unrelated business income – The Healthy Non-Profit

Non-profit fees for service and the smell test

February 17, 2012 DonorDreams Fundraising

On Tuesday, I blogged about the idea of non-profit organizations looking in some non-traditional places to generate revenue such as “selling things” through unrelated business income efforts. Of course, I see non-profits also looking at “related” business income opportunities. Today, I’m turning my attention from external opportunities to “sell stuff” (e.g. thrift stores, eBay, amazon.com, etc) in an effort to create revenue streams and looking inward at internal opportunities to sell your services by charging fees.

It would be too easy for me to take the position that instituting fees to sell your non-profit services to your clients amounts to nothing more than selling your soul. However, as we discovered in Tuesday’s post titled “Should the new non-profit mantra be: Sell! Sell! Sell!” many non-profits are generating a lot of revenue from fees for service — 45 percent of the approximate $1.5 trillion in non-profit revenue comes from fees and services.

I think my blogger friend, Joanne Fritz of about.com, got it right in her post titled “Can a Nonprofit Charge Fees for Its Services?” when she suggested there is a “smell test” that needs to be passed before a non-profit should ask its clients to pay fees for the services it offers. Let’s have some fun with this smell test idea:

<<sniff>> I don’t think domestic violence victims should be asked to pay for a place to spend the night safe from their abuser.
<<sniff>> It seems reasonable to ask students at publicly subsidized universities to pay some tuition.
<<sniff>> It don’t think hungry people should be asked to pay for the food they’re given at a food bank.
<<sniff>> It seems reasonable to ask patients at a non-profit hospital to pay for care and medical attention

Well, that was easy wasn’t it? Hmmmmmm . . . not so fast! The reality is that this issue can put your agency on the proverbial “slippery slope”. Let’s take a closer look:

Why should YMCA’s be able to charge fees to access their fitness programs? Doesn’t their non-profit tax-exempt status give them an unfair competitive advantage over for-profit companies doing the exact same thing? If you ask Bally’s Total Fitness and the fitness center industry, they’d likely say YES . . . the trail of lawsuits throughout the years would seem to support this assertion.
Why should public universities continue to charge more and more for a college education when they can also fundraise and access other funding streams that for-profit institutions of higher education can’t touch? Doesn’t their non-profit tax-exempt status give them an unfair competitive advantage?

In this “New Normal” economic environment, I do think non-profit professionals are eyeing opportunities to “sell stuff” to enhance their revenue streams. However, discretion is the better part of valor when it comes to giving in to this emerging trend because it is one thing to look at the for-profit marketplace to sell stuff, but it can be a completely different issue when you start selling your services (and your soul).

Take the Boys & Girls Club movement as a great example. It is the mission of Boys & Girls Clubs to help “those kids who need us most,” which in most cases translates into providing services to kids from “economically disadvantaged circumstances”. There are a number of Clubs doing the math on charging fees for their services.

While it is true that Clubs have charged membership fees for more than a century, it has always been nominal . . . $1.00, $5.00, $25.00 . . . for a one year membership to the Club. This was done to create a “sense of ownership” because the value associated with something given away for free is NOTHING.

However, what happens to this organization’s soul when fees go from being a program tool to a revenue stream . . . $50.00, $100.00, $250.00, $500.00 per year? At what point are you soulless? At what point do your clients walk away? At what point does your mission collapse under the weight of fee for service”? At what point does the IRS enter the picture and revoke your non-profit status?

I’m not suggesting that fee for service isn’t an acceptable model for some non-profit organizations. What I am suggesting is that passing the smell test is more difficult than you may think, and it requires serious board room consideration.

