by Tiffani Bova
BlackRock’s chief executive officer, Larry Fink, has posted a 2018 letter to CEOs, cautioning them that the world’s largest asset manager won’t support companies that fail to make positive contributions to society.
STORY
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TOMS SHOES
HEART AND SOLE
Goals are only wishes unless you have a plan.
—MELINDA GATES, American philanthropist and cofounder of the Bill & Melinda Gates Foundation
CARING CAPITALISM
SOME COMPANIES COME TO THIS Unconventional Strategies growth path after they have become so safely successful that they can risk taking a long shot on a real breakout strategy. Others try it as a brand “recovery” plan after a social faux pas or corporate embarrassment. But the third, and most interesting for our purposes, are the companies that make this growth path part of their founding design. Some may be small and we’ll never hear about them; others have gone on to become household names that others aspire to mimic. From organic candy that promotes world peace to coffee beans for puppy rescues, there’s no category that should be off-limits. These companies that have made it part of their DNA may actually offer lessons for those already established brands interested in pursuing this as both a social and an economic boost.
One of the first, and most successful, companies to incorporate “social entrepreneurship” with traditional market capitalism was TOMS Shoes. Its story gives an interesting glimpse into how taking a nontraditional growth path not only can pay off on the bottom line but can gain considerable goodwill by benefiting mankind.
TOMS Shoes was founded in 2006 in Playa Del Rey, California, by Blake Mycoskie, a Texas entrepreneur who had successfully founded and sold several companies. Exhausted, he and his wife moved to Southern California, rented an apartment, and took a sabbatical to ponder how to spend the rest of their lives.
A few years before, Blake and his sister, while contestants on the TV show The Amazing Race, visited Argentina. He fell in love with the country and, on a return visit in early 2006, noticed that the country’s polo players were wearing a unique shoe, the alpargatas, that was a simple slip-on with rope soles. During the visit, while doing volunteer work in Buenos Aires, he noticed how many of the city’s poor were without shoes or were wearing castoffs of the wrong size. He resolved to find a way to use the first to solve the second.
Returning to Southern California, he founded TOMS (the name is derived from “Tomorrow’s Shoes”) with $500,000 in seed money made from selling his online driver training company in Texas. The business plan—to make alpargatas with rubber soles for the North American market—had an interesting added wrinkle: to provide a new pair of shoes free of charge to youths from Argentina and other developing countries for each pair sold, a for-profit company based on the buy-one, give-one idea. He received moral support from Bill Gates, who told him the lack of shoes was a major contributor of childhood disease.
Despite being designed as a mechanism for “one-for-one” conscious capitalism, TOMS quickly enough achieved considerable commercial success. Mycoskie initially had commissioned Argentine cobblers to make 250 pairs of shoes of the simplest, “minimally viable” quality and finish to test the concept. Soon after sales officially began in May 2006, the Los Angeles Times ran a story on the company. Within days, the company had received two thousand orders.
By the end of the company’s first year, it had sold ten thousand pairs. A matching ten thousand free pairs were delivered to Argentinean children in October 2006—news of which only adding to the company’s good image. Soon celebrities, among them Tobey Maguire, Keira Knightley, and Scarlett Johansson, were being photographed wearing TOMS. And it was getting lots of positive press from Vogue, People, Time, and Elle magazines.
TOMS didn’t stop with what it could do on its own—in 2006, with sponsors including AOL, Flickr, and the Discovery Channel, it launched an annual One Day Without Shoes event, which encouraged people not to wear shoes for one day in order to raise awareness about the impact shoes can have on a child’s life. By 2011, TOMS had an annual growth rate of 300 percent and had given away its ten millionth pair of shoes. Similar to other companies showcased in Growth IQ (Kylie Jenner, Red Bull, GoPro), TOMS spent little on traditional advertising early on, instead relying on its five million social media followers to create word-of-mouth buzz on its behalf.
By 2012, TOMS had grown from an apartment-based start-up to a global company with $300 million in annual revenues. It used its momentum and growth in its shoe business to fuel the additional growth paths of Market Acceleration and Product Expansion. While it maintained its core philosophy, it now was pursuing Customer and Product Diversification when it decided to expand into eyewear (part of the profit going to save or restore eyesight to the nearly three hundred million people who are visually impaired in developing countries), apparel, and handbags. TOMS Bag Collection supplies funds to train midwives and distributes birth kits for safe childbirth.
But having a strong brand (awareness) for social capitalism doesn’t guarantee success if you decide to expand beyond your core products and services. In 2012, Mycoskie sensed something was wrong, despite the fact that TOMS was now a giant company, growing 300 percent per year and having distributed ten million shoes. He stepped down from the CEO position, moved back to Texas with his wife, and took a sabbatical. During that hiatus, Mycoskie pondered the fate of his company and its philosophy. He realized that the company he founded had become more focused on process than purpose. It had lost its way. During the years of hyper-growth it became disconnected from its greatest competitive advantage: “use business to improve lives.”
