How to Build a Sustainable Revenue Stream

This article is a summary of Episode 41 of our Designing Tomorrow podcast. Each episode is a conversation between Jonathan Hicken, Executive Director of the Seymour Marine Discovery Center, and Cosmic’s Creative Director, Eric Ressler.

A question we've been thinking about a lot lately is : How should nonprofits and social enterprises choose the right revenue model for the work that they're doing? 

Let's break down all the different options for revenue models — whether you're a nonprofit or a social enterprise that earns revenue, or a nonprofit that earns revenue — and think about what are the pros and cons of these different approaches. How do you know which approach is going to be best for your organization? How many different revenue models should you even have? Should you go all in on one, or pick a couple and have them work together?

Earned Revenue Models

We want to start with earned revenue — both because we don't want to go too deep on just donations and gifts, and also because a lot of nonprofits do earn a good percentage of their revenue, and that's a good thing.

Buy One, Give One

One of the things you see a lot — especially in the social enterprise world, and maybe just one of the more commonly discussed — is the buy one, give one model. You think about Tom's shoes or Warby Parker. This is a very consumer-friendly model where, in the case of Warby Parker, you sell glasses and for every pair of glasses that you sell to a consumer, another pair is donated or given to someone in need who needs a pair of glasses that might not be able to afford them on their own.

To us, it's meeting the needs of the consumer group in a couple of different ways. It's saying: "I am buying from a company I can trust. I can buy from a company that has the right values that align with mine." So a consumer might feel more compelled to purchase their products. In that sense, it's a market distinguisher for Warby Parker to be able to offer this service — and at the same time, they're solving a real world problem, which is access to good eyewear.

Let’s look at the Tom’s Shoes example. We actually wrote an article about this. And there’s been some case studies written about this too. Tom's actually stopped doing the buy-one-give-one model after a certain amount of time. And before they stopped, they got a little bit of flack for that model. And of course, there's a critic for everything. We applaud Tom's shoes. We think they're a great brand that’s done good stuff. And they've actually expanded beyond shoes now. 

The flack Tom’s was getting was about the people that they were giving shoes to — maybe shoes weren't the biggest thing that they actually needed. They needed access to clean drinking water, healthcare, just basic income in general. You see this also a lot when nonprofits are doing charity drives or when there's natural disasters and people — out of the goodness of their heart and from a place of virtuousness — want to help. So they just start sending things that they have, and it actually can become a big overhead problem and operational problem for nonprofits.

The downside to this approach is that you have to be really clear that what you're actually making is going to help a community and not just sort of help, but actually be the highest-leverage thing they need, the most important thing they need.

Donating a Percent of Revenue

That leads to another option, which is donating a percent of revenue. This is in the same line of thinking as universal basic income as an experiment. Instead of providing particular services and means testing that, you just say: "We're going to help you out with money, and we're going to trust that you're going to take that money and use it as wisely as you can and spend it on the most important, high-leverage things for you, depending on your needs."

In those two examples, as a consumer, it makes sense. This idea that I'm buying one and giving one. That's a really simple concept. But once you start getting into donation of profits, it's like, "Whoa — where does that money go? Who is it going to? What's the problem being solved?" So it may be simpler to donate a percentage of profits, but that might actually weaken your position in the market — having that as a distinguishing factor for your business.

We've been thinking about this a lot — about how important the way you tell your impact story, or articulate your impact model, actually affects your ability to be successful and build a sustainable business. 

This is especially true for individual gifts or donations or individual purchases in the cases we discussed. 

Sustainability and Environmental Impact

Another model that almost doesn't feel like a model, but is really a sustainability approach and an environmental impact approach. Brands like Patagonia are the classic example of this, but even some t-shirt companies that use a hundred percent organic cotton. These are social enterprises in the sense that they are trying to do no harm, or as little harm as possible, or they're working in an industry in a more socially responsible way.

