The One-for-one Business Model: Avoiding Unintended Consequences

Toms

In 2006, Andreas Widmer and his Seven Fund, a social equity venture fund, awarded Toms Shoes a prize as a model for an innovative enterprise solution to poverty. The award was given, in part, because of the company’s implementation of the so-called one-for-one business model, which means that for every pair of shoes that a customer bought from Toms Shoes, the company would give away a free pair to someone who needed shoes.

“We were impressed by Toms Shoes’ enthusiasm and their focus on entrepreneurship as a solution to poverty,” said Widmer, now the director of entrepreneurship programs at Catholic University. A couple of years later, though, he had second thoughts about the one-for-one model. “The unintended consequence is that, of course, there is a local cobbler who actually makes shoes and sells them. Can you imagine what happened to that guy the day the truck showed up with Toms shoes? Why would you go buy something if you could get it for free? And then, to add to this complex situation, that truck doesn’t show up all the time. That wreaks havoc on a lot of businesses, especially small- and medium-sized ones.”

Widmer believes that Blake Mycoskie, the founder of Toms Shoes, means well. But, Widmer is concerned that the one-for-one business model — and many of the companies that have adopted it — are unintentionally causing as much harm as good. “Mycoskie has a good heart. But, I have matured to see that following the heart to fight poverty is a terrible idea,” Widmer notes. “It pleases you more than it helps anything. To give anything is always a bad idea when you’re trying to fight poverty.” (Toms Shoes’ one-for-one model has evolved in recent years in part as a result of such concerns.)

The one-for-one business model has catapulted to prominence since Toms adopted it. Since 2006, Toms has given away more than 35 million pairs of shoes in 60 countries. Scores of similar businesses, selling a wide range of products, have followed suit. Warby Parker sells and distributes eyeglasses; Roma Boots sells and gives away boots; Nouri Bar donates a meal for a hungry child for every nutritional bar it sells; Sir Richard’s sells and donates condoms; KNO Clothing gives away clothes and donates to homeless shelters; Soapbox Soaps donates a month of water, a bar of soap, or a year of vitamins for each soap product it sells, and so on.

“We know from research that people are most motivated to help when they feel a connection to those whom they’re helping.” Deborah Small

A Winner in Marketing

Many say that from a marketing standpoint, the model is a winner. “We know from research that people are most motivated to help when they feel a connection to those whom they’re helping,” notes Deborah Small, a professor of marketing and psychology at Wharton. “It is easier to connect to a person than to an abstract action. So if a company is giving 10% for research, it’s hard to feel passionate about that. But if you are putting glasses on a poor child’s face, there is a very direct connection. It’s psychologically a smart strategy to connect one donor to one recipient.”

Judging from the number of imitators — and the fact that the private equity firm Bain Capital paid $300 million for a 50% stake of Toms last summer — word seems to be out that the model can be a profitable business for companies that implement it. Still, questions have been raised about whether the social impact aspect works quite as well. Widmer and others say the model can create dependency, sap local initiative, kill demand for local businesses, and make developed world buyers of one-for-one products complacent about taking other action to address social needs.

“The one-for-one model can undermine local producers,” notes Michael Matheson Miller, director of PovertyCure, a group promoting entrepreneurial solutions to poverty, and the producer of the film Poverty, Inc., which he expects to be released this year. “When you give free things, why would you buy local shoes?” Also, if donations are made irregularly, local businesses cannot plan for when their businesses will face a sudden influx of free goods. Giving things away also fosters a poor self-image among the recipients, Miller believes.

Some academic research points to evidence that donations can hurt local businesses. A frequently referred-to 2008 study by Garth Frazer in The Economic Journal concluded that textile donations in Africa significantly contributed to the decline of the textile industry in sub-Saharan Africa in the period 1981 to 2000.

“When you give away something free, you’re giving away a band aid. You’re not addressing deeper causes [of poverty] and you may be inhibiting long-term solutions,” Miller notes. “Poor people aren’t poor because they lack stuff; they’re poor because they lack the infrastructure to create wealth.” That infrastructure includes access to title to their land, the courts, capital and a system for the free exchange of goods, he adds. People who want to help should be asking not, “What can I do to help?” but, “How do people create prosperity for their families, and then, how can I assist with that?”

