CHAPTER 4 | DEvEloPIng An EffEctivE BUSInESS MoDEl 137

interactions exist among the drugs, supplements, and Whole foods, gap, or Target, or a donation to the user’s
food and beverage products they are consuming. The favorite charity. The rewards are used to incentivize people
app also allows users to maintain a health journal, where to keep taking their medications and supplements on time.
they can keep a log of their personal health activity and The brands that offer the rewards benefit by bringing peo-
compare themselves to others taking the same medica- ple into their stores that care about health and wellness.
tions or who have similar conditions. The app sends us-
Mango Health plans to create a range of consumer
ers a reminder when it’s time to take a medication. When
health apps, all of which will include some form of gami-
the reminder goes off, the user is not allowed to ignore it.
fication incentives.
The app most be opened and the user must verify that “I
took it” or additional reminders will be sent. 4-32. Based on the material covered in this chapter, what
questions would you ask the firm’s founders before
An attribute that separates Mango Health from similar
making your funding decision? What answers would
apps is its gamification aspects. Each time a user takes a
satisfy you?
medicine or supplement on time, he or she earns points.
4-33. If you had to make your decision on just the informa-
There are eight different levels that can be achieved, de-
tion provided in the pitch and on the company’s web-
pending on the number of points a user accumulates.
site, would you fund this company? Why or why not?
Each level is associated with a prize, such as a gift card to

caSE 4.1
etsy: breaking Down a business Model
• Web: www.etsy.com • Facebook: Etsy • Twitter: @Etsy
introduction hall meetings with Etsy sellers to provide tips to them on
how to increase their sales. All this was done in part to
Etsy is an e-commerce website that focuses on build community, but there was a broader purpose. Kalin
handmade or vintage items, as well as unique factory- and his team knew that Etsy’s financial success hinged
manufactured products. These items cover a wide range on how much commerce flowed through its site.
of product types, including jewelry, furniture, housewares, Since it launched in 2005, Etsy has grown steadily.
kitchen gadgets, clothing, and art. The site resembles an It currently employs more than 400 people in the United
open craft fair, where sellers (mostly small merchants and States and abroad and facilitates transactions in nearly
local artisans) set up Etsy stores and sell their products to 200 countries. Etsy is still private, so it is not required
buyers, who are people that want unique, mostly hand- to release financial data; but, the estimate is that ap-
made products from small/local producers. Etsy launched proximately $1 billion worth of sales take place through
in 2005. As of late 2013, 30 million buyers and nearly one Etsy’s website each year.
million sellers were registered on the Etsy website.
how etsy Works
history
To sell on Etsy, a seller registers and creates an online
The idea for Etsy originated in a woodworking shop. Etsy store. Creating a store is free. Each item in the
Rob Kalin, who earned a college degree in the classics, store costs 20 cents to list. The prices in the store are
bypassed the traditional job market to focus on his wood- determined by the seller. Etsy takes a 3.5 percent com-
working talents. He created a unique product, a computer mission on each sale. An example of an Etsy store is
encased in wood, but couldn’t find a marketplace to sell AHeirloom, which can be seen at https://www.etsy.
it. So he, along with Chris Maguire, Jared Tarbell, and com/shop/AHeirloom. AHeirloom sells handmade wood
Haim Schoppik, launched Etsy, an online marketplace for items. one of its most popular items is kitchen cutting
crafts where hobbyists and artisans could connect with boards that come in the shape of states. At the time
people interested in buying handmade goods. this case was written, AHeirloom had 209 items listed,
from the beginning, Etsy championed the idea of ranging in price from $2 to $48. When a sale is made,
community. The company saw itself as an advocate AHeirloom collects the money and delivers the item to
of small merchants and artisans. It also took steps to the buyer. Etsy bills AHeirloom and its others sellers
engage its community and empower its sellers. Every once a month for its listing and commission fees.
Monday evening Etsy sponsored craft night, where 50 to To buy on Etsy, a customer can either use the
80 people came to its office in Brooklyn to make crafts. search bar on Etsy’s home page to search for an item or
The company also sponsored employee craft nights can browse through a list of categories that includes Art,
where its employees would hone their craft-making tal- Home & living, Jewelry, Women, Men, Kids, vintage,
ents. At the same time, Kalin started holding virtual town Weddings, and Craft Supplies. A select number of items
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138 PART 2 | DEvEloPIng SUCCESSfUl BUSInESS IDEAS

Etsy’s platform is designed

to help people sell hand-
made items. This photo
contains a collection of
headbands and other hair
accessories made by an
Etsy seller.

