January 1, 2017

Understanding Nonprofit Business Models

In the nonprofit and for-profit sectors, there are many business models for translating resources into results and impact. (Here we define business model as the combination of impact model, revenue model, and cost and asset structure.) Segmenting nonprofits by business model is key because what it takes to build strong and resilient organizations varies by business model i.e., understanding costs and cost structures, core capabilities and other investments required to deliver impact.

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.

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The Bridgespan Group would like to thank the JPB Foundation for its generous and ongoing support of our knowledge creation and sharing work.