So, here are a few questions I recommend board members ask themselves:

Are there for-profit corporations in your community providing similar services? If so, then why should you have a competitive tax advantage over them?
If your fees for comparable services are similar to other for-profit competitors, what differentiates you and makes you special enough to have a tax advantage?
What is stopping you (and I mean really stopping you) from doing a better job with more traditional revenue streams that are unique remedies to non-profit corporations (e.g. fundraising, foundation grant writing, and various other philanthropic opportunities)?
What will your donors think? And at what point will fees damage your philanthropic business model? (e.g. donors balking at giving you a charitable gift because they think you can just hike fees or go sell some more stuff)

So, before you leap I suggest you look. You might not have a revenue problem that needs to be fixed with a fee for service solution. You may have a human resources and staffing issue. You may have board development or volunteer issue. Of course, you may have a revenue model issue that needs to be tweaked with the addition of some fees for service.

Here is some unsolicited advice . . . If you want to “sell stuff” to generate revenue, it is far safer to open a store and weave your mission throughout its operation (e.g. Wednesday’s blog post about thrift stores or Thursday’s post about eBay and Amazon.com) than it is to look internally at selling your services and raising revenue on the backs of those you serve.

What is the going price for a soul today? I think is it PRICELESS.

Here’s to your health!

Erik Anderson
Founder & President, The Healthy Non-Profit LLC
www.thehealthynonprofit.com
erik@thehealthynonprofit.com
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Should the new non-profit mantra be: Sell! Sell! Sell!

February 15, 2012 DonorDreams Fundraising

Yesterday, I introduced the idea of non-profit organizations looking in some non-traditional places to generate revenue such as “selling things” through unrelated business income efforts. Of course, I see non-profits also looking at “related” business income opportunities. Regardless, we’ll be talking about this topic for the remainder of this week. Today, we’re doing a deeper dive on what I think is driving this way of thinking and providing a few tips to those looking at this opportunity.

In the majority of my blog posts, I’ve talked about charitable giving and the $300 billion dollars every year that Americans contribute to charities. The reality is that the non-profit sector reports approximately $1.5 trillion in revenues and $2.5 trillion in assets (source: Philanthropy Journal). In round numbers, the Paul Clarke Nonprofit Resource Center reported a number of years ago that nonprofit revenue shakes out in the following way:

20 percent private contributions (e.g. fundraising)
45 percent fees and services (e.g. tuition and health related fees for service)
32 percent government grants and purchase of service agreements (e.g. Medicare, Medicaid, etc)

However, the 45 percent slice of the pie can be really deceiving as it was pointed out by Amy Blackwood, Kennard T. Wing and Thomas H. Pollak in their white paper titled “The Nonprofit Sector in Brief“. When looking at fees and services, they reported:

“These distributions, however, are largely driven by hospitals and higher education institutions. If we exclude these organizations, the distribution of sources of revenue changes substantially. In contrast, the remaining organizations are less dependent on fees for services and goods and more dependent on private contributions and government grants.”

So, I relayed a conversation in yesterday’s post — “What’s the next new thing in non-profit fundraising” — that I had with a very dear non-profit friend over a cup of coffee. In that discussion, she hypothesized that the next new thing might involve non-profits “selling more things”. I’ve concluded that she may indeed be right for the following reasons:

As you can see from the aforementioned source of funds data, non-profit organizations have been selling services and charging fees for years. While this as primarily been healthcare and education related charities, I suspect that during tough economic times agencies start “looking around” at their fellow non-profits for ideas to “borrow”.
My blogger friend, Joanne Fritz at about.com, also captured some of what I’m seeing in her post titled “Recession Provides Bump to Thrift Shopping and Social Responsibility“.

For those entrepreneurial minded non-profit professionals out there who are intrigued by this possible trend, I have a few suggestions:

