By Dennis R. Young
(This article is part of a series of guest columns written by innovators in the nonprofit sector. PNNOnline will be featuring a new "Challenges of the New Century" guest column each Friday.)
Nonprofit organizations can be thought of as businesses with social missions. On the one hand, nonprofits are privately governed entities which must be financially solvent in order to survive and grow. Nonprofits participate in markets and compete for resources, just like businesses do.
On the other hand, nonprofits must not gauge their performance primarily in terms of financial success. They are entrusted by society to carry out a variety of social missions in social service, health, education, the arts, the environment and other fields, and it is their effectiveness in doing so that constitutes their true "bottom lines." Financial success is only a means to those ends, not an end in itself.
This mixed public-private organizational character raises interesting challenges for the manager of a nonprofit organization. Sound principles of business and economic analysis must be applied to decision-making, but these principles must be properly adapted to the nonprofit context.
Conventional business principles help organizations to run efficiently and effectively, but they are built on the underlying assumption that the purpose of the organization is to make as much money as possible.
Nonprofits must also be efficient and effective in their use of resources, but they must do so in way that maximizes the impact they have on their social missions.
I am the CEO of a new organization, the National Center on Nonprofit Enterprise, which works to adapt business principles so nonprofits can make wise economic decisions. As an illustration, consider the problem of deciding what to charge for the services an organization provides to its customers or clients.
For a private business, it may be a technical challenge to find the right price or to determine how much to sell of a given product, but the guiding principle is clear -- find the price and quantity that will maximize net revenues. Businesses do this essentially by selling as much as they can until the costs of providing another unit no longer brings in enough revenue to offset the additional cost.
The case of a nonprofit is different and varies with the circumstances. Consider two possibilities:
Case 1: A gift shop in a museum or a hospital may be intended purely as a revenue raising program for the host institution. In this case, the pricing of its merchandise would follow conventional business principles -- find the prices that result in the most net revenue. Indeed, any operation that is viewed strictly in fundraising terms by a nonprofit organization should follow this principle.
However, if there are other considerations such as promoting the public's interest in art through sale of books or inexpensive reproductions, the institution may choose to reduce (subsidize) prices below profit-maximizing levels to account for this component of its social mission.
Case 2: The mission of a neighborhood nonprofit day care center may be to serve as many local preschool children as possible, at a certain standard of service, without regard to ability to pay. The nonprofit center's fee policy would have to differ considerably from that of a for-profit day care center in the same neighborhood.
If the nonprofit has other sources of revenues such as grants and contributions, it can use these revenues to reduce its price below the profit-maximizing rate, and perhaps impose a waiting list to account for excess demand beyond what it can accommodate within its break-even capacity. The price of a for-profit center, on the other hand, would be high enough to "clear the market" and eliminate excess demand.
Moreover, the nonprofit center may wish to offer a sliding scale fee schedule so that families with limited ability to pay could be accommodated. Some levels in that fee schedule might be set below the marginal cost of serving a child, if that was what was needed to attract children from low-income families.
A for-profit center might also offer a multi-part price schedule if it felt it could "price discriminate" to take advantage of high income/high demand consumers, but it would be unlikely to subsidize the lower end of the scale unless the socio-economic mix of its children became a selling point to high-end consumers, or if this policy paid off in public relations benefits.
As these cases reveal, sometimes the differences between nonprofit and for-profit "business decision-making" can be subtle, but it is clear that nonprofits cannot blindly apply business methods without appropriate adaptation.
This caution applies to a wide variety of decisions in addition to pricing -- including investment of funds, outsourcing of tasks, deciding whether to undertake a commercial venture, deciding whether to collaborate with a business corporation, determining employee compensation levels, investing in fund raising operations, and so.
Fortunately, there is a growing reservoir of expertise to help nonprofits with their economic issues. Many universities now have academic centers devoted to nonprofit management, and there are many independent consultants working on these issues.
Umbrella associations such at the Alliance for Nonprofit Management and the Nonprofit Academic Centers Council serve to bring many of these resources together. The NCNE serves as a specific contact point in this network; it features an Academic Council whose twenty-seven members are well-versed in many of these issues. For further information about the NCNE, visit our website at or send an e-mail to Sarah Pederson, Administrator, at ncne@nationalcne.org.
(Dennis R. Young is Professor of Nonprofit Management and Economics at Case Western Reserve University and CEO of the National Center on Nonprofit Enterprise in Arlington, Va. In addition to his duties with several other nonprofit entities, Young is author or editor of several books on nonprofit organizations including: "If Not for Profit for What?" (Lexington Books); "A Casebook of Management for Nonprofit Organizations" (Haworth Books); "Economics for Nonprofit Managers" (with Richard Steinberg); "Educating Managers of Nonprofit Organizations (with Michael O'Neill, Praeger Publishers); and "Careers for Dreamers and Doers" (with Lilly Cohen, The Foundation Center).)
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