That is a form of social impact. That is a social enterprise, in our opinion. But it's not a model that's as clear cut. 

However, you look at a brand like Patagonia, who has really authentically owned that model, and they're wildly successful because they build really good products. They understand their audience and their supporters very deeply. They come through on what they say they're going to do. But they’re doing it under this umbrella and this point of view of sustainability and social responsibility. And they're not perfect — and they communicate about where they're not perfect, which is something we applaud. They're constantly making innovations to be more socially and environmentally responsible.

So that's a model too: essentially doing business without doing harm.

Patagonia was in this unique position where they could actually feasibly move the market — and that's what they did by making Earth their one benefactor. It forced other outdoor companies and, frankly, other clothing retailers to meet the challenge that Patagonia put on the table. They're big enough and established enough that they could move the market in a way that was meaningful across the industry.

We do wonder if smaller social impact businesses have that same ability to move the market and have that level of impact that Patagonia did. And we wonder what the efficacy is of a smaller organization who’s making environmentally friendly decisions. What is the end result? When trying to make those responsible choices, it's worth asking: What impact are we actually having?

Our understanding is that Patagonia started that way — sustainability was a core value of the founder and the organization from the early days. But the scale of that impact, the depth of that impact, is only possible because they became really successful. Were they successful because they were sustainable, or are they sustainable because they're successful? If you just don't grow, then your impact is not going to be very large in this kind of model.

Service-Based Social Enterprise

Some clients we've worked with have invented some kind of new technology or are doing energy efficiency work, and they're just a regular business — not even a B Corp — but their mission is moving humanity forward in one way or another, and they've found a way to sell that mission, sell that vision to the consumer, often to other businesses.

That's a really viable approach. It's not as sexy as some of these other models, but it's probably the most common social impact social enterprise model out there — especially the kind of model we're going to need to make big strides on some of these big systemic issues like environment, healthcare, public health, and sustainability. 

We need businesses to consider themselves social enterprises and to do that authentically. That model can work. And then there are, of course, essentially limitless models for how to generate revenue, depending on the context of the business you're setting up.

The Question of Authenticity

Let’s think about the idea of the origin story — and whether these values or this model were baked in from the get-go. We have the feeling that this really seems to matter to the efficacy of any of these models. When we think about cause washing or authenticity washing, we wonder if sometimes we're feeling that when a business jumps into the impact game late.

No shade on Athletic Brewing, they make great non-alcoholic beers. On the can, there's a 2% for trails pledge. We wonder: Did they go into the business wanting to make trail access better, or did they go into the business wanting to make great non-alcoholic beer? And what does that 2% for trails actually mean to a consumer? 

The clients we've worked with who are social enterprises — especially ones doing B2B work, who invented some kind of technology, or who are doing professional services work of one kind or another — have all started with impact and mission really core to their DNA. That's actually something we look for when we bring a client on, especially a social enterprise. We are very committed to doing impact-focused work that's real, that's authentic, that's going to make a difference. That’s some of the things we’re looking for in a new client partnership.

So we get pretty direct early on: How much of this really matters for you? Are you making decisions based on impact, instead of or alongside revenue? Because there is a bit of tension there, in certain cases.

All of the organizations we've worked with have started with that vision in mind, and they've realized that a market-based approach is the best way for them to make an impact. Now, with that said, maybe there are some exceptions. And that doesn't necessarily have to be true.

This starts to blur the lines a little bit. There's a B Corp — an actual accreditation you have to get certified for, with a process and scoring every year or so. But then there are also just businesses making a product or selling a service that's good for humanity. You think about a local guitar manufacturer — people need guitars, music is awesome, it's good for the world. Are they a social enterprise? By whose definition? You can start to look at the impact they're having. Are they doing their work responsibly? Are they exploiting people? Are they importing goods in a way that is hurting the environment?

