For a while now I’ve been pondering the short falls of nonprofits. I think, without a doubt, the shortfalls are pretty simple – mainly that they don’t make a profit and have no business model to support their expenses. In normal commerce, the exchange of money and goods is between two parties, the producer of products or services and the customer (see Figure 1).
Nonprofits, however, introduce a third party into the equation which creates the economic problem. Their flow of commerce goes from the giver, to nonprofit then finally to the recipient of aid. The only return of goods or services that the giver receives is a pat on the back and deduction on their tax returns (see Figure 2).
Essentially, nonprofits spend money to raise money without the exchange of goods or services between the nonprofit and the person with money. This got me thinking of a new way to structure nonprofits which will allow them to be sustainable as a business while maintaining the integrity of their mission.
As the economy continues to shrink and individual’s discretionary income gets squeezed, giving to nonprofits has slowly diminished. You can imagine that as soon as a family has to decide whether to pay for a need, or pay $50 dollars to a nonprofit, they will chose their own self interest (not trying to be negative Nancy, just sayin). Herein lies the problem, giving to a nonprofit is a privilege, not a need, and this privilege is very much contingent on the amount of money people are privileged enough to have.
Nonprofits do incredible work throughout the world, but have very little ability to sustain themselves. This is not only a constant financial struggle, but it also severely impacts the total reach of these organizations. My question is why don’t nonprofit leaders pioneer business models that lead to revenue and sustainability? The natural answer to this question is that nonprofits most times don’t have anything to sell. How does a battered women’s clinic in an inner city have a viable product that can be brought to market? What will they “sell” in terms of value to the customer?
I believe the answer is not in trying to figure out how nonprofits can sell a byproduct of their services, which is not impossible but not universally applicable. The point is not trying to sell something that the women’s clinic in the inner city of chicago can create, because that’s not the way it’s been constructed. A nonprofit can’t be bent into a business and a nonprofit women’s clinic in chicago will always rely on outside funding to be sustained. It is this traditional model for which we need to stop searching for a new answer to the question, but instead ask a new question altogether. The question we should ask is how businesses can be created with the mind of a business but the heart of a nonprofit. Luckily, I think we are already seeing the first wave of businesses who are doing exactly that (ex. Toms).
The more my mind expands on this topic, the more I realize traditional funding options like market valuations and employee relations, among many things, are all impacted. My next topic will be how this new “business mind, nonprofit heart” model won’t be able to float through years of unprofitably like some start-ups we’ve seen (think Twitter). I have a lot of thoughts on this and I’m guessing this is the first of many, many posts on this issue.