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Nonprofit income sources, Nonprofit income sources, 20022002
Government funding, 33%
Private donations, 20%
Fee income, 47%
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OutlineOutline
• Earned income typesEarned income types• PricingPricing• Competition and Competition and
commercializationcommercialization• The government as customerThe government as customer
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Earned income typesEarned income types
Commercial endeavors Other activities
Direct programs TransactionsSeparately-incorporated
ventures
Earned income
Licensing Joint-issue ventures
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Commercial fee incomeCommercial 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 participation Employees are paid
Suppliers subsidize operations with donations
Suppliers charge normal rates
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CollaborationsCollaborations
• Transactions: Transactions: For-profits buy or For-profits buy or sell with social enterprises on sell with social enterprises on favorable terms or dedicate a favorable terms or dedicate a share of profitsshare of profits
• Licensing: Licensing: Enterprises allow the Enterprises allow the use of their nameuse of their name
• Joint-issueJoint-issue promotion: promotion: For-profit For-profit takes on part of the endeavortakes on part of the endeavor
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How not to collaborateHow not to collaborate
• 1997: AMA licenses Sunbeam 1997: AMA licenses Sunbeam Corp to add seal of approval to Corp to add seal of approval to medical devicesmedical 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
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Money and missionMoney and mission
High mission impact
Low mission impact
Positive profit Stars Cash cows
Loss-making Saints Dogs
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Membership incomeMembership income
Organization typePercentage of income
from dues
Labor organizations 66%
Social clubs 60%
Business leagues 40%
Public charities 0.9%
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Trade and professional Trade and professional association membershipassociation membership
association membership
0%
5%
10%
15%
20%
25%
30%
35%
1974
1975
1977
1978
1980
1983
1984
1986
1987
1988
1989
1990
1991
1993
1994
2000
2004
2005P
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Pricing Strategies: For-profitsPricing Strategies: For-profits
• Competitive firmsCompetitive firms– P=MC (marginal cost pricing)P=MC (marginal cost pricing)– Price is bid down to unit-cost levelsPrice is bid down to unit-cost levels– Profit=0Profit=0
• Non-competitive firmsNon-competitive firms– P is set where MC=MR (equimarginal P is set where MC=MR (equimarginal
pricing)pricing)– Price is set so that profit is Price is set so that profit is
maximizedmaximized
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Pricing Strategies: Social Pricing Strategies: Social EnterprisesEnterprises
• Usually, competition is limitedUsually, competition is limited• Pricing schemesPricing schemes
– MC=MR (monopolistic pricing)MC=MR (monopolistic pricing)– P<MC for favored activities or favored clientsP<MC for favored activities or favored clients
• Cross-subsidization from other activities, donations, Cross-subsidization from other activities, donations, or governemnt subsidiesor governemnt subsidies
– Price discriminationPrice discrimination• Classical price discrimination: clients are charged Classical price discrimination: clients are charged
according to characteristics (e.g. kids free)according to characteristics (e.g. kids free)• Voluntary price discrimination: P<MC to induce Voluntary price discrimination: P<MC to induce
donations (e.g. voluntary payment)donations (e.g. voluntary payment)• Intertemporal price discrimination: Price depends on Intertemporal price discrimination: Price depends on
day or time (e.g. weekdays free admission) to induce day or time (e.g. weekdays free admission) to induce participationparticipation
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Competition with the For-profit Competition with the For-profit SectorSector
• Where is competition?Where is competition?– Areas of main competition: health, Areas of main competition: health,
educationeducation– Less competition: Social service, Less competition: Social service,
environmentenvironment• UBIT restricts competition in the U.S.UBIT restricts competition in the U.S.• Competition may drive NPOs to Competition may drive NPOs to
suboptimally-high levels of unfavored-good suboptimally-high levels of unfavored-good productionproduction– NPOs lose “core mission”NPOs lose “core mission”
Ref. Rose-Ackerman 1996
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Who Has the Edge?Who Has the Edge?