Being a social impact organization — or specifically a social enterprise — is not a black and white thing. There are a lot of shades of gray. And you can have an authentic commitment to being focused on impact or having a mission, and unintentionally — or sometimes frankly even intentionally — create harm for a certain population of the world. This is messy stuff.

The tension exists at every stage for social enterprises. In our experience, it is felt most acutely in the impact investor category — where impact investors are looking for financial returns alongside social impact returns. And a lot of times those two outcomes are completely opposite. Because there are ways — especially if you look at a lot of successful larger-scaled businesses and do a little digging — they're riding on exploitation one way or another. They're either exploiting people, or the environment, or both, in order to be profitable. When they're really driving towards growth and profit and revenue as the main things they're working towards and measuring, you have to also just look at how that impacts the people they're working with, the rest of the world, other organizations doing similar work. It is a tension for social enterprises.

It can be hard when you are trying to grow and scale. Just like nonprofit organizations, these organizations are trying to build sustainable businesses, and they have all the same growth struggles and startup struggles. Sometimes they're taking outside investment, and their incentives aren't necessarily aligned with the impact — because the investors might just be a bank, not an impact investor. We don't envy social enterprises. They've got a really tough job and we applaud all of them.

But we have to be mindful of holding two things at once: true, authentic accountability for these organizations and some standards — and also not just looking for the first time they mess anything up and saying, "These people are BS, boycott them." That's something we should be aware of.

Nonprofit Revenue Models

A lot of nonprofits have some kind of mix of gifts and earned service fees or products sold. The Seymour Center is an example of this — with a gift shop and rentals for weddings and other events. It's a pretty mixed model.

Before we dig into some of these different models, let’s think about the pros and cons of earned revenue versus gifts.

One key way to think about this: earned revenue is unrestricted revenue, and unrestricted revenue is king. In that sense, making money through earned income channels is preferable because you can channel that to where you need to in terms of programs. Granted, lots of philanthropy comes through unrestricted too, and you always want to pursue that — but it's a sure thing when you go through the earned revenue track

It's really, really hard to run a nonprofit unless you've got a rock-solid level of assurance that you have funders or donors who are with you to the end. Having that earned revenue opportunity in front of you provides that balance. There are lots of models that don't rely on earned income at all, and more power to you — but there's something to be said for building a business that has value to offer to a customer that wants to pay for it, while also being able to promise impact when they spend their money with you.

The Value of the Market Test

Sometimes people are  judgmental about how nonprofits are relying on donations to power their work — almost like it's easier than having to build something that has market value that people are willing to pay for. 

There is something special about the free market — people actually choosing to purchase something and that value exchange. It’s a test. There's proof of concept. You really don't know if it's going to work until you actually ask someone to buy. You can have a great idea. It can sound awesome on paper. People can say they're excited about it. People will even say they will buy it. But until you actually put it in front of someone and say, "It's time to go," you don't really know if that's going to be true or not.

So in certain ways, the market test — even if it's not a huge element of your fundraising strategy — is an interesting way to test out ideas and see if you're doing a good job with your branding, marketing, and messaging.

Now, should you be running a side experiment if that's not your main approach to revenue? It’s probably not a good use of your time and energy.

You could argue that raising money is a form of a market test. You're not selling a product, but you're still asking someone to fork over money, whether they're an individual donor, a major donor writing a big check, a foundation, or a government grant. There's always some kind of financial transaction, and people are going to do that mental calculation: Do I think that this, whatever I'm investing, is worth it? Whatever that means to them. But there's something about the market-driven approach that definitely has value.

There is a corollary in fundraising where you're putting out value to a donor and they're going to tell you yes or no. The difference is: If you're selling a product, the person buying it is getting the value from it. In fundraising, oftentimes the beneficiary of the investment is not the person giving the money. Fundraisers are selling emotions, we're selling feelings, we're selling legacy. We are selling something — but oftentimes it's not the donor that's getting the benefit directly.