When the Model Works

“One-for-one models are increasing in popularity,” says Katherine Klein, vice dean of Wharton’s Social Impact Initiative. “We have seen a lot of innovation and experimentation with these models. That’s great, because it’s not clear which approaches have the greatest sustainability and impact. Which models inspire the greatest buying and thus the greatest giving? And which models have the greatest impact? We’ll need time, experimentation, and rigorous research to answer these questions rigorously.

“And to be clear, these questions are different,” Klein notes. “The first is about the consumer who’s buying a company’s products or services. It’s about marketing. What inspires the customer to buy from a company that’s got a one-for-one model? Consider a few different companies’ one-for-one propositions to consumers. Historically, Toms has said, ‘If you buy a pair of shoes, we’ll give away a pair of shoes.’ Cotapaxi says, ‘If you buy this product – say, a backpack – we’ll give a donation that will pay for a child to receive a week of tutoring in a community center in Kenya.’ United by Blue says, ‘For every product sold, we will remove one pound of trash from oceans and waterways.’ And Bridgeway Capital Management says simply, ‘We donate half of our profits to charity.’ We need research comparing the effectiveness of these differing models in attracting customer purchasing and loyalty.”

According to Klein, the second question is about effectiveness on the ground – about creating social impact. She notes that some critics look at “buy one, give one” models and argue that it’s never appropriate to give resources – shoes, glasses, scholarships, or even cash – to the poor. “Clearly that’s an oversimplification,” Klein says. “Randomized control trials have shown us that giving away some products – malaria bed nets, for example – maximizes positive impact. So, I’m wary of making generalizations just yet. We have a lot to learn about how to maximize impact to promote well-being and combat poverty.”

Klein points out that the good news is that a great deal of innovation is going on in business. “More and more companies are engaging in social impact – in corporate social responsibility that is integral to the company’s strategy and core business, not an add-on,” she notes. “For companies interested in implementing a one-for-one model, I would recommend a careful, not cavalier, approach in choosing a model Twitter . What issues, outcomes and locales resonate with the company and especially with its founders? Authenticity is important. What strategies, contributions, or gifts do leading researchers and NGOs recommend to maximize impact? And what story and model will captivate and inspire consumers?”

In certain circumstances, the one-for-one model may be fine, like giving away eyeglasses, if you’re not undermining a local industry, PovertyCure’s Miller says. Also, clearly, when there is an emergency, donations are critical, Miller and others say. The problem is that the emergency model has become the standard model for assistance. “A crisis is Haiti in the earthquake, and New Jersey in the hurricane,” says Widmer. “During such humanitarian crises, we have an obligation to help. At some point, though, it’s not a crisis any more. Poverty is not a humanitarian crisis; poverty is systemic. Being poor is being excluded from networks of exchange and productivity.”

Several executives who are now running one-for-one businesses agree that the one-for-one model may have unintended harmful consequences. Many of them have modified the model significantly to avoid these negative effects.

Toms itself has revised its business model in ways that appear to be responsive to some of these criticisms. Last year, for example, it began selling coffee and giving away a week’s worth of clean water for every pound of coffee sold. Critics say that’s an improvement over Toms’ shoe giveaways because the coffee is grown in the countries where the water is provided, sustaining local jobs. Also, Toms is working to develop local manufacturing in Haiti for the shoes that it gives away, according to the company’s website. Blake Mycoskie declined to be interviewed for this story.

“We have seen a lot of innovation and experimentation with these models. That’s great, because it’s not clear which approaches have the greatest sustainability and impact.”  –Katherine Klein

“The idea of making the shoes in the country [where they are donated] is definitely an improvement,” notes Miller. “The best way to achieve long-term sustainability is for local businesses to flourish.”

Samuel Bistrian, founder and CEO of Roma Boots, adheres to the one-for-one model, while at the same time taking steps to address what he agrees can be unintended harmful consequences. Bistrian, who grew up poor and wore shoes full of holes through many frigid Rumanian winters, is convinced of the importance of making one-for-one donations of his company’s boots in Romania and 16 other countries on four continents where hardy footwear that can keep out the cold and damp are unavailable. Even so, he has also begun donating to educational organizations for each pair of boots he sells and he is trying to develop manufacturing plants as close as possible to the donation locations. And, when told that some other one-for-one companies, including Warby Parker, charge nominal fees for the items they “donate,” Bistrian said he thought it was a great idea and that he was going to consider whether Roma should start doing the same. “That kind of stirs my thinking,” he says.