DreamBig/Shutterstock
are also featured each day on Etsy’s home page. When mass production and the advent of the big-box store.
a buyer enters an Etsy online store, he or she can read Etsy is helping bring back these businesses by providing
reviews from past buyers and see how the seller stacks them a platform to sell their products to a sizeable audi-
up on a five-star scale. AHeirloom, for example, has ence of buyers.
over 3,600 reviews and nearly a perfect five-star rating. Etsy’s basis of differentiation flows from its mission
to focus on handmade goods, the number of buyers
business model breakdown and sellers on its site, and the sense of community that
it has created. Although its website is easy to navigate,
At the heart of Etsy’s success is its business model. that’s not what differentiates Etsy from its rivals. Many
A business model is a firm’s plan or recipe for how it online businesses have websites that are easy to navi-
creates, delivers, and captures value for its stakehold- gate. What differentiates Etsy are the factors mentioned
ers. The Barringer/Ireland Business Model Template, above. It’s instructive to note that Etsy’s points of dif-
completed for what Etsy looks like today, is shown ferentiation are made possible by its core competencies
nearby. The following is a breakdown of each of the and key assets. from the beginning, Etsy has excelled
four major categories of Etsy’s business model. What at helping its sellers increase sales via Web-based tools,
is particularly instructive is the way the model fits to- educational materials, and offline events. It also set its
gether. As you read through the description of each business up in a way that encourages its sellers to build
category, notice how it affects the other categories and awareness of Etsy in general. Each seller has its own
Etsy’s business model as a whole. Etsy store. As sellers promote their Etsy stores, they
introduce people to Etsy more broadly, which is a key
core Strategy factor that has enabled Etsy to grow so quickly.
Etsy has two target markets—its sellers and its buy-
Etsy’s mission is ambitious. It wants to “re-imagine com-
ers. Its sellers are the producers of handmade goods. Its
merce in ways that build a more fulfilling and lasting
buyers are people drawn to the site because they want
world.” To do this, Etsy has built its business around the
something unique, something that has a story. They
neighborhood feel. Its focus is on constructing a way to
want something that they enjoy telling other people
shop that is meaningful to both sellers and buyers. To il-
about. It’s a different motivation for buying than shop-
lustrate this point, Etsy CEo Chad Dickerson said, “Etsy,
ping at Walmart or on Amazon.com. This is what Etsy
technologically and culturally, is a platform that provides
means by “re-imagining” commerce. Etsy’s product/
meaning to people, and an opportunity to validate their
market scope has expanded since its inception. While
art, their craft.” To further articulate Etsy’s core values
the majority of items are still handmade, on october 1,
Dickerson said, “At the end of each transaction you get
2013, Etsy announced that it would allow factory-made
something real from a real person. There is existential
goods on its site. This move, according to the company,
satisfaction to that.” In addition to this set of values, Etsy
was necessary to allow its most successful sellers to
is an advocate for small merchants and artisans. These
expand their businesses and keep them from leaving
are two categories of businesses that have been hurt by
 CHAPTER 4 | DEvEloPIng An EffEctivE BUSInESS MoDEl 139

Core Strategy Resources

Business Mission Basis of Differentiation Core Competencies Key Assets

• Re-imagine commerce in ways • Focus on handmade goods • Developing and maintaining a • Intuitive and easy-to-navigate Web-
that build a more fulfilling and • Largest number of registered buyers vibrant community of buyers and based platform
lasting world and sellers of handmade goods in sellers • Etsy’s community of both buyers
the world • Development of tools and and sellers
• Sense of community associated educational materials to empower • Continual inflow of high-quality
with its site sellers hand-made products
• Generating word-of-mouth aware- • Is a Certified B Corporation
ness of their business
Target Customer(s) Product/Market scope
• Buyers—A global clientele that wants • Handmade goods
unique, hand-made products from • Manufactured goods that meet
small/local producers strict guidelines
• Sellers—Small merchants, home- • Global audience of both buyers and
based businesses and local artisans sellers
who want to sell their goods online

