Segmentation is also required to enable a better understanding of the critical capabilities that distinguish the best from the rest. However, there is currently not a commonly understood and agreed upon approach to business model definition and segmentation, nor a well-defined framework for describing the core capabilities required by nonprofit organizations to make them strong and financially resilient.
We explored this idea in 2016’s Pay-What-It-Takes Philanthropy, published in Stanford Social Innovation Review. Bridgespan examined the financials of 20 well-known, well-funded nonprofits, and observed that indirect costs varied significantly across organizations (between 21 percent and 89 percent of direct costs), and much of the variation was driven by business models. Advocacy organizations, for example, had very different indirect cost requirements than direct service providers (see below).
Just as SG&A varies by industry, indirect costs vary by business model.
Source: Bridgespan analysis; financial data and conversations with select organizations (excluding pass-throughs)
Recognizing different business models in the sector can provide powerful insights. Nonprofit leaders, once recognizing the business models their organization uses, can begin to answer critical strategic questions like: Which business models drive the most value for my organization and best help us to achieve our goals? Which capabilities are most critical for us to invest in? What peers and benchmarks can I look to in order to inform my understanding of what drives success?
In collaboration with thought leaders, practitioners, and partners, Bridgespan is spearheading an ambitious endeavor to identify the common business models across the nonprofit sector, and the core capabilities of each. We seek to not just provide a taxonomy, but to bring powerful insights to bear, to help nonprofit leaders make more informed strategic choices, and to enable and embolden conversations with funders around investment in critical capabilities. This is work in service of and in partnership with the social sector.Return to the Initiative Overview
Additional resources on nonprofit business models
- Pay-What-It-Takes Philanthropy, Stanford Social Innovation Review (Summer 2016)
- Ten Nonprofit Funding Models, Stanford Social Innovation Review (Spring 2009)
- The Looking-Glass World of Nonprofit Money: Managing in For-Profits’ Shadow Universe, Clara Miller, Nonprofit Quarterly (Spring 2005)