Nonprofit Business Modeling

Defining the nonprofit business model and ooking at how nonprofits have used them to combat crisis.

key ideas

The concept of business models first emerged in technology-focused business sectors in the 19th century. The definition of a business model (and what makes one good) has changed often, but scholars generally agree that they:

  • Identify customer base(via either social or utilitarian motivations

  • Outline methods for production

  • Identify metrics for success

Currently, business models are most often understood as a description of how a business sustains competitive advantage. They describe the value logic of an organization in terms of how it creates and captures customer value (Fielt, 2014).

Nonprofits are socially driven, meaning their value is not defined solely in terms of profit.

BUT nonprofits still exist in a for-profit market!

At the end of the day, just like a for-profit organization revenue needs to exceed the cost of services or they risk closure.

So, how have scholars discussed business models so far?

Scholars all seem to define the purpose of a business model slightly differently, each basically using the term to define a framework that describes how an enterprise conducts business. Most also agree that business models are provisional, largely created through trial-and-error, and meant to fluctuate with the organization.

The following definitions & scholars pop up regularly in literature surrounding business modeling; they define business models as:

  • Defines a business model as an architecture for the product, service and information flows, including a description of the various business actors and their roles

    For Timmers, it includes a description of the enterprise’s potential benefits for various business actors and a description of revenue sources.

  • Defines a business model as a unique blend of three streams:

    • Value stream for business partners and buyers

    • Revenue stream

    • Logistical stream

    All of which are critical to metrics of success and efficiency.

  • Defines a business model as a template that depicts the content, structure, and governance of transactions. These structures are designed explicitly to create value through the exploitation of business opportunities (i.e., profit).

  • Defines business models as a framework that takes technological characteristics/potentials as inputs and converts them through customers and markets into economic outputs.

    In other words, business models spell out how a company makes (and can potentially make) money by showing where it lives in the value chain.

  • A business model is a concise representation of how an interrelated set of variables (venture strategy, architecture, and economics) are addressed to create sustainable competitive advantages in the market.

  • A business model defines how the company creates and delivers value to customers, and then how it converts payments received for that value into profits.

    They allow businesses to develop value propositions, assess risk, and establish structures to meet social needs.

    • Alt, Rainer, and Hans-Dieter Zimmermann. “Status of Business Model and Electronic Market research:An Interview with Paul Timmers.” Electronic Markets, vol. 24, no. 4, 2014, pp. 235–41, https://doi.org/10.1007/s12525-014-0177-3.

    • Chesbrough, Henry, and Richard S. Rosenbloom. “The Role of the Business Model in Capturing Value from Innovation: Evidence from Xerox Corporation’s Technology Spin‐off Companies.” Industrial and Corporate Change, vol. 11, no. 3, 2002, pp. 529–55, https://doi.org/10.1093/icc/11.3.529.

    • Erwin Fielt. “Conceptualising Business Models: Definitions, Frameworks and Classifications.” Journal of Business Models, vol. 1, no. 1, 2014, https://doi.org/10.5278/ojs.jbm.v1i1.706.

    • Magretta, J. (2002). Why Business Models Matter. Harvard Business Review, 80(5), 3-8.

    • Mahadevan, B. “Business Models for Internet-Based E-Commerce: An Anatomy.” California Management Review, vol. 42, no. 4, 2000, pp. 55–69, https://doi.org/10.2307/41166053.

    • Morris, Michael, et al. “The Entrepreneur’s Business Model: Toward a Unified Perspective.” Journal of Business Research, vol. 58, no. 6, 2005, pp. 726–35, https://doi.org/10.1016/j.jbusres.2003.11.001.

    • Teece, David J., and Greg Linden. “Business Models, Value Capture, and the Digital Enterprise.” Journal of Organization Design (Aarhus), vol. 6, no. 1, 2017, https://doi.org/10.1186/s41469-017-0018-x.

    • 7Zott, Christoph, and Raphael Amit. “The Business Model: A Theoretically Anchored Robust Construct for Strategic Analysis.” Strategic Organization, vol. 11, no. 4, 2013, pp. 403–11, https://doi.org/10.1177/1476127013510466.

But what does this all mean for nonprofits?

Nonprofit business models tend to emphasize a social purpose rather than generating a profit.

This purpose conflicts with the fact that nonprofits exist/compete with (and are therefore predominantly modeled after) for-profit businesses. At the end of the day, their books have to balance just like a for-profit business’ (Topaloglu et al., 2018).

Nonprofits must strike a balance between mission accomplishments and fiscal responsibility (Chetkocivh & Frumkin, 2003)—this is why we often see nonprofits behaving like for-profit enterprises when it comes to business models (Dart, 2004).

Social purpose organizations (SPOs) often work parallel to nonprofits and struggle with the same social-to-economic purpose shift. These organizations also tackle social problems but are typically linked to some for-profit enterprise (Cooney, 2012).

Key differences in nonprofit business models:

  • Financial support is spread amongst many different sources

  • Support does not come solely from people who tangibly/transactionally benefit from the business (like investors or customers do)

  • Volunteer labor reduces expected (or allowable) labor expenses

  • The value of the product doesn’t always match the value of the investment

    • Chetkovich, Carol, and Peter Frumkin. “Balancing Margin and Mission: Nonprofit Competition in Charitable Versus Fee-Based Programs.” Administration & Society, vol. 35, no. 5, 2003, pp. 564–96, https://doi.org/10.1177/0095399703256162.

    • Cooney, Kate. “An Exploratory Study of Social Purpose Business Models in the United States.” Nonprofit and Voluntary Sector Quarterly, vol. 40, no. 1, 2011, pp. 185–96, https://doi.org/10.1177/0899764009351591.

    • Dart, Raymond. “Being ‘Business-Like’ in a Nonprofit Organization: A Grounded and Inductive Typology.” Nonprofit and Voluntary Sector Quarterly, vol. 33, no. 2, 2004, pp. 290–310, https://doi.org/10.1177/0899764004263522.

    • Dolnicar, Sara, et al. “Mission or Money? Competitive Challenges Facing Public Sector Nonprofit Organisations in an Institutionalised Environment.” International Journal of Nonprofit and Voluntary Sector Marketing, vol. 13, no. 2, 2008, pp. 107–17, https://doi.org/10.1002/nvsm.311.

    • Topaloglu, Omer, et al. “The Theoretical Foundations of Nonprofit Competition: a Resource-Advantage Theory Approach.” Journal of Nonprofit & Public Sector Marketing, vol. 30, no. 3, 2018, pp. 229–50, https://doi.org/10.1080/10495142.2018.1452818.