How The Structure Of Nonprofits Limits Growth

A bottleneck is a limitation is the system. In nonprofit organizations, that bottleneck is its financial structure. For some nonprofits, moving some of their services from a Donor-Subsidized model to a Client-Paid model will greatly increase their impact.

In 2004, when I began training nonprofit workers in coaching skills, I used a Donor-Subsidized model. We charged reduced fees to attend our events, so I needed to raise money to cover the substantial remaining costs.

Clients found our coaching training life-changing and recommended it to others. Soon the number of people in our workshops doubled, then doubled again. Although we had twice the money from the fees we received, the money we needed to raise also doubled.

Our expenses went up at an even greater rate. When we were small, we were able to get people to help us out with graphic design, websites, training, meeting locations, administration, etc. As we grew larger, we couldn’t rely on volunteered or doing-us-a-favor discounted help (more on this problem here).

To make a long story short, our growth stopped because we didn’t have the funds. I realized our donor-subsidized structure had become donor-limited growth. Let me explain.

The Donor-Subsidized Model

Nonprofits work in an economy where donors pay for the nonprofit to deliver services to other people as inexpensively as possible. This funding model produces a lot of good in the world. It allow services to be delivered to those who otherwise couldn’t pay for them.

But there’s a systemic limitation built into the Donor-Subsidized model.

The amount of donations determine how wide the door is open to providing services. When donations are at a healthy level the nonprofit can provide subsidized services. However, in order for the nonprofit work to expand, donor funding must also expand to support the increased activity.

Constantly raising more and more money to serve more and more people is difficult. Foundations want to fund projects that build capacity of the nonprofit, or fund immediate relief aid. The categories foundations are most reluctant to fund are salaries and ongoing organizational expenses.

How can we expand services if we can’t fund additional staff and ongoing expenses to deliver our services?

Nonprofits have found various ways to reduce this limitation, like having staff raise support from personal donors, developing a fundraising department, and constantly creating new projects and services that will attract donors.

This model works for many, but not everyone.

I’ve seen wonderful initiatives die on the vine for lack of donor interest. I’ve worked with willing and able potential nonprofit staff unable to raise their needed personal support. And worst of all, many nonprofits must reduce the scope of their services to the level of donations available to support those services.

The Donor-Subsidized model can be summarized as,

  • Donors pay you to deliver services to others.
  • To increase services, you must receive more donations to deliver more services to others.
  • You have two competing jobs: raising money and delivering services. These job compete because spending time in one stops time spent in the other.
  • Donations and services scale at different rates of increase. When donors scale more slowly, services are limited.

The Client-Paid Model

Back to my story. I wasn’t satisfied with our reduced growth. I started this organization in order to make an impact in the lives of as many people as possible. So, I began looking for ways to restructure ourselves to eliminate this financial bottleneck.

One way around the Donor-Subsidized bottleneck is to create a financially sustainable model based on fees generated from delivering your services. I call this Client-Paid.

Using this financial model, the more you deliver services, the more your finances increase to support the delivery of those services. It’s like continually widening the door. In this way, an organization could expand its impact as long as there are people willing to pay for its services.

I understand that many nonprofits serve those who can’t pay for it’s services. I’m not thinking of them. I’m thinking of coaching, training, consulting, running community groups, etc. Some of the services nonprofits now offer could be reworked into growth-sustainable, client-paid services.

With a Client-Paid model,

  • Clients fully pay you to deliver services to themselves.
  • To increase services, you increase the number of clients.
  • You have one job: delivering services to paying clients. Delivering high-quality services is your sole focus.
  • Activities and finances scale at a similar rate of increase.

What Happened After I Made The Switch

Four years ago, I moved to a Client-Paid model. I spent months revising our training workshops to increase the value to clients. I learned how to describe those workshops in ways that would help people see the value for themselves. Then, I relaunched our programs with increased, appropriate, and sustainable-for-us prices.

This is one of the scariest moves I’ve made! I risked the significant impact we were already making. But I wasn’t satisfied impacting only a few hundred people a year because of the limitations of our financial model.

It’s now more than 4 years later.

  • Year 1 of the change saw a big drop in the number of people we trained. But our finances actually increased. I reinvested that money back into our programs, website, and marketing.
  • Year 2 we grew.
  • Year 3 we trained more people than any previous single year.
  • Year 4 we trained 2,500 people in 19 countries, which is 5x more than the year before the change.

Frankly, the Client-Paid model is a more difficult road to travel. Offering services for cheap or free is easier and generates a crowd fast, but it’s doesn’t have built-in sustainability. Charging a fee for those same services is more challenging, but sustainable. It requires those services to appeal to clients, be professionally-delivered, and produce results in the lives of clients – or they won’t repurchase or recommend you.

This discussion about financial models can be particularly difficult for nonprofit leaders to get their minds around. We’ve been in the Donor-Subsidize economy so long that we can’t imagine anything else. The biggest objection I hear is nonprofits can’t make a profit. Think in terms of individual services rather than your whole organization. There is plenty of room in nonprofit legal structures to experiment.

Let’s enlarge our perspective and be mission-driven to explore new possibilities to reach more people with our life-changing services.

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    Keith is President of Creative Results Management. He helps busy leaders multiply their impact. Keith is the author of several books including The COACH Model for Christian Leaders.

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    6 thoughts on “How The Structure Of Nonprofits Limits Growth

    1. Thank you very much keith for writing this
      The problem you highlighted is what a non-profit I am engaged is experiencing. You have given much food for thought

    2. I might have understood it wrong, but to me it sounds like you guys just changed to being a business, pure and simple?

      • It’s not purely one structure, nor is it simple, actually. “Being a business” to me sounds like a legal structure. That’s not my focus. My objective is to maximize impact. We have some services that are Donor-Subsidized, but many services are Client-Paid. It’s not either-or. There is plenty of room in nonprofit legal structure for Client-Paid, and many businesses include Donor-Subsidized for some part of their work.

        • I did not mean that neither of the ways are easier, or simple, sorry if it came across that way. If I understand it right you are operating with two pairs of concepts, one how to get the resources, Donor vs Client-Paid and the other the framework, Non-Profit or Business. If so it makes sense to me 🙂

          • No worries, Roger! I’m trying to operate from only one objective: impact – deeper life-change in more and more people. And then let our financial and legal structures follow what best serves expanding impact. Rather than the other way around, restricting impact in order to conform to a financial / legal structure, which I see too many nonprofits doing.