Nonprofits and Their Transactional Environment
By Fred Darbonne
Nonprofit organizations generate different forms of capital than commercial enterprises, making it easy to underestimate their operating environment. In commercial enterprises, the structure is clear: produce a product or a service that the customer needs, hopefully do this better than your competitors, and the customer exchanges money for what you offer. Of course, there are layers of complexity here, but this is the essential economic transaction.
Nonprofits produce social capital. Some nonprofits produce social capital in the form of education, human services, and other resources that improve quality of life. Others, such as arts and cultural organizations, improve life by producing cultural capital, such as works of art and expanded personal capacity to understand, enjoy, and benefit from various art forms.
We can miscalculate the exchanges made between nonprofits and those with whom they connect. The primary, explicit transaction may be for the needs the nonprofit directly fills or the personal development the customer is seeking. There is additionally an implicit transaction made between the organization and its patrons or participants, which involve the intangible benefits gained through one’s association with, participation in, or support of the nonprofit. These benefits are just as critical as the objective resources produced, and they help motivate supporters to provide the value the nonprofit then transforms into social capital.
For nonprofits, the transactional environment is probably more complex due to the intangibles involved, but this environment is just as critical for nonprofits as it is for commercial enterprises. Without clients or patrons, there is no organization. Rather than money as the medium of exchange, there are other benefits that those who engage with the nonprofit expect in return for their support or participation. These expectations can be explicit, but they are often more implicit. Explicit forms of exchange included benefits such as necessary health or human services, exposure to new art forms, or the opportunity to learn a new skill or expand one’s knowledge. Grantmakers are certainly explicit in expecting their funds to further their philanthropic priorities or those of a foundation’s creators. This social capital is what the nonprofit provides in exchange for its tax-exempt 501c(3) status.
The implicit transactions are usually subtle. Supporters and patrons often seek intangible benefits through their financial and leadership support. There are reasons people serve on the governing boards of nonprofits, donate to their annual funds, and include them in their estate planning. Nonprofit leaders cannot specifically know or even control individual motivations but understanding their reality can help guide their efforts to cultivate support. In addition to supporting a mission they believe in, the benefits exchanged for dedication to the cause might include social power or access, meeting the leadership expectations of one’s community position, or connection to influencers one would not otherwise easily meet. People join museums or subscribe to season tickets for the social benefits as much as the art itself.
Nonprofits need to factor the transactional environment into their strategic planning if they want to expand their reach and keep stakeholders engaged. An analysis should ask penetrating questions such as “Why would someone participate in or seek services from our organization rather than our peers?” “How is what we offer different from or more effective than our competitors?” “What needs beyond the obvious are our participants seeking to fulfill through their involvement with us?” Answers to these questions will, in turn, require value innovation to generate what the nonprofit’s customers are seeking beyond the obvious. These are central strategic thinking questions for any strategic planning process, but especially for nonprofit organizations.