How do you turn a service-based business into a product-based business?
That was the challenge facing Steve Croth, co-chief executive officer of Toronto-based Better The World Inc., two years ago.
He had co-founded the company, a provider of technology for cause-marketing, fundraising and social-responsibility programs, with several partners in 2008.
The company was originally conceived as a product-based firm, but the partners didn't get the traction in the market they had hoped for. They fared better after shifting gears and offering customized services, but knew that the potential for growth was limited as a service-based business.
It would be easier to scale the business if they were selling a product, but how could they come up with a promising product, especially since their first one had failed?
Before starting Better The World, Mr. Croth worked as a marketing manager at Microsoft Corp. Believing that "there was more to life than driving an additional 10 to 15 per cent a year," he made a leap in 2008 to start a company that, as he puts it, "uses the power of consumerism for good."
He knew that corporations were spending millions of dollars on philanthropy, but their stories were not getting out to the public. With his partners, he developed a Web-based platform that let corporations tell their philanthropic story to consumers in exchange for charitable donations. However, the business wasn't successful because it faced a chicken-and-egg problem: It needed big brands to get consumer eyeballs, and it needed lots of eyeballs to get the brands.
Through this process, however, companies became interested in the platform for their corporate social-responsibility programs, and Better The World began to provide customized solutions. An early client was The Pearson Foundation, a U.S.-based non-profit aimed at promoting literacy.
"They were giving away a million books a year but no one knew and no one cared," Mr. Croth says.
Better The World worked with the foundation to set up a program called We Give Books, under which children read free books online with parents and teachers; the act of reading results in the donation of a book to a child in need.
Better The World developed similar philanthropic programs for major businesses such as Aeroplan, where members raise miles for charities or causes they care about, and Indigo Books and Music Inc., where people can donate to put books in the libraries of underprivileged schools across Canada.
Although clients were happy, Mr. Croth realized the business had limited growth potential. Each program had to be developed individually and so the business model wasn't scalable.
"I didn't leave Microsoft for this," he recalls thinking. "We only have a lifestyle business now. I want to build something big, something that I can scale limitlessly. How can we turn Better The World into a product-based business? How can we find a business model like eBay and Paypal, which is based on transactions?"
To come up with a potentially promising idea, Mr. Croth brought all 15 employees together two years ago,and asked them to think about possible product-based solutions that Better The World could develop and sell.
He held a brainstorming session to find five ideas that warranted further exploration and scrutiny. To encourage open discussion, he deliberately did not structure content; the "rules of the day" included "there are no bad ideas," "everyone gets a turn to speak and present," "nothing is personal," and "trash talking is welcome."
Mr. Croth did, however, structure how each idea would be evaluated against the others, in the initial brainstorming session and when the five finalists were assessed. The criteria included: market characteristics, such as market size and existing competition; fit with Better The World's knowledge and capabilities; soundness and scalability of the business model; and, the time required to develop and launch the product and achieve scalable revenue.
The winning idea was a product they named FlipGive. It is a digital marketing platform for retailers that, as Mr. Croth describes, "uses the power of grassroots fundraising to guarantee sales, drive widespread social media promotion, and create positive social impact."
Fundraisers use the Web and online social networks to sell and promote offers, such as gift cards or vouchers, from popular retailers. Every offer sold provides a donation to the fundraiser, drives a customer for the retailer and provides revenue for FlipGive from the retailer.
So, rather than, say, sell chocolate bars to raise money for their schools, parents can now sell things such as Indigo gift cards, where every $25 card sold results in a $10 donation to the school.
In this way, FlipGive makes it easier to raise more money by providing things to sell that most people want and need.
The brainstorming and filtering process was successful because it enabled the Better The World team to integrate different types of knowledge, Mr. Croth says. Indeed, he describes FlipGive as a "mash up" of three types of knowledge.
The first was the knowledge gained by his company, both in understanding the challenges that corporations face in engaging customers with philanthropic programs and in building technology platforms.
The second was the knowledge gained by paying attention to other online businesses.
"When we started brainstorming two years ago, daily deals sites were huge," Mr. Croth recounts.
"I loved what Groupon was doing for the transparency of marketing costs. Marketing costs are often a black box: you put money in and hope it converts to customers. Groupon guarantees that you only pay the cost – the discount – when someone walks in the door. However, the downside is that it relies on a discount and many major retailers aren't willing to risk being seen as a discount brand. We wanted to retain the transaction-based transparency in costs, but avoid the discounting."
The third type of knowledge was personal, Mr. Croth says.
"Our families were spending hours and hours fundraising for our kids' sports and schools. There is a huge need for local fundraising, given government cutbacks in schools and the rising cost of extracurricular activities. It is getting to the point that some families just cannot afford to let their kids play hockey, for example," he says.
"However, the dollars raised by community clubs and teams are usually paltry compared with the effort invested. I remember my wife spending hundreds of hours planning a fun fair that yielded a couple of thousand dollars. Selling items like chocolate bars and cheese is a $4.5-billion industry engaging 100 million people each year, but the yield for the sales force [the kids and their families] is small. As well, local merchants get little public recognition for donations, such as goods donated for silent auctions."
With all fundraisers done online, FlipGive makes fundraising more effective and efficient, and enables businesses to get credit, publicly, for helping their customers in their communities, Mr. Croth says.
Mr Croth has spent the past year developing, piloting and doing a beta launch of FlipGive. The company has almost doubled in size to 25 employees and has several major clients, including Indigo, Lowe's Canada and Spy Inc., the active eyewear company.
Better The World just completed its own fundraiser in August, yielding $2.5-million of capital to grow the FlipGive business.
Special to The Globe and Mail
Becky Reuber is a professor of strategic management in the Rotman School of Management of the University of Toronto.
This is the latest in a regular series of case studies by a rotating group of business professors from across the country. They appear every Friday on the Small Business website.
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