There is a corollary where you can measure your effectiveness against the market, so to speak. It's a philanthropic market — it's different. Nevertheless, there is something simple and satisfying about saying, "I've got something. Will you buy it?"

When someone's buying a product or a service, it is usually to benefit them directly, or at least their organization directly. And if someone's making a gift or a donation, they're getting something out of it — certainly — that feeling of generosity, the deep knowing that they're making a difference. But it is different because they are not the end beneficiary of the impact. That's an important distinction.

The Nonprofit Revenue Spectrum

When thinking about revenue models for nonprofits, we see this as a spectrum and a scale. On one side is small donors — many individuals, high scale. On the other side of the spectrum is large donors — fewer individuals, and small scale, but large gifts. There's a whole bunch of plots on that spectrum.

You can think about this the same way you'd think about for-profit businesses. A SaaS business might ask: Am I going after the small business market — lots of volume, low contract amount — or am I going after enterprises — fewer contracts, really high dollar amount?

Small and Individual Donors

So let's talk about these different models and who they might be a good fit for. The model most people think about when they think about nonprofits is many individual donors making small gifts. Those gifts could be one-time gifts or they could be recurring gifts, which is very timely — everyone’s talking about recurring giving right now. They could be a membership, which is basically a more formal version of a recurring gift.

Basically, this is often how people think nonprofits are funded and structured — which sometimes is true, but actually often is not. Most nonprofits are not mostly funded by many, many small donors, despite how people tend to think about it. There are exceptions to that, of course. But should a nonprofit ever just completely write this audience off?

When tens of thousands of people are experiencing an organization’s offer every year, that is a built in baseline, a built in community that if you are able to mobilize them effectively, could generate meaningful income to the organization. If your reach is inherently large — by the nature of what you're providing, touching a lot of people at the same time — you're probably in a better position to go after that high-volume, low-dollar-amount approach.

If this is going to be a major part of your fundraising strategy, it's important that your impact is simple and clear. You can do it if your impact isn't simple and clear, but it's a lot harder. We've had to help some people figure out how to take a very complex, murky story and figure out how to frame a narrative around it that makes it feel more simple and clear. 

Reach is part of it, but the way you make an impact is really important too. Because if it's hard to tell a story about it — if people who aren't deeply involved in your organization can't just get it pretty quickly — you have an uphill battle to fight.

At that high volume of audience members or contributors, your story is going to be entering lots of ears and being interpreted in lots of different ways. So you need to make sure that story is clear, concise, and consistent no matter who's hearing it.

Recurring Giving and Membership

There's been a lot of recent reports coming out about giving overall being down, individual giving is down overall, but recurring giving is actually going up — and because of that, generating more lifetime value and revenue for nonprofits.

Let’s think about recurring giving and memberships and maybe what could be helpful for social impact leaders who are looking at spinning up recurring giving or a membership model for their organization.

For a nonprofit that welcomes the public into their space, the way to think about membership is: first of all, it's a community to activate. You're asking people to put some skin in the game, to join the community, to fuel the impact together. And you're reaching out and trying to activate that community for all sorts of things — not just attending events and participating in programs, but notifying people about opportunities to take action in the community. For mobilizing lots of people who care deeply about a cause, you have a community to activate.

When it comes to fundraising, membership is a pipeline for major giving. Look at every member and decide if you want to approach them about getting involved more deeply. In our experience, out of a hundred members, there might be ten who look like possible major donors. Of those ten, there might be one that actually does become a major donor. But it starts with bringing in a lot of people at that low giving level. It's a low barrier to entry. It gets people started, gets their feet wet, and gives you an opportunity to get to know them and invite them deeper into the organization.

You need to be very disciplined about this. Consider looking at that membership pipeline weekly to identify who might become bigger donors later down the line.