• Nonprofit Nonprofit enterprise enterprise advantagesadvantages– Tax benefitsTax benefits– Trust because of Trust because of
non-distributionnon-distribution
• For-profit For-profit advantagesadvantages– TechnologyTechnology– Sufficient Sufficient
financing and financing and staffingstaffing
– High-profile High-profile expertiseexpertise
– Political lobbying Political lobbying capacitycapacity
Nonprofit managers must trade on these
Ref. Frumkin ch 3 2002
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Competition Among Nonprofit Competition Among Nonprofit enterprisesenterprises
• Competition for what?Competition for what?– Members/clientsMembers/clients– Donors/volunteers/donationsDonors/volunteers/donations– Inventory (e.g. books, art works, etc.)Inventory (e.g. books, art works, etc.)
• Competition with whom?Competition with whom?– Other NPOsOther NPOs– For-profitsFor-profits– GovernmentsGovernments
• Identifying competitionIdentifying competition– Similarity of prizes (management perspective)Similarity of prizes (management perspective)– Similarity of services (client/donor perspective)Similarity of services (client/donor perspective)– Common competitor: inaction (e.g. no medical Common competitor: inaction (e.g. no medical
care)care)
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Social Enterprise Social Enterprise CommercializationCommercialization
• ReasonsReasons– Increasing competition with for-profitsIncreasing competition with for-profits– Increasing competition with other social venturesIncreasing competition with other social ventures– Growing reliance on donations and earned incomeGrowing reliance on donations and earned income– Corporate partnershipsCorporate partnerships– Demand for accountabilityDemand for accountability– Nonprofit culture becoming more “corporate”Nonprofit culture becoming more “corporate”
• RisksRisks– Loss of core missionLoss of core mission– Decreased attention to need, more on bottom lineDecreased attention to need, more on bottom line
Ref. Salamon & Young 2002
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Privatization: A Common Privatization: A Common Opportunity to Earn RevenuesOpportunity to Earn Revenues
•The practice of delegating public The practice of delegating public duties and responsibilities to private duties and responsibilities to private organizations (nonprofit and for-organizations (nonprofit and for-profit)profit)
•A frequent revenue-generating A frequent revenue-generating opportunity for social entrepreneursopportunity for social entrepreneurs
•Governments are often the customer Governments are often the customer for an enterprise’s servicesfor an enterprise’s services
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Why Privatization?Why Privatization?
• Reduced costsReduced costs• Specialized expertiseSpecialized expertise• Increased qualityIncreased quality• Smaller government Smaller government
and less bureaucracyand less bureaucracy• Market based Market based
incentives resulting incentives resulting in efficienciesin efficiencies
• Competition vs Monopoly
• Greater reliance on free enterprise - market based principles (assumes competition)
• Greater use of voluntarism
• Politics
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Dangers to Social enterprises from Dangers to Social enterprises from Partnerships with GovernmentPartnerships with Government
• Loss of nonprofit autonomyLoss of nonprofit autonomy• VendorismVendorism• BureaucratizationBureaucratization
Source: Frumkin ch 3 2002
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Types of PrivatizationTypes of Privatization
Source: General Accounting Office, 1997
Form of Privatization Percent of StatePrivatization Cases
2.95
78.06 8.48 4.11 3.32
0.96 0.91 0.58 0.46
Public-private partnerships
Contracting outGrants
VouchersVolunteerism
Private donationFranchise
Service sheddingDeregulation
Asset sales 0.17
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Necessary Conditions for Necessary Conditions for Contracting OutContracting Out
• Competition among potential Competition among potential providersproviders– Multiple bidders and bidsMultiple bidders and bids
• Ability and willingness to Ability and willingness to monitor providersmonitor providers– CapacityCapacity– Political willPolitical will
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Privatization in Competitive Privatization in Competitive IndustriesIndustries
• More competitionMore competition– GarbageGarbage– Snow removalSnow removal– TowingTowing– Data processingData processing
• Less competition– Foster care– Domestic
violence– Chemical
dependency