First things first . . . sit down and figure out upon which revenue model you’re building your non-profit agency. This is one of those foundational decisions that shouldn’t be taken lightly. The Stanford Social Innovation Review did a very nice job distilling this question into 10 different revenue models. Click here to read that article.
If you want to open a store and sell stuff, then you need to start thinking and acting like a for-profit business person. Being a non-profit in a for-profit environment might not work very well. While this single thought could (and probably should become a blog post unto itself), I will share the following few tips: take a few business courses; develop a written business plan; remember that it is all about location-location-location; figure out the “pricing points” thing quickly; and be prepared to do marketing in a very different way from what you’ve done for your non-profit services.
Be extra careful with the “unrelated business income” thing. You don’t want the IRS to take away your non-profit status.
Tie your income-oriented “business venture” into your mission. If done correctly, you might be able to generate income from sales AND cultivate a new base of donors who are ALSO willing to make charitable contributions to your private sector fundraising efforts. This could be done in a variety of ways including: employing clients to operate the store, selling items made by your clients, decorating the store with mission-focused messages, etc
Involve your donors. If you look throughout your donor database, you’ll find a diversity of people from many different walks of life that possess a variety of skill sets and experiences. You’re not in this thing alone . . . you have passionate supporters who love you. If you engage those donors the right way, you might just see their involvement impact how they see your mission and their support of it.

Lots and lots and lots of questions, and the answers can get very complicated. So, before leaping, make sure you take a very hard look at whether or not this is something that fits with your organizational culture.

Does your agency operate a store or business venture? Please share your successes and challenges. Maybe its not a store, but you’re starting to eye product sale opportunities (e.g. cookies, candy bars, popcorn, etc). If so, what are the considerations racing through your mind. Please scroll down and share some of your lessons and considerations in the comment box below.

Here’s to your health!

What’s the next “new thing” in non-profit fundraising?

February 14, 2012 DonorDreams Fundraising

A few weeks ago I had the opportunity to share a cup of coffee with a dear friend of mine who runs a local non-profit organization in Elgin, Illinois. During the course of that conversation, she openly wondered what the “next new thing” in non-profit fundraising will be. It was a great conversation . . . so, I’ve decided to share and engage all of you in the discussion.

Our conversation started off innocent enough. She was reflecting on the state of the local non-profit community, and I was scribbling notes frantically in hopes of possibly finding a business lead or two or three. 😉

I think she hit upon something very interesting when she said, “I’ve never seen a time when ALL of the different sources of funding were down at the same time and under so much pressure.” For example, when her agency’s United Way funding seemed to start trending downward, she found alternative revenue streams from federal, state, and local government agencies. When foundation and corporate sources would dry up, she was able to rely on individual giving and special events.

In her experience, non-profit fundraising was like a lava lamp with funding streams going up and down and coming back again. The world she described felt sustainable to her because as a strategic thinker she always seemed to be able to identify THE “next new thing” and position her agency to take advantage of it. However, today’s “New Normal” feels very different from any other time she’s experienced, and she wondered out loud what the next new thing will be.

As my coffee cup was near empty, she appeared thunderstruck and then said, “I just wonder if non-profits need to start looking at selling things like our for-profit friends do, but doing so in a way that it can be wrapped around our non-profit mission.”

Of course, she is speaking to the issue of “unrelated business income“. However, it might not have to be “unrelated”.

The example she gave involved operating a thrift store. However, she wondered if the store couldn’t also be linked to her non-profit’s client base with job training and childcare opportunities infused throughout. This idea would involve donors donating items to the store. It would involve clients working at the shop, thus earning money, learning transferable skills, and becoming more self-reliant in life. It would involve subsidized childcare, which is a huge barrier to many single and working women trying to make ends meet. In the end, all of this would result in a revenue stream for the non-profit, and just possible THE “next new thing”.

I am intrigued by this idea and will spend the next few days blogging about unrelated business income and outside-the-box revenue ideas with which non-profits seem to be experimenting. I find this idea so interesting because many non-profit agencies haven’t had to think about business-related issues such as the marketplace, supply and demand, customers, pricing, etc etc etc.

So, please join me on this strangely curious trip and discussion.

Has your agency started examining the idea of “selling things” in an attempt to generate new revenue? If so, what have you tried and what was the result? What were some of the interesting disconnects you may have experienced when traveling down this road. Please share examples of other organizations in your community or nationally that have gotten into the unrelated business income game.

If you scroll down, you will see the comment box. You know what to do. 😉

Here’s to your health!