Pragmatically, what we've seen people do is look at a combination of data points that include: 

• Family wealth 
• Connection to the cause
• How engaged and involved they are 
• How much overlap is there between values and the impact that you're creating
• How much they care about that impact

Use all of the data at your fingertips. Did this person attend an event and what was that event about? Or what campaign did they give to? That's going to tell you a little bit about what they care about. But ultimately, the real meaningful qualification happens as part of a relationship, as part of a real conversation. Still, you need to have a system for vetting those initial touch points.

This is a good argument for some kind of donor engagement platform or CRM and having that data. But you don't need a super crazy complex system to do this well, because it really is about community, really about relationships, really about listening to your community and your supporters.

Major Donors

Organizations that are solving big problems are generally better suited to go after major giving. When working with major donors, they're often thinking deeply and thoughtfully about the legacy they want to leave on their community, their state, their country, or whatever their area of interest is. And they’re being very selective about where they're investing to maximize their impact.

Some absolutely brilliant philanthropists are thinking about these problems in ways that are genuinely admirable and instructive.

That’s often pretty big. It's often family legacy stuff. This is more reason to nail the story, nail the niche, nail the messaging, to understand exactly what makes your donors tick so you can go into those conversations ready to talk big dollars.

Our sense from working with clients who have major donors, is that a lot of times the reasons that people give — even large amounts of money — usually come down to some kind of personal connection to the cause. Either they really care about the work being done, they have some kind of personal connection in that way, or it's about community, it's about their legacy.

There's a box that needs to be checked before anything else matters — they really care about the work you're doing, and they probably cared about that work even before they ever met you.

Some questions come up for major donors — especially individual donors who might not be professional philanthropists but who have wealth and want to give back to their community or give to a cause that they care about. They may not have a family office, so they certainly don't have a foundation.

• Does data matter to them? 
• Do they need proof of impact and metrics and numbers? 

Or is it really more about an intuitive assessment of whether your organization is going to come through, and fit alignment in values? What makes them tick?

The honest answer is: every donor has such a different story and such a different reason for being involved. It would be a disservice to try to coach people in any one direction. What's worth coaching instead is to have that conversation and to think of yourself as almost like a matchmaker. The goal isn't even really to talk about your organization — it's to talk about the cause. What do you care about? The goal is to hook them up with the organizations that are going to help them have the impact they want to have. Even if that's not your organization, that's okay. You want them to fuel your cause because they have the resources to do so.

Institutional Philanthropy

Another category of major gifts is what we like to call institutional philanthropy. This might be a foundation. This might be a government grant. These are organizations that are professional firms that are set up to support nonprofit organizations. 

As far as family offices go, we've seen all flavors of them. They could be more institutional or they could be essentially more just an estate for a wealthy family as a philanthropist family. And they could act with extreme rigor and process, or they could be just a little bit more fast and loose with how they donate. And we’re not here to judge either approach, but when we're talking about more institutional philanthropy, our sense is that institutional philanthropy is really best fit for organizations that have some kind of established need — there's a model that's proven, and it's really just the funding is there to fund that project.

Public health is a good example of this. Education and some of public good initiatives that basically a lot of society has agreed this is an important issue — this is foundational work. This also includes investment in infrastructure and some of these problems that not any one organization is going to solve — where it's going to take a network of organizations across the entire spectrum or across a multi-step project. So think about public infrastructure projects, and sometimes these might even be government employees doing this work or government contractors. Our sense is that government grants, broadly speaking, are best for organizations that fit nicely into that category.

Think about homelessness and housing advocacy. Often, the major funding comes from state and federal grants and some private foundations. This is a long established problem with some established solutions, and you just have to do the work every day. 

But when thinking about grants, particularly from institutions, you might think about it in terms of piloting something new.

When thinking about grants from private foundations, one useful frame is piloting something new — getting an influx of cash that allows you to prove a concept. You can get an institution excited about launching something new with you and piloting it out together, trying to launch something new, and getting an influx of cash that allows you to prove the concept.