Financials Operations

Revenue Streams Product (or service) Channels

• Sales commissions—3.5% on each item sold via the Production • Esty website
Etsy website • Etsy’s secure platform allows small • Retail partners
• 20 cent listing fee for each item listed merchants and artisans that have • Temporary holiday storefronts
• Showcase—Etsy’s advertising program for its sellers products to sell to connect with
people interested in buying hand-
made goods
Cost Structure Financing/Funding • Etsy’s platform was built and is Key Partners
maintained by an in-house staff of IT
• Cost-driven business • $97.3 million in angel and • Third-party developers
professionals
• High fixed/low variable costs venture capital funding • Local organizations and
• Major categories of costs: Web- since the company businesses
based platform development; staff founding in 2005 • Community and business
salaries and general administrative; • Funding from operations alliances
seller education initiatives

Etsy: Barringer/Ireland Business Model Template

© 2014 Bruce R. Barringer and R. Duane Ireland

the site. There are restrictions. The seller must design Etsy newbies and veterans boost their clientele. Etsy labs
the product, or hire someone to design it, and be open organizes community events for Etsy sellers, facilitates
about where it is made. Some controversy was caused online workshops, and assembles Etsy teams, which are
by this move, but Etsy’s numbers continue to grow. groups of sellers that organize around a particular loca-
tion or craft. These efforts have enabled Etsy to build and
maintain a vibrant community of buyers and sellers.
Resources
As mentioned earlier, Etsy’s website is constructed in a
Etsy has three core competencies—the development of way that has led to a core competency in generating word-
tools and educational materials to empower sellers, the of-mouth awareness of its business. As sellers promote
growth of a vibrant community of buyers and sellers, and their Etsy stores, they promote Etsy more broadly. Etsy has
the ability to generate word-of-mouth awareness of its also been a leader in social media, including major pres-
business. The first, which has been developed over time, ences on both facebook and Twitter. The combination of
includes tools and educational material to empower Etsy these factors has been instrumental in Etsy’s growth.
sellers. A key to Etsy’s success has been a recognition In regard to key assets, Etsy’s platform is intuitive
that its sellers, which it affectionately calls Etsians, must and easy to navigate. Its community of buyers and sell-
be successful for the site to work. As a result, from the ers continues to grow. Its sellers populate its site with
beginning Etsy has focused on developing tools, edu- a continual influx of fresh new products, which keeps
cational materials, and offline events to assist its sellers. its buyers coming back. Etsy takes deliberate steps to
for example, each year Etsy sponsors an event called add to its key assets in ways that support its mission
the Etsy Success Symposium, which is a physical and and provide people another reason to engage in its site.
online gathering of Etsy sellers for the purpose of helping for example, in early 2012 Etsy became a Certified B
one another increase sales. Etsy produces a number of Corporation. B Corporations are a new type of company
publications, including the Etsy Seller’s Handbook and the that uses the power of business to solve social and envi-
Etsy Success newsletter, both geared towards helping ronmental problems.

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140 PART 2 | DEvEloPIng SUCCESSfUl BUSInESS IDEAS

financials businesses to support crafts and homemade products.