Warby Parker’s Approach

From its inception, Warby Parker, through its non-profit partners, has charged for the eyeglasses it “gives away” in 35 countries. Also, the monetary donations Warby Parker makes for every pair of glasses it sells are used to train people to give basic eye exams and sell glasses in the “donation” locales. “By charging [for glasses], you make a needy beneficiary into a responsible consumer. It treats them with greater dignity,” notes Neil Blumenthal, co-CEO and one of four founders of Warby Parker. Widmer agrees with Blumenthal’s analysis. Any model that requires those who receive goods or services to pay even a nominal amount is an improvement because it fosters self-esteem, Widmer says.

Blumenthal believes that whether donations foster dependency “is a broad question about international development and poverty alleviation irrespective of the one-for-one model. The question is, ‘How do you empower people to fulfill their potential?’ It’s all situational.

“At times, distributing free goods can create dependency. At other times, it can be beneficial, like vaccines are a public good that make people healthier and reduce lost productivity,” Blumenthal notes. The impact of donating food depends on the situation. Food stamps are clearly beneficial in the U.S. But distributing food to the “wrong places” — for example, donating large amounts of grains to areas that depend on growing and selling them — can have an adverse effect, he adds.

The website of The Naked Hippie, a T-shirt company that sends 100% of its profits to organizations that make microloans in Africa, Asia and South America and only makes a profit if the loans are repaid, displays a chart that distinguishes three categories of social businesses: “1.0 businesses” — for which Toms is cited as a prime example — treats symptoms; 2.0 businesses — for which Warby Parker is the prime example — treat causes; and 3.0 business like The Naked Hippie, restore health, according to the chart.

“By charging [for glasses], you make a needy beneficiary into a responsible consumer. It treats them with greater dignity.” –Neil Blumenthal

Adrien Edwards, The Naked Hippie’s founder and CEO, notes that the diagram is not intended as a criticism but rather to “differentiate” the social impact models. The “treating the cause” model is a step between “giving someone a fish” and “teaching them how to fish,” he says. His company restores health in that by providing loans, it invests in individuals, giving them a feeling of self-worth and hope, Edwards notes. The difference between that and providing training — as Warby Parker, for example, does — is that when you provide training, you’re implying, “You don’t know how to do this; I’ll help you out,” Edwards points out. “When you give a loan, you’re saying, ‘We know you have the capability; all you need is the money to do it.’”

Executives of companies that practice the one-for-one model generally agree that manufacturing whatever they’re donating locally would be the ideal model, but they say it is not always feasible, at least in the short run. Blumenthal of Warby Parker says that’s what he’d like for his company, but it’s not possible, given the nature of the eyeglass industry, at least for now.

Meanwhile, for Lauren Walters, co-founder and CEO of 2 Degrees, which donates a meal for every food bar it sells, local sourcing of the ingredients of the food it donates is a crucial aspect of the company’s current model. “We want to do things that as we help feed kids, we also help the local economy and local farms be more sustainable to deal with the underlying issues of poverty,” he says.

At the same time, Walters says he is not doctrinaire about his approach. His first priority is to feed hungry people. He wouldn’t forego feeding hungry kids while waiting for local self-sustaining capacity. “There are some continuing emergencies in food security. Let’s find the food locally. Let’s provide funds so people can buy food locally. But I’m not a purist. I’m not willing to let hungry families go without food while we wait for the system to catch up.”

Many Variations

While one-for-one companies are inventing many variations on the basic theme, their leaders are careful not to criticize colleagues. “If you do something kind, it gets an enormous amount of criticism,” says Edwards of The Naked Hippie. “The moment you do something nice, people ask, ‘How does it really help? It’s a learning industry; it’s evolving. If the intent is in the right place, then, as they need to pivot, to adjust, they will.”

Davis Smith, founder and CEO of Cotopaxi, an outdoor adventure equipment company that donates to nonprofits for the development of water systems and education for every item it sells, has a similar view. “It’s hard for me to criticize [the one-for-one model]. It takes a lot of guts to start a business and give away money. Are there problems in [Toms’] strategy? I’m sure they’d be the first to say, ‘Yeah.’ And, they’re trying to improve. Toms has shown the world that you can run a business well and do good. Its biggest contribution is having ushered in the age of social entrepreneurship.

“Like people, businesses don’t know the best way to help, so their efforts can have unintended consequences. We’ll try to do better, which doesn’t mean we’ll be perfect,” Smith says. “Ten years from now, we’ll probably look back and say, ‘Oh no,’ I can’t believe we did that.”

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