invested.

    Melissa

    22 Aug 06 at 8:53 am

  4. PS I’ve never heard of a non-profit driving a for-profit out of business. Can you please provide an example? Also, can you send the list of these grants that will fund a non-profit enough to drive a for-profit out of business? Thanks!

    Melissa

    23 Aug 06 at 1:43 pm

  5. Craig’s List is driving for-profit newspapers - even major national ones - out of business, and it is a not-for-profit organization. There’s your example.

    I’m glad someone brought up tax status. Seemed like the original post was missing a key issue.

    I was surprised this was about non-profit status at all - I thought there was to be a dicsussion of business model. Non-profit and for-profit tax status has little to do with the question of business model, unless you are talking about companies that receive donations. Business model is a question of how the business makes money - does it sell advertising? Does it charge users? Does it subsidize users by selling advertising? Does it strike clever deals with other value chain participants (for example, Hertz, owned by Ford, was used to get people to try Ford cars).

    Non-profit status may be about more than tax status, but the original post missed the tougher question for these high operating leverage, hard-to-scale businesses - namely, “How are you going to cover your costs, and maybe turn a profit?”

    Alex

    24 Aug 06 at 1:09 pm

  6. All great points guys. :-) I appreciate your additions to the discussion.

    Melissa, I am not sure of any not-for-profit companies driving for-profits out of business nor do I know of any grants that will do what you would like. Sorry I am not of much help here!

    One more thing - I did want to point out quickly that this post was not intended to discuss business models. Alex seems to think I meant to say business models when I used the term profit models (based on his post about being disappointed in my writing). This was not the case. I just wanted a term that sounded a bit nicer than tax status for the title. Well, carry on!

    Eric

    27 Aug 06 at 7:33 pm

  7. Eric, I think you highlight a growing trend; but one that has already been in existance for 40 years. According to Social Franchise Ventures, nonprofits have been pursuing social enterprise for 40 years and currently generate $250B in income.

    I think we will see even more companies head towards social enterprise as nonprofits face increased funding pressure and more people become in need.

    Craigslist is a for profit business model…
    http://www.startupboy.com/journal/2006/2/6/craigslist-is-worth-more-than-ebay.html

    Melissa, you may want to check out Community Wealth Ventures.

    ventureblogalist

    12 Sep 06 at 6:24 am

  8. MokshaYug Access (MYA) is a rural infrastructure and services company with a primary focus on microfinance. It launched operations in April 2006 and has 85 employees working towards creating wealth for the rural poor.

    For the month ending 30th April 2007, MYA is operating in 247 villages in Bagalkot & Badami Taluk covering a population of 3,66,433. We have promoted 951 SHGs consisting of more than 17,637 members.

    MYA plans to expand its operations into districts of Bagalkot, Bijapur and Belgaum covering a population of 7.7 million and subsequently franchise out the business across rural regions in the poorest districts of India.
    For more information: http://www.moksha-yug.in

    Rajesh Mergu

    20 Jun 07 at 4:52 am

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