Earned Income for Nonprofits: Four Dirty Little Words?

What happens to fundraising if we follow the preventative healthcare model that has been expounded on this blog? What if, in a few short years, our programs are demonstrating wonderful health impacts? How is that going to play with our existing donor base?

Would it mean that our direct mail might have to stop looking like this:

Our operators are standing by for your calls.
And start looking like this…
Now we all know that the Ghost of Food Banking Past  (yes, I’m exaggerating to make a point) helps keep those donations flowing in, so that we can get food out to people who can truly benefit from it. Yet once we begin to focus on that same food leading to health outcomes, are we going to be able to pull on the hunger heart strings in the same way?
I don’t think so.
We asked our direct mail company why some recent mailers had brought soft returns, and their response was that our mailers were too positive. The kids looked too happy.
Tricks of the Photographic Model Industry # 234: Hop em up on Mountain Dew and then switch out the Hot Cheetos for fresh fruits and vegetables right before the cameras start clicking.

We all know it.

In the hunger business, negative sells.

Positive is understood by a different type of donor or  foundation, looking beyond immediate the immediate need, towards a long-term solution.

Nevertheless, I guarantee that whatever organization you represent, in the next 3 years you are going to have to come face to face with the need for an increase in …EARNED INCOME.

Much as you want to wear the garlic around your neck and make crosses out of two rolled-up annual reports, you are still going to have find more money from non-charitable sources – there is simply no way around it in the world we find ourselves in.

I attended a workshop with noted nonprofit consultant Andy Robinson last week, that focused on this very area. Andy is the author of Selling Social Change (Without Selling Out) – and the title suggests that he understands a little of the ambivalence in nonprofit organizations around this subject. I’d like to share some of the things that came up in the session.

Nonprofits need to decide what is the best mix of resources that is going to make them sustainable. We all agree that the old borders between non-profit, business and government are eroding. Businesses acting like nonprofits, nonprofits acting like businesses and the government…well that situation has always been fluid.

Let’s consider the pros and cons of generating earned income, starting with the positive:

• Diversified funding base – a key to sustainability

• An expanded prospect pool for individual gifts – doing business can be a great way of meeting people who can be inspired by your mission and give.

• It reduces reliance on grant income and also provides unrestricted funds.

• It provides new publicity and advocacy opportunities.

• It builds new skills and leadership with the organization.

That sounds great, but what about the downside:

• Most obvious is risk – sometimes you are going lose money. Research by the U.S. Bureau of Labor Statistics shows that nearly six in ten businesses shut down within the first four years of operation. You could bring your nonprofit down with your business if your comb-over is not as impressive as Donald Trump’s.

• The up front costs – it takes money to earn money, so the lower the start-up costs the better.

• Mission creep. If your commercial empire takes off, you may find the tail wagging the dog.

• You already have enough work to do, so this will need dedicated staff time. Otherwise it’s a hobby and hobbies don’t make money.

• One other concern is the potential tax liability. if you are a charitable organization and are charging for services that are directly connected to mission, you don’t have to pay tax on that income. However, if you set up an unrelated business, you may have to pay UBIT (Unrelated Business Income Tax). Finding that connection can be important. The YMCA used to regularly get sued in different states by other for-profit health clubs saying their charitably subsidized clubs presented unfair competition. However, the Y won every one of those cases because they could clearly point to their actions as a way of delivering on their mission statement. Girl Scout cookies get away with the same thing, because they teach leadership – girls track product, log payments, use merciless sales techniques…

Now get out there and sell, and don’t think about the nutrition issues! Whaddya mean ‘mint thins’ is an oxymoron?

• One key area of concern that I voiced to Andy at the workshop, was the need to educate contributors so they realize that you as a charitable organization still need donations.

It is clear that market research and feasibility studies, no matter how simple, are a vital first stage. As a nonprofit you need to consider what services could you sell? What publications? What cause-related marketing? What goods (wholesale preferably).

There was naturally some pushback from workshop attendees about the notion of charging for services, many of which in one form or another would have been offered free by the organization. Andy referenced a study that looked at vocational training courses that were either free or charged a modest fee. Far better outcomes were identified amongst those who paid something for the service. They valued it more. Whether this is a sad reflection of our society or not, it is a reflection. People value what they pay for and do not value so much what they get free.

This is a stimulating challenge for us in non-profits. Sliding scales, scholarships, are both possible. Andy suggest we do some testing with any charge for services and track the results. From my perspective the difference between a business and a nonprofit charging for services is that the non-profit is not afraid to potentially put itself out of business, by providing a product which can help the recipient move beyond the need for those services, or into a place of new possibility where they can generate more for themselves and their families. That ‘more’ might be money or community or advocacy for improvement in their neighborhood. In contrast, a for-profit wants to keep you endlessly coming back to buy ‘newer, better’ versions of the same thing.

Don’t try this at home, folks.

As a food bank, we are looking very carefully at earned income. We have always been in the earned income business, in that we charge a very modest shared maintenance fee on some food items that we provide (which prevents agencies from just taking more food than they can effectively use, and which goes some small way to defray the costs of running the warehouses). This is a clear case of putting a value on something that would be valued less if it was free. We also do our own attempt at social engineering by spending hundreds of thousands of dollars on purchasing fresh produce and making that available with no shared maintenance fee, because we want to drive agencies to provide more fresh produce to their clients.

We are already expanding our resale food selections (where we buy food and resell to agencies), charging a modest 10% mark up, with the stipulation that we will only charge this if we are able to provide the food cheaper than they could source it via a local wholesaler or superstore. We want to expand this to make more food and non-food (cleaning products, paper goods etc) available to the full range of local non-profit organizations. (Member and non-member alike).