An example is Etsy’s involvement in new York’s annual
Etsy has three revenue streams, including a 20 cent Renegade Craft fair, which is an event that features and
listing fee for each item listed on its site, a 3.5 percent champions the work of artisans and small merchants.
commission on each item sold, and Search Ads, an Etsy is also branching into areas that enable it to sup-
advertising program that allows Etsy sellers to pro- port small businesses and entrepreneurship in more
mote items in their online stores. This mix of revenue general ways. for example, in 2013 Etsy announced
streams makes sense given Etsy’s core strategy and plans to collaborate with local communities to teach
its resources. The larger and more engaged a commu- entrepreneurship skills to residents. By doing this, Etsy
nity it builds, the more revenue it will earn from listing is helping seed the next generation of Etsy sellers. All
fees and commissions. Etsy’s cost structure is based of these efforts are consistent with Etsy’s mission of re-
on cost containment and a high fixed/low variable cost imagining commerce and acquainting as many people
model. Etsy has high infrastructure costs, driven by as possible with Etsy and the marketplace it facilitates.
the network capacity and data storage necessary to
service 30 million registered buyers and one million
registered sellers, and the nearly one billion dollars of challenges ahead
commerce that flows through its site each year. It also Etsy’s primary challenge will be to maintain the integrity
has a staff of 400 that manages the site and maintains of its business model while trying to grow. The complex-
the Etsy community. To support its core strategy, the ity of this challenge is starting to show. Many Etsy sell-
firm has people with job titles that don’t exist in most ers, for example, were not happy with the company’s
businesses, such as Head of Seller Education (currently decision to allow the sale of manufactured goods. But
Danielle Maveal). Etsy’s variable costs are low. It costs providing this option has allowed some of Etsy’s most
Etsy very little to add another buyer or seller to its site. successful sellers to effectively grow their businesses.
notable is the amount of funding that Etsy has A limitation of producing handmade goods is that it’s
raised—$97.3 million. The funding has been used to labor intensive. When artisans make something that
build out the company’s infrastructure, add employees, sells well (such as a piece of jewelry or furniture), if they
invest in strategies for expansion, and fund seller educa- can’t offload some of the actual production of the good,
tion initiatives. Etsy is reported to be profitable. If this is their sales will be limited by the time they have to make
the case, it is funding its operations in part through its it themselves. Sellers complain about rising fees, which
own revenues. may be an artifact of Etsy’s need to produce sufficient
profits to satisfy investors. Its initial listing fee was 10
Operations cents per item, and it’s now 20 cents. Some also com-
plain about the lack of traditional marketing and would
Etsy’s website was built and is maintained by an in- like to see Etsy take a more active role in driving traffic
house staff of IT professionals. The site has a homespun to its site. Recall that Etsy takes the opposite approach.
rather than a highly polished look. This is intentional, It relies on its sellers to promote their Etsy stores, and
although some critics have urged Etsy to up its game benefits when the customers of individual sellers learn
some in terms of site design and functionality. In terms about Etsy more broadly.
of channels, Etsy’s main channel is its website. As
mentioned earlier, Etsy is strictly a platform that brings
buyers and sellers together. While a seller’s Etsy store discussion Questions
resides on Etsy’s website, all of the logistics involved 4-34. What is Etsy’s core strategy, or how the firm intends
with the sales process are handled by the seller. This in- to compete in the marketplace?
cludes stocking the store, processing orders, collecting 4-35. What evidence can you provide to demonstrate that
payment, and shipping the merchandise. This arrange- Etsy’s founders, Rob Kalin, Chris Maguird, Jared
ment relieves Etsy of the cost and responsibility of pro- Tarbell, and Haim Schoppik, developed a disruptive
viding for those functions. business model as the foundation for launching their
In terms of channels, the majority of sales flow firm?
through Etsy’s website. Etsy is experimenting with some 4-36. In thinking about the firm’s “basis of differentiation”
additional channels. It has partnered with select retail as part of its business model, what does differentiate
chains, such as West Elm and nordstrom, to sell some Etsy from its competitors?
Etsy products in its stores. It also has tried some special 4-37. What are Etsy’s three core competencies and how do
promotional events, such as setting up temporary physi- these help the firm in its efforts to be successful?
cal storefronts in new York City during the Christmas
season to feature products made by Etsy sellers. Sources: Etsy home page, available at www.etsy.com, accessed
Etsy has several key partners, or groups of partners, June 3, 2014; o. Malik, “Meet the Man Behind new York’s other
Billion Dollar Internet Company. This one Makes Money,” gigaom,
which improve its operations and help expand sales. In
available at https://gigaom.com/2013/08/23/meet-the-man-
terms of operations, by publishing its API (Application behind-new-yorks-other-billion-dollar-internet-company-this-one-
Programming Interface), Etsy has enabled third-party makes-money/, posted on August 23, 2013, accessed on June
developers to create tools that help Etsy sellers more 3, 2014; “The ‘Etsy Economy’ and Changing the Way We Shop,”
efficiently manage their inventory and track their ship- Entrepreneur, March 22, 2013. “Etsy,” Wikipedia, www.wikipedia.
ments. Etsy works with a number of organizations and com, accessed June 4, 2014.
 CHAPTER 4 | DEvEloPIng An EffEctivE BUSInESS MoDEl 141