Brands That Use the TOMS Model for One-for-One Giving:
Warby Parker
Bombas
One World Play Project
Bixbee
Roma
Smile Squared
SoapBox
Figs
Better World Books
State
Mycoskie returned to TOMS revitalized—and with a plan. He did not assume the CEO position. Until that point, he owned 100 percent of the company. He decided to sell 50 percent of TOMS, which at the time was valued at $625 million, to Bain Capital in mid-2014, and at the same time he agreed to bring in a more seasoned CEO. It was quite fitting that TOMS hired Jim Alling, who understood socially conscious companies better than most, having been an executive at Starbucks working with Howard Schultz for eleven years.
Next up: TOMS Roasting Company in 2013, and TOMS Bags in 2015. In keeping with the one-for-one promise, purchases of these products help improve the lives of people in need by helping restore sight, providing safe water, supporting safe birthing practices, and aiding bullying prevention programs. Mycoskie was going back to first principles. “My mission was clear: Make TOMS a movement again”—and improve lives.
When it was time for TOMS to celebrate its anniversary, it did it the best way it knew how: by giving back. On the tenth anniversary of its One Day Without Shoes awareness campaign, it encouraged social media users to take a picture of their bare feet or their TOMS and tag a photo with a #withoutshoes hashtag. Every photo shared counted toward giving up to one hundred thousand new pairs of shoes to children in ten countries.
Today, after a decade in business, TOMS enjoys annual sales of an estimated $400 million, employs 550 employees, and has five products, each with its own one-for-one offer combined with additional give-back programs such as eye exams, medical care, and sometimes even surgery based on the various needs of a particular country. Its products are sold by hundreds of retailers around the world—including Whole Foods (Amazon), and it partners with over one hundred NGOs and other nonprofit partners in more than seventy countries. Just as important, it has distributed more than seventy million free shoes and delivered 175,000 weeks of clean water to the developing world. Not least, TOMS’s concept of “one-
for-one” support has become a model to socially conscious companies around the world.
Being an inspiration is gratifying. Being a catalyst is satisfying.
—BLAKE MYCOSKIE
Writing in Harvard Business Review, Mycoskie said, “I feel more energized and committed than ever. As far as we’ve come, I still see tremendous opportunities to grow our movement. The ‘why’ of TOMS—using business to improve lives—is bigger than myself, the shoes we sell, or any future products we might launch. . . . Now that I have a clear purpose and amazing partners supporting me, I’m ready for the company’s next 10 years and the many adventures ahead.”
TOMS SHOES
KEY TAKEAWAYS
Mycoskie has built a company that is winning both sales and hearts by giving away a pair of shoes for every one that it sells through its business. While not every company is able to start with this one-for-one model, look for ways you may be able to use this concept within a single product line or during certain promotional events. This model has been emulated by some of the most disruptive and hot companies, such as Warby Parker and Bombas (recently purchased by Walmart).
The line is blurring between nonprofit and for-profit organizations. TOMS just happened to catch the context of the market perfectly. It was able to intersect with the rise in consumers who have become more conscious about their spending. They are willing to spend on consumer goods that also do some good in the world. Using a value proposition like that for positioning and messaging—“cause-related” marketing—can help a company improve its brand reputation as good corporate citizens, but only if the message is authentic to who and what the brand is.
Attach a story to your product.
Give customers pride in wearing/using your product
Make efforts sustainable via one-for-one.
TOMS’s success was fueled by one product, shoes. When it began to branch out into new product and customer categories (Customer and Product Diversification), it got distracted and began to lose its way. Let’s, for a moment, reflect on Starbucks, another brand that had lost its “soul” as it started to expand its products and services. Starbucks became disconnected from its greatest competitive advantage—Customer Experience—but found its way back. Both CEOs took time away, and when they came back, they returned with a renewed sense of clarity. You could even add Steve Jobs to the mix. Time away provided him with an entirely new sense of purpose. It unleashed another level of “vision” that he applied to Apple. Taking a step back, pausing, and hitting reset is sometimes the best way to move forward.
STORY
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LEMONADE INSURANCE
WHEN LIFE GIVES YOU LEMONS
We have to execute our purpose objectives in order to deliver performance. It is not Performance and Purpose; it is not Performance or Purpose; it is Performance with Purpose.
—INDRA NOOYI, chairman and CEO of PepsiCo
THE WILLINGNESS TO TAKE AN Unconventional Strategy path is right there in the name—Lemonade Insurace. In any industry, the name would be fun; but in the staid old insurance industry, where companies are named after cities and Founding Fathers, it was obviously designed to raise eyebrows. The two men who founded Lemonade in April 2015 had no previous insurance experience other than buying policies. They were, in fact, serial technology entrepreneurs. Looking for new opportunities, they spotted in the insurance industry a nearly $5 trillion market ripe for a technological, digital revolution.