This approach is already happening successfully with Second Harvest Food Bank of Central Florida’s Power Purchase program. The CEO, Dave Krepcho, affirmed this morning that their purchase program has the dual role of providing lower prices to agencies and netting surplus revenue. “If they can get it cheaper somewhere else, we suggest they do so…This year the net revenue number will be approximately $250,000 on close to $3 million in sales. We are designing a Community Kitchen program now so that it will be economically self-sufficient in three years. I affirm your looking into entrepreneurial programs, it’s the direction we must go.” 

I also recently looked at a study done by another urban food bank that examined at the feasibility of undertaking such a resale program and decided it would not be successful for them. There were a concentration of Catholic agencies in their area who were mandated to purchase from a central purchasing agent (no jokes about the Pope getting his cut, please) and that there was a possibility of a similar arrangement being in place with local YMCAs. This negative report, which highlights all of the challenges (many of which would not necessarily apply to us in Santa Barbara) is extremely useful to us. If we move into a business area with a clear understanding of the challenges we would face, as opposed to clutching starry-eyed dreams of flowing streams of golden sustained income, then we will be far more likely to be successful.

The number one challenge identified was the issue of pricing. Most ventures fail by not knowing how to price services effecively. We don’t know how long it will take us to do something, and often the cost of a unit of service remains opaque to us. Andy believed that nonprofits almost  always underprice the value of the services they provide.

When looking at your business proposition, you need to consider whether it represents a ‘market push’ whereby you need to convince the market of the need for your service (like the electric toothbrush vs. the old school manual) or ‘market pull’ whereby there is enough existing demand, that if you provide enough services, you can meet currently existing needs.

The other painful reality is that being a nonprofit is not going to get you any free pass on the customer service side. If you don’t get things right the first time, they won’t be back again, no matter how compelling your mission is.

It is helpful to consider case studies, so we can consider a range of approaches nonprofits are taking to make earned income work. At one end, you can take an organization like Minnnesota Public radio which after 25 years was spun off as a for-profit subsidiary for $175 million dollars, most of which went to their endowment. Another interesting organization is the Okanogan Highlands bottling company, which you can find at www.purewater.org.

It is a fascinating case study, because they had a specific ‘ill’ that they were fighting against, which was a gold mine. It would bring pollution and they provided studies which showed that the value of the water they could bring out of the same site in the form of bottled mineral water would actually be more valuable than if it operated as a gold mine. They did this by commissioning studies that demonstrated how much water was used to extract the gold. You should check out the video they have at their website, because they show how the empty bottles can be repurposed as advocacy tools to send to our representatives at the congressional and senatorial level, to convince them of the efficacy of their course. Perhaps there is a way your agency could incorporate the same approach to get the message across.

Nativeseeds.org is a great website to look for the kind of  nonprofit that recoups 30 to 40 percent of their income through sales of food, crafts and products.

As organizations, we often have fabulous ideas at the programmatic level. How can this be monetized? Check out www.swop.net to look at how they developed their ‘products’ to move from a text book on Chicano studies (which had resulted from a ‘market opportunity’ they identified, because this area was being ignored in traditional history programing). So they created a text book, which then became a DVD, a coloring book, a mural magnet series, a t-shirt etc. This is a pretty politically-minded right-on organization and they’re selling refrigerator magnets? Maybe it’s time we questioned the stereotypes! If the content is solid, the expression of that content can play out across a number of media.

Another example organization is www.globalexchange.org. They are a human rights organization that focuses on tourism. Their proposition – both a value proposition and an advocacy proposition is “What would happen if we brought the people who were interested in an international social cause to the place in the world where that cause is actually playing out. A week in the jungle with the Sandinistas? Not quite. Nevertheless it has resulted in an organization that has 3 million dollars a year in tourist income. Is there a way we can  involve people in the excitement of our day-to-day mission? And then charge them for the pleasure?

A food bank was also considered in our discussion, the Food Bank of Western Massachusetts. www.foodbankwma.org. They used a CSA model for a farm they purchased. The plan involves CSA shareholders paying the full cost of $200k per year but only taking half of the food that is generated. The rest goes to the food bank.

One final example was www.pedalpower.org, which was a community bike organization that had a fascinating  business proposition. Rather than upset the existing marketplace, which you could argue something like the CSA proposal might do, they presented themselves to existing business organizations an entity that would build the market. They would focus on the low-end of the market and offer people sliding scales of rates. They could either fix their own bikes with supervision or with Pedalpower stepping in with physical help. They sold this to the other businesses in the market with the explanation that they were drawing people in at the bottom end of the market. Once people entered the market and wanted to find more sophisticated bikes, they would seek out the other businesses in the market. It worked and the other businesses began to offer them free spare parts and other help.

The final example we considered was www.farestart.org in Seattle. Like Catalyst Kitchens and other organizations, they focus on teaching culinary skills and how to hold a job. They also help with job placement. This was an organization that acutually switched from being a for-profit to a nonprofit organization.

We have all been victims of workshops with consultants who want to draw you in with the promise of education, which is really a promotion for their services or their books. I have no reservation in letting you know that Andy’s book is simply essential for any nonprofit hoping to focus energy on new sources of earned income. It will make you think long and hard about how earned income could work for your organization.

Good luck, and let’s start shaking up the old nonprofit/business divide even further. We have much to learn from each other.

One thought on “Earned Income for Nonprofits: Four Dirty Little Words?

  1. Pingback: Divided We Stand? Facing the challenges of Collective Impact, Corporate Philanthropy, Earned Income and more – A dialogue with Jan Masaoka, ED of CALNonprofits. « From Hunger to Health

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