caSE 4.2
tOMs’s One-for-One business Model:
is it sustainable for the Future?
• Web: www.toms.com • Facebook: TOMS • Twitter: @TOMS
introduction was added in 2014. for every bag of coffee that’s sold,
ToMS donates an equivalent amount of money to pro-
In 2005 Blake Mycoskie, a serial entrepreneur, needed vide clean water and sanitation for people who need it
a break. After starting 5 companies in 12 years, he trav- the most.
eled to Argentina looking for some time to relax. He
met some expatriates who were doing social work in
villages on the outskirts of Buenos Aires and asked if he tomS’s business model
could tag along. In one village in particular, he noticed ToMS is known for pioneering the one-to-one business
that most of the children didn’t have shoes. He stopped model. A firm’s business model is a plan or recipe for
a few of the kids to look at their feet and saw cuts, how it creates, captures, and delivers value to its stake-
abrasions, and infections. He knew the villagers were holders. ToMS’s business model is unique in that it
poor and couldn’t afford to buy their children shoes combines the goals of a for-profit company with the am-
and wondered what he could do to help. He also knew bitions of a philanthropic organization. ToMS’s business
there was an inexpensive shoe in Argentina called the model template is shown nearby. The following is a brief
alpargata. What would be the best way to provide poor overview of each of the major sections of the business
Argentinean children alpargata shoes? model template.
Mycoskie thought about starting a charity but felt
the charity model wouldn’t work. He envisioned himself core Strategy
asking his family and friends for contributions, and knew
they would contribute once, or twice, or maybe even ToMS’s mission is “one for one.” The mission is made
several times. But it would be hard to continue to ask. possible by the way ToMS is structured. ToMS has two
What he needed was an approach that would sustain parts. ToMS is a for-profit company that manages the
itself by selling a product that people needed to buy overall operations and logistics. friends of ToMS is a
anyway. The approach Mycoskie came up with he later nonprofit organization that assembles volunteers, deliv-
dubbed “one for one.” He would create a for-profit busi- ers the shoes, and coordinates the eyewear/site restora-
ness to sell alpargata shoes, and for every pair sold he’d tion and coffee/clean water initiatives.
donate a pair to a child in need. An important decision Mycoskie and his team made
Mycoskie returned to the United States and set early on, when ToMS was strictly a shoe company, was
up shop in Santa Monica, California. He started ToMS that the cost of providing shoes to children in need would
with no shoe industry experience. The company was be built into the shoes’ selling price. The same approach
originally called Shoes for Tomorrow but was quickly now applies to eyewear and coffee. As a result, as long
shortened to ToMS. To get started, Mycoskie went from as ToMS sells its products, it can fulfill its philanthropic
one retail store to another with his unique business idea. mission. It does not need to rely on donations, as most
A few los Angeles boutiques agreed to sell the shoes. charities and nonprofits do, to sustain itself.
His first break came when the Los Angeles times ran an ToMS’s strategy is built on selling practical prod-
article about his business. To Mycoskie’s surprise, the ucts. Shoes, eyewear, and coffee are products that are
article spurred $88,000 in orders in a single weekend. sold widely. Its shoes are pricey ($54 to $80 for a pair
fast forward to today. ToMS is now an international of simple slip-ons), but people know that when they
brand. It’s one for one model has been expanded to buy ToMS shoes they are paying for a pair that will be
include shoes, eyewear, and coffee. As of mid-2014, donated to a child in need. ToMS relies heavily on vol-
ToMS had given away 10 million pairs of shoes in 60 unteers, interns, and partners to do much of its work.
countries, had helped restore sight for 200,000 people Many of the people who volunteer and work with ToMS
in 13 countries, and is providing clean water and sanita- are motivated by the company’s mission, which changes
tion to villagers in 5 countries. The one-to-one model lives. In some countries, shoes are required in order to
has been tweaked some, but the intention is the same. attend school. owning a pair of shoes provides a child a
ToMS still gives away a pair of shoes for ever pair it chance to be educated and to have a better life. ToMS
sells. Eyewear was added in 2011. Rather than donat- is not reluctant to share these types of realities, which
ing a pair of glasses for every pair its sells, ToMS do- deeply resonate with volunteers and customers. ToMS
nates an equivalent amount of money that is used for has almost as many interns, for example, working in its
sight-saving measures, such as eye surgery, medical facilities as employees. friends of ToMS works with non-
treatment, or a new pair of prescription glasses. Coffee profits and ngos to distribute its products. It does this

