Dream > Believe > Pursue Earning Revenues

Dream > Believe > Pursue 2 Nonprofit income sources, 2002

Dream > Believe > Pursue 3 Outline Earned income typesEarned income types PricingPricing Competition and commercializationCompetition and commercialization The government as customerThe government as customer

Dream > Believe > Pursue 4 Earned income types

Dream > Believe > Pursue 5 Commercial fee income More likely to be directly- produced More likely to be separately incorporated Good or service appeals to purchasers’ goodwill Buyers motivated entirely by self-interest Primary motive for production: mission Primary motive for production: revenues Sales do not cover program costs Sales generate a positive profit stream Volunteer participationEmployees are paid Suppliers subsidize operations with donations Suppliers charge normal rates

Dream > Believe > Pursue 6 Collaborations Transactions: For-profits buy or sell with social enterprises on favorable terms or dedicate a share of profitsTransactions: For-profits buy or sell with social enterprises on favorable terms or dedicate a share of profits Licensing: Enterprises allow the use of their nameLicensing: Enterprises allow the use of their name Joint-issue promotion: For-profit takes on part of the endeavorJoint-issue promotion: For-profit takes on part of the endeavor

Dream > Believe > Pursue 7 How not to collaborate 1997: AMA licenses Sunbeam Corp to add seal of approval to medical devices1997: AMA licenses Sunbeam Corp to add seal of approval to medical devices AMA does not test actual devicesAMA does not test actual devices Scandal ensues, AMA backs outScandal ensues, AMA backs out Sunbeam sues for $20mSunbeam sues for $20m Settlement: AMA pays $9.9mSettlement: AMA pays $9.9m

Dream > Believe > Pursue 8 Money and mission High mission impact Low mission impact Positive profitStarsCash cows Loss-makingSaintsDogs

Dream > Believe > Pursue 9 Membership income Organization type Percentage of income from dues Labor organizations66% Social clubs60% Business leagues40% Public charities0.9%

Dream > Believe > Pursue 10 Trade and professional association membership

Dream > Believe > Pursue 11 Pricing Strategies: For-profits Competitive firmsCompetitive firms –P=MC (marginal cost pricing) –Price is bid down to unit-cost levels –Profit=0 Non-competitive firmsNon-competitive firms –P is set where MC=MR (equimarginal pricing) –Price is set so that profit is maximized

Dream > Believe > Pursue 12 Pricing Strategies: Social Enterprises Usually, competition is limitedUsually, competition is limited Pricing schemesPricing schemes –MC=MR (monopolistic pricing) –P<MC for favored activities or favored clients Cross-subsidization from other activities, donations, or governemnt subsidiesCross-subsidization from other activities, donations, or governemnt subsidies –Price discrimination Classical price discrimination: clients are charged according to characteristics (e.g. kids free)Classical price discrimination: clients are charged according to characteristics (e.g. kids free) Voluntary price discrimination: P<MC to induce donations (e.g. voluntary payment)Voluntary price discrimination: P<MC to induce donations (e.g. voluntary payment) Intertemporal price discrimination: Price depends on day or time (e.g. weekdays free admission) to induce participationIntertemporal price discrimination: Price depends on day or time (e.g. weekdays free admission) to induce participation

Dream > Believe > Pursue 13 Competition with the For-profit Sector Where is competition?Where is competition? –Areas of main competition: health, education –Less competition: Social service, environment UBIT restricts competition in the U.S.UBIT restricts competition in the U.S. Competition may drive NPOs to suboptimally-high levels of unfavored-good productionCompetition may drive NPOs to suboptimally-high levels of unfavored-good production –NPOs lose “core mission” Ref. Rose-Ackerman 1996

Dream > Believe > Pursue Who Has the Edge? Nonprofit enterprise advantagesNonprofit enterprise advantages –Tax benefits –Trust because of non-distribution For-profit advantagesFor-profit advantages –Technology –Sufficient financing and staffing –High-profile expertise –Political lobbying capacity Nonprofit managers must trade on these Ref. Frumkin ch

Dream > Believe > Pursue 15 Competition Among Nonprofit enterprises Competition for what?Competition for what? –Members/clients –Donors/volunteers/donations –Inventory (e.g. books, art works, etc.) Competition with whom?Competition with whom? –Other NPOs –For-profits –Governments Identifying competitionIdentifying competition –Similarity of prizes (management perspective) –Similarity of services (client/donor perspective) –Common competitor: inaction (e.g. no medical care)

Dream > Believe > Pursue 16 Social Enterprise Commercialization ReasonsReasons –Increasing competition with for-profits –Increasing competition with other social ventures –Growing reliance on donations and earned income –Corporate partnerships –Demand for accountability –Nonprofit culture becoming more “corporate” RisksRisks –Loss of core mission –Decreased attention to need, more on bottom line Ref. Salamon & Young 2002

Dream > Believe > Pursue 17 Privatization: A Common Opportunity to Earn Revenues The practice of delegating public duties and responsibilities to private organizations (nonprofit and for- profit)The practice of delegating public duties and responsibilities to private organizations (nonprofit and for- profit) A frequent revenue-generating opportunity for social entrepreneursA frequent revenue-generating opportunity for social entrepreneurs Governments are often the customer for an enterprise’s servicesGovernments are often the customer for an enterprise’s services

Dream > Believe > Pursue 18 Why Privatization? Reduced costsReduced costs Specialized expertiseSpecialized expertise Increased qualityIncreased quality Smaller government and less bureaucracySmaller government and less bureaucracy Market based incentives resulting in efficienciesMarket based incentives resulting in efficiencies Competition vs Monopoly Greater reliance on free enterprise - market based principles (assumes competition) Greater use of voluntarism Politics

Dream > Believe > Pursue 19 Dangers to Social enterprises from Partnerships with Government Loss of nonprofit autonomyLoss of nonprofit autonomy VendorismVendorism BureaucratizationBureaucratization Source: Frumkin ch

Dream > Believe > Pursue 20 Types of Privatization Source: General Accounting Office, 1997

Dream > Believe > Pursue 21 Necessary Conditions for Contracting Out Competition among potential providersCompetition among potential providers –Multiple bidders and bids Ability and willingness to monitor providersAbility and willingness to monitor providers –Capacity –Political will

Dream > Believe > Pursue 22 Privatization in Competitive Industries More competitionMore competition –Garbage –Snow removal –Towing –Data processing Less competition –Foster care –Domestic violence –Chemical dependency