Government grants, whether they're state or federal, typically come in to fund proven organizations that have some kind of proven model, some early success of impact, and are there to help scale. Now, that's not always true — there have been some amazing government-funded moonshots. But generally, that's the pattern.

Corporate Giving

Corporate giving doesn't fit nicely into any of these categories, and similar to institutional philanthropy, there's not just one flavor of corporate gifts. You think about CSR arms to large corporations, and we’ve seen a trend of a lot ot corporations actually having a separate impact arm or even an impact fund, where they are acting more like a foundation within a corporation.

For most small and mid-size nonprofits, corporate giving is a dangerous game. In most cases, corporations give for one of two reasons: it's coming out of the marketing budget or it's coming out of the HR budget. And oftentimes, those impact arms often live within the marketing business unit. So really the investment in causes is driven by brand and public awareness and public perception and reputation. Fine — but it's worth being honest about why that investment is happening. It’s for marketing and brand recognition. 

On the HR side of things, a company might want to build a great experience for their employees and wants to create a better employee sense of meaning or fulfillment at work. Those are the two budgets in most cases where corporate giving is coming from.

We’ve seen a couple of organizations that have been really successful with corporate giving, and we've broken down a case study of an organization that grew massively with corporate giving. But it's potentially a fickle space — especially when you start to see market conditions change for the worse — this is often one of the first things to go in the budget. It can feel elective in these kinds of organizations. It's not necessarily driving the bottom line. 

Now, there’s probably some exceptions to that. There are probably some corporations out there that have a really solid corporate giving arm and program it's a core part of their business. They wouldn’t cut it quickly. But it does feel like a little bit exposed to trends in culture, trends in the market, in a way that feels a little bit too risky to go all in on corporate giving.

We imagine that there are some amazing corporations out there that are having a real impact. Think about Marc Benioff and his work in Salesforce and the fortune he's amassed there. We’re fans of some of the work that he's doing and funneling it through the company. But that tends to be the exception and not the rule. We caution nonprofit leaders not to put too much time or energy into that unless they have a really clear line of sight to some return.

Capital Campaigns

Capital campaigns can be incredible — but only when the time is right and when the organization is set up to do so. In our experience, capital campaigns have been most helpful when an organization is at some kind of huge growth or inflection point. They want to build a new center, or they’re trying to fund a new arm to the organization — some kind of big, bold but also easy-to-grok mission that the campaign donors can really understand and feel like they can be part of building. And not just at large for the organization, but a project or a very tangible outcome.

Capital campaigns can be large and small and everything in between. The other thing that we’ve seen that we find interesting is that by the time capital campaigns go public, they're usually between 70 to 90% funded already. So this is basically another form of major donor fundraising, but a little more tightly scoped to a project versus the mission at large. And then it is nice that there's an opportunity, in certain cases, to do some kind of public campaign to open it up to smaller donors to hit that last 30 to 10% of funding. That can be a good awareness campaign too, so it serves that purpose as well.

10 Questions to Find the Right Revenue Model

To wrap up with something actionable. Here are five questions to ask yourself when playing around with different revenue models and trying to figure out what's right for your organization.

1. What model aligns best with your mission?
2. Who is your target audience, and what model is going to align best with them?
3. What are the resources and the capacity that you have to actually execute on any of these models?
4. What are your short and long-term goals as it relates to fundraising, and how might these models support those goals?
5. How can you balance long-term stability with short-term growth?
6. What problem are you solving? 
7. Who are you solving it for? 
8. And who's willing to pay to solve that problem? 
9. Are the people trying to solve the problem the same people who are buying? 
10. Are the people trying to solve the problem different people who aren't getting the value?

Ultimately, start with one question: Am I solving an important problem, and is there anybody out there to pay for it? Be really honest with yourself about who those people are.

Check out the full conversation on our Designing Tomorrow podcast.