Creating a sustainable and scalable enterprise to feed unsheltered homeless has proven itself to be embroiled in a number of complex systems, food distribution, transportation, and others as demonstrated by the last three posts. We devised our Operational Unit or means of delivering the food, a Mobile Food Bus in the last post but we still need a targeted market to pursue and to make the enterprise’s operations sustainable and hopefully scalable.
Practically speaking, for a start-up operation, three meals a day is a lot of meals. Jo could readily come up with three camps of 25 to 30 people per camp very close to each other, with some smaller camps in close proximity. So, she initially thought to provide 200 to 300 meals a day plus groceries in this limited areas plus small camps and any street people that show up to start.
This seemed to be doable based on our targeted market scenarios. However, it would be only a small percentage of the potential total population to be served. It still needs to be determined whether or not the enterprise could be grown or scaled to serve a far larger number of unsheltered homeless. From an ABCD perspective, it might also be asserted that it should be determined that such an enterprise would not be turned into a bureaucratic form of control diminishing the self-worth of individuals in exchange for sustenance.
Different business models can fulfill different sets of needs so it is necessary to determine what needs we are attempting to fulfill then determine what product fulfills those needs within that business model or delivery system for which we can create a sustainable financial model. This is an iterative process that goes back and forth.
What the nonprofit should understand is the constraints and inefficiencies of the systems (invariably plural) it is working within and then determining whether it can devise financially sustainable ways that can be scaled to overcome them which then drive the numbers in the financial model.
Nonprofit organizations, however, can impose their own constraints or inefficiencies by too quickly becoming too product-centric or specific service-centric and not paying enough attention to the business model or systematic means of delivering the product or service.
Two important variables that can determine a social enterprise’s potential are the operational unit’s “reach” and its “penetration rate.” Reach is the number of potential customers or beneficiaries that the operational unit can access (before competition or other alternatives) and penetration rate is the percent of those customers that the venture would eventually serve over time (after competition or other alternatives). This is part of the bounding of the operational unit. It forces constraints to avoid what were termed in the first post as unrealizable idealism. To be more precise goals that are unrealizable within the constraints of available resources and time. We were not going to feed all the homeless in Oregon. A purpose of the financial model is to grow available resources to meet the ostensibly unrealizable goals over time.
The geographic size of the potential target market in question was first set at 431 square miles but Jo decided to limit that to an area of approximately 289 square miles, east of I-5. The total population number was set at 1,887 from the homeless census. The potential target of our operation, the proportion which could be reached, was estimated initially at ninety percent because the homeless census was able to ascertain where approximately ninety percent of the unsheltered homeless were situated. However, just because we know where they are or were at doesn’t mean we truly have the potential to reach them so we also did other scenarios at lower percentages.
Next was a matter of estimating our operation’s level of penetration, going into a geographic area, finding the targeted population and serving them. The last mile and routing challenges discussed in previous posts would very likely limit effective penetration. This gave us the total population x potential targeted percentage x penetration. Again we ran different scenarios using limited targeted levels to reflect likely limitations in operations. We didn't want to start out promising too much.
Then it was a matter of determining our venture's potential market share or the proportion of our potential target we could serve out of all the other alternative offerings in the area such as soup kitchens and food delivery by churches. This we did set high, again at ninety percent fairly confident if we could get the food to the homeless then they would use our services. This then gave us total population x potential target percentage x penetration x market share which equaled our Operational Unit's customer/beneficiary base or how many served at steady state.
The ventures proposed through the course were all modeled at a future point in time when “at-scale,” meaning covering the entire targeted geographic area and operating at “steady-state,” defined as having matured, with revenues and costs holding constant. Again, this is a wrong or an unreal model but still useful as it allows the social entrepreneur to see the potential financial viability of the enterprise over an extended and forward looking period of time. If the numbers don’t work in the model, they are not all that likely to work in reality.
The Operational Unit's beneficiary base at steady state is based on the Operational Unit's monthly beneficiary transaction rate at steady state which is determined by your product's service's intended frequency of use daily.
What a transaction is for a nonprofit is the point of exchange with beneficiaries or clients for a product or service. The size of our customer unit was set at one, as in one food package, multiplied if needed by the number in a family or group. The initial frequency of use was set at once a day.
The client load of an individual salesperson each month depends upon the number of days in a month available for conducting transactions and the number of transactions that can be performed each day.
Two variables that would drive our costs then are the number of monthly sales or “transactions” conducted with beneficiaries or clients, and the “client sales load” of a single salesperson. Even if the beneficiaries are unable to pay, the financial model still treats them as customers or clients. While this may be seen as a matter of respect, it also recognizes their importance to the financial viability of the enterprise. If this is not done, then the systematic approach sought by the financial model is reduced to simply pouring money on to the problem until it runs out.
Calculating the number of salespeople required for an Operational Unit requires dividing the number of transactions conducted over the course of a month by the "client load," or the average number of transactions a salesperson can perform monthly.
The most conservative first estimate for an operational unit put us at 4,892 transactions per month. Under it, we reached only 40% of the 1,887 unsheltered homeless listed by the census giving us a target market of 755. Our penetration rate was set at a seemingly reasonable 30% with 90% market capture or a steady rate penetration of about 27% which equaled serving 204 beneficiaries. Supplying an average of one meal per day for a 30 day month, and assuming an 80% repurchase rate (as mentioned previously, people move around) put us at the 4,892 transactions per month. Our least conservative estimate put us at 27,513 transactions per month using perhaps possible but idealistic numbers.
We then had who our target market was and how we intended to reach them. We still needed to operationalize how it was going to be done.
If we simply totaled the miles from base to the food pantries as described by the Food Network map then the distance could be covered in three days at eight hours a day but that does not take into account actually delivering to and feeding people or the complex scheduling of food pick-ups and deliveries which are unlikely to be that efficient.
For-profits are naturally concerned with sales and margins as defining their means of being financially rewarded or making a profit. A non-profit enterprise usually doesn’t need to be as concerned with sales and margins. It should though understand the total costs required to offer products or services to targeted beneficiaries so that one knows precisely what’s needed in terms of fundraising.
Even if one could get all volunteers or had real property and equipment donated, one still wants to calculate a cost to demonstrate the enterprise is financially sustainable and, for in-kind matching contributions from major donors which are often a requirement.
Next Part 5
Next Part 5
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