In this age of the tech startup, we’ve grown accustomed to for-profit business models that involve risking money to make money, yet we cringe at hearing nonprofits talk about taking risks. And I’ve witnessed many people react with surprise to the idea of a nonprofit making money or charging for services. I more frequently hear that nonprofits should “act more like a business” rather than hear people acknowledge that nonprofits are businesses, businesses that should have sustainable business models.

A core difference between the for-profit and nonprofit worlds is in the definition of customer and client. In the private sector, the terms are commonly used interchangeably. Yet for nonprofits, these words can refer to very different audiences, and this difference lends itself to two distinct types of business models in the sector.

Client: those who benefit from the services provided by the organization

Customer: individual or entity that pays or funds the organization in order to allow it to achieve its intended impact

 

Business Model Type #1: When the Customer & Client are NOT the same

Last year, we partnered with a New York-based education organization to plan for its financial sustainability. At the outset, we had to identify the organization’s core clients and its customers. Its clients are New York City students. The identification of its customers was more complex and comprised the core of our work. We assessed the potential of the following typical customers for nonprofits:

Institutional Philanthropy: Institutional philanthropy refers to traditional foundation giving. It can be most often used as short-term risk capital. Because foundation giving priorities change often, foundation grants are typically not meant to provide sustainable revenue streams. Institutional philanthropy is the seed funding of the nonprofit sector: capital nonprofits can use to build their organizations or to create new programs and initiatives.

Corporate Giving: Corporate giving comprises grants from corporations, corporate sponsorships, and in-kind donations of time and resources. Similar to venture capital funding in the private sector, corporate funding can be viewed as medium-term risk capital for nonprofits to use to expand or pivot innovative program and service offerings.

Government: Government grants and contracts are often larger dollar amounts that can be used to support the rollout of programs that have been tested. Similar to the investment banks of the private sector, government funding typically comes when an idea has been vetted, the concept has been proven, and the organization is ready to reach a broader audience.

Individual Giving: Individual donors are the stockholders of the nonprofit sector. They represent the largest percentage of philanthropic giving, nearly 5x that from foundations in 2016, but individual donor cultivation requires time and energy. Additionally, individual gifts often have fewer spending restrictions for the recipient, which makes individual giving a market for longer-term, sustainable revenue.

 

Business Model Type #2: When the Client and Customer ARE the Same

It is not uncommon for nonprofits’ beneficiaries to pay for all or part of the cost of services. For example, earlier this year we worked with a philanthropic membership organization, whose members pay dues to obtain access to resources. For this group, a large percentage of its business model is dependent on:

Earned Revenue: Earned revenue is any type of funding that involves an organization selling or contracting its services and/or product offerings. Earned revenue can be an ideal long-term, sustainable capital source because it is a reliable stream of unrestricted dollars, but it’s not a panacea. There are very specific conditions that have to be met for earned revenue to make sense as a capital source.

Ultimately, like any business type, every nonprofit is different, with different audiences and goals for impact. Certain forms of revenue may or may not be viable for specific program models, as nonprofit business models work in service of missions. Nonprofits are dynamic businesses, constantly developing new initiatives and revamping programs to best serve clients and attract customers. For exactly those reasons, nonprofit business models should be dynamic, too.