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What’s your business model? Chances are good that you could answer that question if

posed without the MBA jargon. So, here’s the question asked differently.

What are the elements of the way(s) you serve your consumers, and how do these elements work together?

A surplus of words can sometimes overshadow good instincts. Most nonprofit founders and those who follow them in management roles typically have a good idea of how their programs succeed. In all likelihood they won’t talk about their “business model” but instead will talk eloquently in terms of the consumers’ needs, what the organization (or program) does to serve those needs and how it does it. That’s a pretty good summary of a business model.

TheModelPrecedesthePlan

Business plans in nonprofits are getting their share of attention today, but business models are less understood. An organization has to have a clear business model before it can create a business plan. One of the reasons that business plans are more intuitively understood than business models is that they usually have a major quantitative element, and this makes them easier for outsiders to understand.

By contrast, business models are more conceptual even though they should be based on quantitative information.

They also tend to be based on internal knowledge and assumptions that are not necessarily publicized. In some cases they include a “secret sauce,” better known as intellectual property.

In the government-funded nonprofit world, the business model is essentially established by the government entity via laws, regulations and the terms of competitive bidding. In these cases, even the successful street smart nonprofit manager might not think of the terms of their government arrangements as being a business model even though that is exactly what it is.

AnActualBusinessModel

Many readers are probably familiar with the company known as Zipcar. Fewer are familiar with the way the Zipcar business model evolved.

Thanks to the case writers at Harvard Business School, we have a clear and simple example of how a business model drives a business plan, and of how each might change over time.

Robin Chase and her friend Antje Danielson started Zipcar in February 2000 as a “sophisticated form of car sharing.” Danielson had been to Germany and was impressed by the practice that was increasingly popular throughout Europe. Chase spent two months modeling pricing structures and various other assumptions. She concluded that Zipcar needed to operate with several key elements in its business model. With these assumptions set, Zipcar started.

Within six months it was obvious that several of these key elements needed revision. The $300 up-front fee, which

worked well in Europe, turned off American consumers. Parking turned out to be an unexpectedly high cost in crowded Boston, and the company would lose members faster than expected. Since most of these discoveries were made before the company officially launched its service, the erroneous assumptions were quickly corrected.

Zipcar illustrates the power of business models. First, they derive from what might be called the “central vision” of the nonprofit. Often this is the founder’s vision, although it could easily be a collective vision of two or more people consciously trying to follow a model

Modeling Success: Adapting to Change Builds InnovationBy Thomas A. McLaughlin

Nonprofit Advantage | June 2015 | Page 21CONNECTICUT ASSOCIATION OF NONPROFITS

that was established successfully elsewhere.

For example, what is today the Make-A-Wish Foundation started spontaneously from a community’s desire to support a seriously ill young boy. The experience was so moving and so humane that it rapidly spread to other communities. Many other nonprofits, especially the members of one of the national federations of nonprofits, came into being in a similar fashion by following a new nonprofit business model.

Unlike large for-profit companies such as Zipcar, many medium to large-sized nonprofits have more than one major business model. This is true by definition for what used to be called “multi-service organizations.” Even large single-purpose entities such as colleges or hospitals are likely to have different business models. And each would likely have its own business plan, although it wouldn’t necessarily be called a business plan.

Modifying your business model is a crucial step in adapting to changes in your external environment. Many different business models of health and human service organizations are at the early stages of unprecedented integration that might well produce refined and updated versions of these 20th century business models. For instance, physician-oriented primary care and residential programming for troubled adolescents are two examples of business models that are almost certain to undergo significant change in the next decade: in many areas, these changes have long been underway.

HowtoBuildYourBusinessModel

How do you construct a business model? Here’s a difficult but worthwhile guideline: Never exceed a single page when listing the elements of your business model. If a business model can’t be summarized on a single page it might not be refined

enough to attempt. For those with good experience in one part of the nonprofit sector, tweaking a well-known business model could be all that is needed. For instance, there is one organization using a long-established business model that has achieved unusual success simply by adding a single individual with marketing responsibilities. This is a small change in the business model but a relatively large change operationally since it boosts the normal growth rate.

To narrow your scope of work, use a handful of common business planning areas. Some useful areas include:

• Consumers and potential consumers

• Funders and potential funders• Differences or similarities to

competitors’ models• Human capital• Geographic reach

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Page 22 | Nonprofit Advantage | June 2015 CONNECTICUT ASSOCIATION OF NONPROFITS

Whatever your business model, it has probably been done before. Take full advantage of the many sources of public information on nonprofits and their programs and services. Some states require detailed financial reporting, and of course all nonprofit tax returns (IRS Form 990) are publicly available. Use these sources as well as practitioners’ experiences to devise a business plan specific to your community’s needs.

Finally, remember that most innovation in the nonprofit sector comes from changing a well-accepted business model. A century ago, home care evolved from the model of hospital care. Small home-like units for disabled clients developed as an alternative to large institutions. Could the next major shift in nonprofit services be happening right now in your organization? If so, it started as a business model, even if you didn’t call it that. Thomas A. McLaughlin is the founder of the nonprofit-oriented consulting firm McLaughlin & Associates and a faculty member at the Heller School for Social Policy and Management at Brandeis University. He is the author of ‘Streetsmart Financial Basics’, published by Wiley. His email address is tamclaughlin@comcast.net.

The case referenced in the column is taken from Harvard Business School Publishing, case #803096. Reprinted with permission of The Nonprofit Times, 12/1/14.

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