“Eighty-one percent of millennials even expect their favorite companies to make public declarations of their corporate citizenship”
“Eighty-three percent of junior staff would prefer to work for a company that operates with a social purpose”
As mentioned earlier, millennials are looking for brands that contribute to a greater purpose. More than a third have said they would spend more on a brand that supports a cause they believe in. While many industries are starting to take note and take more socially progressive stances, the insurance industry may in fact be held back by its long legacy and established business models.
That was the context from which Daniel Schreiber and Shai Wininger launched their company. The insurance business in the United States suffered from poor customer satisfaction (i.e., a poor Customer Experience) and was far behind in the application of the latest information technologies, notably big data analytics and social networks (Customer and Product Diversification).
The pair set out to attack those weaknesses with a combination of behavioral and digital technology, social media, and a new sales and service model—and to roll them in rapid sequence to create an integrated and unique Customer Experience. The goal was to create a brand-new insurance user experience that realigned the customer with the insurer in regard to coverage, ease of use, and incentives—in other words, an almost complete break with hundreds of years of insurance company history. Focusing on ways to Optimize Sales as a growth strategy is good, but not necessarily a game changer. However, combining that with the most Unconventional Strategies part of the start-up was its promise to “give back up to 40 percent of premiums to a cause its customers want to support.”
Wait, what? Yes, you read that correctly. Lemonade will ask its customers to “nominate a charity when they first buy a policy.” It then collects the premiums of everyone who has chosen the same charity and puts it into a single pool, which pays claims. Anything left over goes to their chosen charity. That, and that alone, was by far the most profound break from other insurance carriers, many of which follow a much more traditional path of social responsibility, such as Allstate and Insurance Australia Group, both on Fortune magazine’s 2017 “Change the World” list.
The basic financial model was comparatively simple and straightforward. Lemonade charged a 20 percent flat fee on the customer’s premium. The company used the remaining 80 percent to pay claims and purchase reinsurance (typically through Lloyd’s of London). This was already a new paradigm.
Traditionally, insurance companies earn their money through a “float”—that is, by investing customer premiums—then (when everything goes right) paying out less in claims and expenses than they took in from premiums and earning an underwriting profit. Lemonade instead not only simplified the process but, in the process, removed itself from being in an adversarial role with its own clients. But it didn’t stop there—it got even more interesting: any unclaimed premiums were then to be awarded annually to a nonprofit of the user’s choosing in a program titled “Giveback.”
Giveback is a unique feature of Lemonade, where each year leftover money is donated to causes our policyholders care about. We treat policyholders who care about the same causes as virtual groups of “peers.” Lemonade uses the premiums collected from each peer group to pay the group’s claims, giving back any leftover money to their common cause, and uses reinsurance to cover for cases where the group’s claims exceed what’s left in the pool.
Beyond the obvious difference in business models with its Giveback program, Lemonade is taking advantage of new technology such as artificial intelligence, in particular machine learning and chatbots (programs that can talk directly to users in a conversational language) to work with its customers in policy creation and claims handling.
What the claimants didn’t know was that their entire interaction with Lemonade had been carefully orchestrated from the start to convince them not to try to defraud the company—including signing a pledge of honesty at the beginning (instead of at the end) of the claims process. They also spoke directly into their computer or phone’s camera to make their claims—psychologically more supportive of honesty than merely filling out a claim form.
By the same token, the Giveback program not only enhanced Lemonade’s reputation as a good company to belong to (it is officially, and legally, a “social benefit corporation”) but also
reinforced honest dealings. After all, cheating Lemonade on a false claim is as good as taking money from your favorite charity—it’s not just a big, anonymous company you are ripping off but people in need. And not any people, but ones the customers actually nominated when they first bought their policies.
Giveback essentially puts “unclaimed money” out of reach of both the company and its customers. Further solidifying this message for customers and prospects alike is the knowledge that Lemonade is one of the few insurance companies in the world to receive B Corporation certification for its commitment to social and environmental justice—the equivalent of being a “fair trade” food or coffee vendor.
As of December 2017, Lemonade has raised a total of $180 million in investment capital from a blue-ribbon list of investors that includes Japanese telecom giant SoftBank and Silicon Valley venture giants Sequoia Capital and GV (Google Ventures). The customers who are joining largely fit the same profile—younger, educated, tech-savvy, above-average earners, passionate about giving back—and almost a fifty-fifty split of male and female policyholders.
While the company still has a comparatively small footprint—in August 2017, Lemonade Insurance had forty-eight employees and $2 million in revenue—it has signed up more than fourteen thousand customers. That’s minuscule compared to the industry titans. Still, in fewer than two years, Lemonade had become the largest insurer of first-time buyers (many of them millennials) of renter’s insurance—surpassing such insurance titans as Allstate, Geico, Progressive, State Farm, and USAA. It has been able to secure $325 million of reinsurance protection from two of the top three global reinsurers. All of those accomplishments have made it one of the hottest—and most honored—new start-up companies in America.