By Phil Harvey
More and more nonprofits are turning to business models to achieve their social objectives. The internationally focused Acumen Fund, for example, invests charitable donations in for-profit companies that work in agriculture, health, education and other public service areas. The Skoll Foundation identifies and rewards young entrepreneurs who are “leveraging business for the greater good.” The David and Lucille Packard and the Bill & Melinda Gates foundations have provided “program related investments,”–low- or zero-cost loans–to push NGOs into activities that are sufficiently profitable to assure that the loans can be repaid. These foundations are clearly convinced that “market-based approaches” are a necessary component of philanthropic work. At the same time, nonprofit boards are increasingly urging their managers to be more businesslike and to earn “profits” to help defray expenses. Overall, there is a clear trend toward commercial enterprise within the public service sector.
The answers to these questions are unclear. Some NGOs have successfully added profit-making enterprises to their work. Others have struggled, as new commercial activities can often be risky. In a Harvard Business Review article in 2005,[i] William Foster and Jeffrey Bradach point out that the failure rate for profit-oriented projects in NGOs is very high and, they note, some failures even go unrecognized because managers fail to consider all of the costs related to revenue-generating projects.
My own experience with DKT International, an international family planning organization I founded in 1989, offers some lessons for organizations wanting to adopt a for-profit approach. DKT uses a system called social marketing which tracks the commercial model very closely. Contraceptives are attractively packaged, marketed and distributed through wholesalers and many thousands of retailers throughout the cities and rural areas of developing countries. The idea is to make affordable contraceptives as easily available as Coca Cola, tea, and cigarettes. The system requires that the condoms, emergency contraceptives, birth control pills, and other contraceptives must be purchased, even if the price is very low. In middle income countries like Indonesia and Brazil, it has been possible for DKT to make a true profit with these activities. In poorer countries the contraceptives must be subsidized to be affordable, but even then some revenue is generated. In Ethiopia, for example, sales revenue covers about 20% of DKT’s program costs.
Importantly, the marketing of contraceptives is central to DKT’s mission and our focus, including revenue generation, has been notably successful. But when DKT has moved away from its core mission, it has not done well. Attempts to earn extra revenue by selling razor blades, sanitary napkins, and other unrelated items have generally failed.
According to Foster and Bradach, the most important principle for NGO managers to keep in mind when considering a for-profit project is not to depart from their nonprofit mission. An organization may be effective at providing one service, but fail when it tacks on another, as was the case with DKT’s razor blades
What can other nonprofits learn from these experiences? For one, don’t mistake revenue for profit. Projects, especially those with a non-mission focus, may be costing you money even if the revenue looks good. Add in the costs of managers’ time, and overheads like rent and utilities to see if you are actually making money.
Be sure that you stay focused on your mission, first and foremost. If your profit-oriented project helps you achieve your goals even if it doesn’t make money, it’s probably a good bet. But if it takes your focus away from your goal and distracts management, you will be likely to fail.
That said, if you can find a revenue-generating enterprise that is central to your mission, the income you earn will stretch your budget, give you a degree of independence from your donors, and place your organization on a more solid financial footing. For DKT, the revenue from contraceptive sales now covers two-thirds of all its program expenses. By focusing our mission and using commercial models for marketing our service, we have been able to cover program costs and achieve our goals of providing affordable family planning methods to communities across the globe.
[i] W. Foster and J. Bradach, “Should Nonprofits Seek Profits?” HBR, February 2005.
Phil Harvey is founder and Board Chairman of DKT International, an international nonprofit family planning organization. His book, Let Every Child Be Wanted: How Social Marketing is Revolutionizing Contraceptive Use around the World, describes DKT’s social marketing approach in detail.