1. Dream > Believe > Pursue Earning Revenues and Government Support

2. Dream > Believe > Pursue 2 Nonprofit income sources, 2002

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

4. Dream > Believe > Pursue 4 Earned income types

5. 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

6. 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

7. 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

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

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

10. Dream > Believe > Pursue 10 Trade and professional association membership

11. Dream > Believe > Pursue Source: 2004 Maxwell School Poll of Civil Society Trade and Professional Association Membership Levels Source: 2004 Maxwell School Poll of Civil Society

12. Dream > Believe > Pursue 12 An enormous salary differential

13. Dream > Believe > Pursue 13 Better jobs Percent “very satisfied” with their jobs

14. Dream > Believe > Pursue 14 The story here Associations are where the winners meet Through association involvement, upwardly-mobile professionals Identify themselvesIdentify themselves Learn from one anotherLearn from one another Form communities of winnersForm communities of winners

15. Dream > Believe > Pursue 15 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

16. Dream > Believe > Pursue 16 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

17. Dream > Believe > Pursue 17 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

18. 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 3 2002

19. Dream > Believe > Pursue 19 Competition Among Social 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)

20. Dream > Believe > Pursue 20 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

21. Dream > Believe > Pursue 21 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

22. Dream > Believe > Pursue 22 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

23. Dream > Believe > Pursue 23 Dangers to Social enterprises from Partnerships with Government Loss of nonprofit autonomyLoss of nonprofit autonomy VendorismVendorism BureaucratizationBureaucratization Source: Frumkin ch 3 2002

24. Dream > Believe > Pursue 24 Types of Privatization Source: General Accounting Office, 1997

25. Dream > Believe > Pursue 25 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

26. Dream > Believe > Pursue 26 Privatization in Competitive Industries More competitionMore competition –Garbage –Snow removal –Towing –Data processing Less competition –Foster care –Domestic violence –Chemical dependency

27. Dream > Believe > Pursue Direct Government Subsidies Are Large … Billions of 1997 dollarsPercent of total revenues All nonprofits207.831.3 Arts and culture1.59.7 Health137.742.2 Education23.119.4 Social welfare40.152.1

28. Dream > Believe > Pursue 28 …and Growing

29. Dream > Believe > Pursue 29 U.S. Governments Fund the Nonprofit Sector at an Unremarkable Level Data: Salamon, et al. (1999)

30. Dream > Believe > Pursue 30 Indirect Subsidies and Taxes Taxes foregone on deductible contributionsTaxes foregone on deductible contributions UBITUBIT Property taxesProperty taxes Tax creditsTax credits

31. Dream > Believe > Pursue 31 Income Tax Revenues Foregone t=individual’s marginal tax ratet=individual’s marginal tax rate m=gross incomem=gross income D=tax-deductible donationsD=tax-deductible donations t(m-D)=taxes paidt(m-D)=taxes paid tD=indirect government subsidytD=indirect government subsidy 2002 estimate: $37.2b2002 estimate: $37.2b

32. Dream > Believe > Pursue 32 Corporate Tax Exemption and the UBIT As a general rule, organizations have incentives to invest in activities where their earnings are tax exempt but other organizations must pay taxAs a general rule, organizations have incentives to invest in activities where their earnings are tax exempt but other organizations must pay tax Nonprofits to a significant degree can shift costs from exempt to non- exempt activitiesNonprofits to a significant degree can shift costs from exempt to non- exempt activities → UBIT payments to government are very low→ UBIT payments to government are very low

33. Dream > Believe > Pursue 33 The Property Tax Exemption Could be thought of as a subsidy by the state, or as a reflection of the “sovereignty” of nonprofitsCould be thought of as a subsidy by the state, or as a reflection of the “sovereignty” of nonprofits Total US value of exemption around $6 billion (mostly in hospitals and education)Total US value of exemption around $6 billion (mostly in hospitals and education) Increased use of PILOTS: strategic move for nonprofitsIncreased use of PILOTS: strategic move for nonprofits

34. Dream > Believe > Pursue 34 Nonprofit Revenues Are Interrelated Earned income Government support Private contributions

35. Dream > Believe > Pursue 35 Crowding In or Crowding Out? Crowding outCrowding out –Lowered perceived need –Donors resemble tax payments –Less incentive to fundraise Crowding inCrowding in –Subsidy is a signal of quality or guarantee of due diligence –Government grants only given as a match to private gifts