May 19, 2024

You’re the Boss: How Many Business Models Can One Company Have?

Sustainable Profits

At TerraCycle, while we’re trying to keep stuff out of landfills and change the way people think about waste, the ultimate goal is to make money. Over the years, I have been challenged again and again to find ways to build our revenue and refine our business model to make us profitable and to maintain aggressive growth. Along the way, we have changed our model numerous times.

The original plan for TerraCycle was to develop an eco-friendly waste management company. People would pay us to take organic waste and instead of dumping it in landfills we would feed it to worms. But at the roughly $50 per ton we were paid to cart the waste, we couldn’t come close to making money (or getting a date!). By the end of one summer, our plan had evolved. We would still take organic waste and feed it to worms, but we would create most of our value and revenue by selling worm waste as premium fertilizer.

TerraCycle started packaging liquefied waste in used soda bottles as “TerraCycle Plant Food.” With this model change, TerraCycle grew to $3.3 million in revenue in four years, selling our fertilizer to major retailers like Wal-Mart and the Home Depot. To source used soda bottles, we created what we call our “Bottle Brigade.” (If you go to our Web site, you can sign up free and send us used soda bottles.) We paid the shipping and a 5-cent donation per bottle to the school or charity of the sender’s choice. The program was well received by schools, and within two years, 4,000 had signed up. Ironically, the success of the program almost destroyed us. We had to pay hundreds of thousands of dollars in shipping and donation costs, and we simply couldn’t afford them.

Desperate to save the brigade program, we decided to try to find sponsors — corporations that would be willing to pay the shipping costs in return for some positive publicity. We started by approaching first the manufacturers that made the bottles and then other environmentally minded companies. We were completely unsuccessful. These companies did not see the benefit in paying us to collect waste that had nothing to do with their own products — but that’s where we got the idea for our next business model evolution.

While the companies didn’t want to pay us to collect waste produced by other companies, they were very eager to pay us to collect waste from their own products. A concept we started to call “sponsored waste” was born. The idea was to run subsidized collection programs for waste and then turn that waste into new raw materials for products that could be sold to consumers. For example, one of our first products was a backpack made from used juice pouches.

It was immediately obvious to me that there was far more growth potential in selling sponsored waste than there was in selling more worm-waste fertilizer, where we had to compete in a crowded market that is dominated by a few huge players. By Year 5, our growth rate, which had exceeded 50 percent but was relying solely on fertilizer, was slowing considerably.

Nonetheless almost everyone (from my board to my management team) advised me to keep TerraCycle focused on its core business. Our early investors had invested in a consumer product company that sold worm waste plant food in used soda bottles to major retailers. And that’s what they wanted us to do. In their minds, sponsored waste was something completely different and not what they signed on for.

Because I firmly believed that this new path was the right one, I tried my best to convince the investors. And then I just did it. Within a year we were collecting drink pouches, yogurt cups, energy bar wrappers and cookie wrappers that we turned into pencil cases, planters, notebooks, kites and so on. Within that same year, all of these products, and more, were available at major retailers who agreed that they embodied the same product tenets as our plant food — namely, they were better, greener and cheaper (and made from waste).

But there was a problem. As we broadened what we manufactured, our margins decreased, often well into the negative. It had taken us four years to bottle worm waste profitably, and adding sewing lines and other manufacturing lines to our factory only compounded the margin issues. We hardly had any in-house experience with these new manufacturing supply chains, and the products we were making had put us into competition with very strong, typically China-based, manufacturing firms. As a result, we had to drop many of our prices below our costs, to get the business.

For example, we made (and still make) a bag for Target called the reTote, a landmark eco-friendly product made entirely from used plastic bags. The catch was that while we were selling it to Target for a few dollars, our costs in the first year were more than $10 per unit. Our losses peaked in 2008, when we reported a $4.5 million loss on $6.6 million in sales. The issue was simple. We were a fertilizer company, and we knew nothing about making the kinds of products we were trying to make. We needed another business model.

Walking through a Wal-Mart one day, I noticed that Disney and Nickelodeon seemed to have products in every category from backpacks to stationary to shower curtains to food products. Obviously, there was no way these media companies could be expert in so many consumer product categories, so I investigated. It was a good friend and board member, Brett Johnson, who helped me understand the licensing model. Disney merely provided the characters and styles, and other companies designed and manufactured the products. I knew TerraCycle could fit the same model. We would collect the waste and design the products and processes but find best-in-class manufactures and licensees to help us make, market and sell the products.

Today, even our worm-waste fertilizer, which is still going strong, is a licensing deal. Under this new business model, TerraCycle has grown to over $13.5 million in sales, is operating in 14 countries with more than 85 employees. At a profit.

Have we finally found our business model? I believe that you should hold strong to the core of what makes your idea special (in TerraCycle’s case, that’s eliminating waste). But I’m sure TerraCycle will face many more challenges. We’re going to keep our eyes open.

Tom Szaky is the chief executive of TerraCycle, which is based in Trenton, N.J.

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