(continued)
142 PART 2 | DEvEloPIng SUCCESSfUl BUSInESS IDEAS

Core Strategy Resources

Business Mission Basis of Differentiation Core Competencies Key Assets

• “One for One” • Strong brand • Pioneered the one-for-one business • Blake Mycoskie
• Business structure: TOMS (for profit) model; diligence in execution has • Corporate culture
and its collaboration with Friends of created a strong brand • Relationships with nonprofits that
TOMS (non profit subsidiary) • Creation and management of for- help TOMS distribute products to
• Products (shoes, eyewear, coffee) profit/philanthropic business strategy children and people in need
that resonate with consumers) that is sustainable • TOMS volunteers
• TOMS volunteers • Ability to create passion and • Interns (that work in TOMS
• Ability to change lives excitement about what TOMS is facilities)
doing in others (nonprofit partners, • Campus clubs
TOMS volunteers, Interns, etc.) • Day Without Shoes campaign
Target Customer(s) Product/Market Scope • Willingness to learn (i.e., responding
• Consumers who resonate with • Shoes, eyewear, and coffee to critics who point out how TOMS
TOMS one-for-one approach and • Branded products (t-shirts, caps) could be doing things better by
the company’s combined for- • Misc items sold via the TOMS adopting the best suggestions)
profit/philanthropic persona marketplace
• TOMS products are sold worldwide.
Shoes have been distributed to 60
countries, eyewear 13, and clean
water provided in five

Financials Operations

Revenue Streams Product (or service) Channels

• Product sales, which include shoes, eyewear, and coffee Production • Online (TOMS.com, Zappos.com,
• TOMS branded products (t-shirts, sweatshirts, caps, and TOMS flags) • Products (shoes, eyewear, & coffee) etc.)
• Misc items available via the TOMS Marketplace, including Accessories, are made by contract manufacturers • Retailers (Nordstrom, Whole Foods,
Home & Bath Products, and a small number of Tech Products which are carefully selected and etc.)
• All sales trigger a commensurate gift to people in need. monitored • Products distributed to children and
• Products are shipped directly to adults in need via Friends of TOMS,
retailers or online outlets for sale to nonprofit partners, and TOMS
Cost Structure Financing/Funding their customers (TOMS does not volunteers
• Cost-driven business • Initial capital infusion of dropship)
Key Partners
• Low fixed/high variable costs $500,000 from founder Blake • TOMS collaborates with nonprofits
• Major categories of costs: Mycoskie to distribute the shoes and eyewear • Friends of TOMS
Product manufacturer, • Profits from business operations and to provide clean water for those • Nonprofit partners
distribution of products to • TOMS customers/supporters in need • TOMS volunteers
people in need, salaries and volunteer their time to get products • Top brands, such as Ralph Lauren
general administrative to adults and children in need and and Element Skateboard
to spread the word about TOMS. • Affiliates (via the TOMS affiliate
program)

