Why does the private sector tend not to regard nonprofits as equals but like second-class enterprises?

Years of listening to derisive comments have led me to the conclusion that the reason is a pervasive misconception about nonprofits: our private sector colleagues believe that nonprofits do not have to compete in the marketplace, that nonprofits do not have to compete to survive.

Humbug and balderdash!

Almost all charitable nonprofits do have to compete, and compete quite vigorously, in two different marketplaces and do so simultaneously.

COMPETITION FOR CUSTOMERS

The first marketplace is for customers, or in nonprofit terms, ‘clients’, ‘ticket buyers’, ‘students’, ‘patients’, in short those served by nonprofit organizations.

Without clients no nonprofit can, or should, survive any more than a grocery store, car maker or law firm can or should. If there is no demand, there is no need for a source of supply: one of the few commonalities of the two sectors.

However, unlike the private sector, complicating the nonprofit market for customers is that there are actually two sub-markets. One is the general public or subsets thereof. Think of your child in high school: how many unsolicited recruitment packages from colleges and universities flood your physical and electronic mailboxes? Why do hospitals run ads in the media, boasting and boosting one specialty or another? What theaters, museums, opera companies, do not have active marketing programs?

The other sub-market for customers consists of contractors and professional funders, particularly governments and foundations, which want to ‘buy’ specified programs or services for targeted populations. Using taxpayer or donor funds, both put out Requests for Proposals to which nonprofits are invited to compete. Assuredly the nonprofit competition for RFP funds is every bit as competitive as it is in the private sector. Indeed, in some cases, organizations from both sectors are competing for the same business, e.g. for-profit hospitals and nonprofit ones and for-profit substance abuse programs and nonprofit ones.

Although the two sub-markets have distinct differences, they share a critical similarity unique to the nonprofit sector: neither sub-sector’s customers pay the full cost of program or service delivery inclusive of overhead and a profit margin.

Whereas the private sector and its customers expect prices will be sufficient to cover all costs plus a profit margin, the expectation, indeed the requirement in the nonprofit sector is that the customer will not pay full price. Why not?

Not charging full costs is not only a defining characteristic of charitable nonprofits, it is a legal requirement. If a nonprofit organization did charge full costs for its services it would not be ‘charitable’ or ‘exempt’, meaning donations would not be necessary nor would they be deductible, and the nonprofit would have to pay property, sales and income taxes. Simply put, a profit-making organization is not a charitable one.

The second reason why both public and subsidized customers pay less than full costs is because they can. The competition for customers and for any funds is so keen among nonprofits that they willingly accept contracts and grants which will cost more the provided funding. Concurrently these same organizations complain about inadequate overhead funding while continuing to compete vigorously for such business. During the recent recession, it became axiomatic for nonprofits to be asked and to be willing to “do more for less”. This led a colleague to opine that eventually nonprofits will be doing everything for nothing.

The bottom line is by their very nature and because of the competitive market in which they operate, in nonprofits, the client doesn’t pay full costs and may not pay anything. Crazy as it may sound, the business model of charitable organizations rests on the fact that each and every person served requires some level of subsidization.

And that brings us to the second area of competition.

COMPETITION FOR DONATIONS

Whereas a for-profit can raise needed funds from selling more stocks or borrowing money either with bonds or from lending institutions, nonprofits must look elsewhere. ‘Elsewhere’ means contributions from donors.

Stockholders and lenders make their financial investments with the expectation of not only getting their money back but receiving more than what they invested. In nonprofits, donors don’t even get their money back.

If you think finding stockholders or lenders is competitive, try asking someone to just give you money. That type of competition in a class by itself.

There’s a further distinction between fundraisers in the private sector versus those in the nonprofit sector. In the private sector, those responsible for raising funds frequently have a personal financial interest: the more they raise, the higher their personal compensation.

That is not only not the case in the nonprofit sector, commissions and bonuses are forbidden by codes of professional conduct and various laws and regulations.

There is a final distinction worth keeping in mind, the consequences of not raising needed funds. Insufficient funds can lead to adverse consequences on employees and suppliers of for-profit enterprises. However painful such consequences may be in the private sector, insufficient funds in the world of charitable nonprofits has similar consequences but addition ones: on those dependent on the amount or level of services provided.

Insufficient funds in the charitable sector have wider and deeper consequences than in the private sector, a reality that adds to the competitive imperative for funds.

So to our private sector colleagues cum critics who think those of us in the nonprofit sector insulated from competition and marketplace pressures, we say, loudly and proudly, “Think again.”