This article is an excerpt from the Shortform book guide to "Business Model Generation" by Alexander Osterwalder and Yves Pigneur. Shortform has the world's best summaries and analyses of books you should be reading.
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Do nonprofits need a business model? What revenue models are most common amongst nonprofit and social cause organizations?
Although nonprofit and social causes organizations do not seek to make profits in the conventional sense, they still need to have a business model to plan how they will meet their objectives and cover their expenses. According to business experts Osterwalder and Pigneur, there are two main nonprofit business models: 1) donor-supported organizations, and 2) organizations that balance profit with social and environmental impact.
We’ll discuss both of these concepts below.
Types of Nonprofit Business Models
There are two main types of nonprofit business model patterns defined by how these organizations receive revenue:
1. Donor-Supported Organizations
When third-party donors fund the organization’s mission, the business model has to place emphasis not only on how to fulfill the mission but how to appeal to third-party donors so that they support the mission. Therefore, the organization has to manage third-party donors in the same way that conventional profitable businesses manage their customers. Consequently, the development and management of these relationships form a large part of the organization’s activities.
(Shortform note: Aligning both donors and beneficiaries into one business model is difficult to balance. Donor-Supported Organizations need to focus on fulfilling their mission, but they also need to fully consider how they create value for their donors. In other words, donors are more likely to contribute if organizations can provide proof of specific and measurable improvements made possible by their donations.)
2. Organizations That Balance Profit With Social and Environmental Impact
When the organization has to generate its own revenue to fulfill its mission, it should balance its need to make profits with its need to make a positive social and environmental impact. To evaluate this impact, the authors recommend extending the business model to include two additional elements:
- Social and environmental costs of this business model
- Social and environmental benefits of this business model
(Shortform note: Many experts believe that all businesses should be held accountable for their environmental, social, and governance (ESG) impact, not just businesses that focus on social causes. However, companies haven’t quite figured out how to measure their ESG impact.)
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Here's what you'll find in our full Business Model Generation summary :
- The nine elements that make up any successful business model
- Different ways you can combine these elements to create business model patterns
- Techniques you can use to generate innovative ideas