Toms: Barringer/Ireland Business Model Template

© 2014 Bruce R. Barringer and R. Duane Ireland

in part because local organizations, already embedded in efforts are making a difference, and it involves a lot of
a country, know the needs better than ToMS does and people in what it does. These factors have enabled
can direct the company. An example is ToMS’s partner- ToMS to build a strong brand. Its core strategy is also
ship with the Seva foundation to implement its eyewear/ working. It has remained sustainable without needing
restore sight program. The Seva foundation runs sight donations. ToMS has also excelled at creating excite-
programs in nepal, Tibet, and Cambodia. It is uniquely ment and passion in others for what it is doing. It does a
equipped to help ToMS make the best use of its dollars. lot to elicit this. for example, every two weeks a group of
ToMS’s product/market scope now includes ToMS volunteers travels to Argentina or another part of
shoes, eyewear, and coffee. The company also has a the world to make a “shoe drop,” which is the term that
“Marketplace” that sells a variety of items, including ToMS uses for distributing shoes. Anyone can apply for
jewelry, household items, and tech products. The com- the trip, and for many it is a life-changing experience.
pany’s “one for one” mission still applies, just in a differ- Every shoe ToMS gives away is placed on a child’s foot
ent form. If you buy a $140 Turquoise Alba necklace, for by a ToMS volunteer. volunteers pay their own travel ex-
example, your purchase will get you the necklace and penses, but the trips are organized by ToMS.
provide 11 meals for a child in need. ToMS also listens. It has both proponents and crit-
ics that are vocal in their feedback. Rather than ignoring
the feedback, ToMS reacts, which encourages addi-
Resources
tional feedback. for example, one source of criticism
ToMS has been diligent in the execution of its one-to- that ToMS has faced is that when it gives a child a pair
one model. Its products are appealing, its philanthropic of shoes, it is a one-time event. The child will eventually
 CHAPTER 4 | DEvEloPIng An EffEctivE BUSInESS MoDEl 143

grow out of the shoes and be right back to where he in Rwanda, Malawi, and guatemala. In regard to
or she started. ToMS acknowledged this criticism as a distribution, ToMS delivers its products to its retail and
valid point, and has responded by putting a program in online partners, who in turn sell to their customers.
place that tracks the children to whom shoes have been ToMS does not drop ship or sell on a consignment
provided. It makes sure the children receive additional basis.
shoes when needed. Manufacturing and selling is only the first step in
ToMS has a number of key assets. It has a healthy ToMS’s overall process. Its philanthropic efforts come
corporate culture, which draws people in. It has an next. To distribute its shoes, ToMS partners with non-
entire apparatus to get people involved in its initiatives, profits and ngos in the countries in which it distrib-
including community groups, students, educators, utes products. These organizations are called “giving
and others. You can see ToMS’s work in this area by Partners.” The giving Partners identify the children in
accessing the ToMS Community website (www.tom- need. The process of actually distributing the shoes
community.com). ToMS also frequently touts the work is referred to as Shoe Drops. friends of ToMS helps
of its volunteers on its Twitter account, which is avail- coordinate the Shoe Drops. ToMS’s eyewear/restore
able at @ToMS. ToMS also organizes events, which sight and its coffee/clean water initiatives are executed
are heartfelt and draw attention to its products and in a similar manner. ToMS works with friends of ToMS
causes. The most popular event is its one Day Without and local organizations to make the distributions.
Shoes campaign. This campaign was started in 2008 In regard to channels, ToMS sells its products
to raise public awareness of the importance of shoes. through both retail and online outlets. over 500 retailers
It asks ordinary people to go one day without shoes, around the world now carry ToMS shoes. Its distribution
just to see how it feels. The point is to instill in people network for eyewear and coffee is growing. A string of
what a difference a simple pair of shoes can make, ToMS café-stores is on the drawing boards. The café-
particularly for children. The campaign grows every stores will sell ToMS coffee in a coffee house setting
year. You can see highlights of the most recent year’s and will sell ToMS shoes, eyewear, and other products
campaign at www.toms.com/daywithoutshoes. In past in an adjacent retail setting. ToMS’s business model
years, people from over 25 countries have participated. would not be possible without key partners. Its most
Participants have included Kris Ryan, Charlize Theron, important partners are friends of ToMS (its nonprofit
the Dallas Cowboys Cheerleaders, and employees from subsidiary), the nonprofits and ngos that distribute its
nordstrom, Microsoft, and Aol. products, and its volunteers. ToMS also has a robust
affiliate program.
financials
ToMS’s revenue comes from product sales. ToMS is a criticisms of tomS
cost-driven business. It contains costs via its partner-
ships, volunteer network, and by avoiding traditional for some, it may be hard to imagine that ToMS has
marketing. ToMS does very little traditional marketing, critics, but it does. Its critics point out flaws in ToMS’s
such as print media, radio, and television. Instead, it approach, which some go as far as to say threaten the
relies on word-of-mouth, social media, and prominent firm’s future.
placements in retail stores by its retail partners. ToMS The criticism focuses on three main issues. first,
does not manufacture its products. Instead, it relies critics argue that ToMS, along with similar organiza-
on contract manufacturers and growers (for its cof- tions, makes people in poor countries dependent on the
fee) spread throughout the world. ToMS’s approach to good will of others rather than creating opportunities for
manufacturing has raised eyebrows because it produces them to take care of themselves. Many social entrepre-
products in China, where labor practices are suspect. neurs believe that the best way to create sustainable
ToMS aggressively polices its manufacturers and other change in an impoverished country is through educa-
suppliers. It maintains strict standards that everyone tion, job creation, and trade, rather than aid, which is
in its supply chain is obligated to adhere to, particu- what ToMS does. In fact, a mantra among some social
larly when it comes to fairness to workers. ToMS’s entrepreneurs is “trade not aid.” Microfinance, which
employees regularly visit its manufacturers to monitor provides loans to people in developing countries to start
compliance. their own businesses, is based on these principles. The
ToMS funds it operations from profits. It also ben- second criticism is that ToMS has manufacturing facili-
efits from the work of its volunteers. ties in China and elsewhere where human rights viola-
tions have been documented. The third criticism is that
by pouring a large number of free shoes into countries
Operations
such as Argentina and Ethiopia, ToMS is inadvertently
To produce its products, ToMS manages a global sup- stymieing local entrepreneurship. The idea is that by
ply chain. Its shoes are made in low-wage countries providing shoes for free, ToMS takes potential busi-
such as China, Argentina, and Ethiopia. Its eyewear is ness away from local companies, which provide not only
made in Italy. Its coffee beans are sourced from growers shoes but jobs.
across the world and are roasted in the United States. ToMS is aware of these criticisms, and in each case
Some of its most popular selections come from growers has responded in a proactive manner.
(continued)
144 PART 2 | DEvEloPIng SUCCESSfUl BUSInESS IDEAS

is tomS’s business model Sustainable? discussion Questions

The question is, “Is ToMS’s business model 4-38. What is ToMS’s target market? How might this
sustainable for the future?” The primary threats to its market change in the future?
business model stem from the criticisms it receives, 4-39. What revenue streams does ToMS have that support
its reliance on people continuing to pay a premium for how the firm competes? How sustainable are these
its products, and whether the one-for-one movement revenue streams?
will continue to resonate with volunteers and nonprofit 4-40. What key assets does ToMS possess and how
partners. Another threat is the nature of the products sustainable are those assets?
that ToMS sells. on the one hand, selling a physical 4-41. What are the major challenges ToMS faces as the
product mitigates ToMS’s risk because it does not firm continues implementing its business model as
have to rely on donations to fulfill its mission. on the a means of reaching its mission? Which of these
other hand, ToMS has the dual challenge of managing challenges is the most serious and why?
a global supply chain while at the same time leading
a worldwide philanthropic effort. The complexity of Sources: ToMS website, www.toms.com, accessed June 5, 2014;
this challenge will grow as ToMS continues to scale ToMS, Wikipedia, www.wikipedia.com, accessed June 5, 2014;
its business. no company has attempted to scale a A. Spaulding, S. fernandez, and J. Sawayda, “ToMS: one for
one-to-one business model to the extent that ToMS one Movement,” Daniels fund Ethics Initiative, University of new
is contemplating. Mexico, http://danielsethics.mgt.umn.edu