Donald Mitchell asked:
Carefully examine how to expand your nonprofit organization’s business model (who, what, when, why, where, how, and how much of providing benefits) to 21 times its current size. For best results, you should be guided by what will be easily understandable and desirable by your stakeholders (those affected by the benefits, not just the direct beneficiaries) . . . and where the adjustments will provide more effectiveness for the nonprofit organization.
Business model innovation is something that many nonprofit organizations struggle with. In this article, I have broken out three of the elements and supplied three examples to make innovative business model thinking and analysis easier to do. This article’s material will be clearest to those who have already read about continuing business model innovation.
Do More of What You Do Now
Unless you are providing a very small percentage of the needs of each beneficiary, growing by 21-fold requires adding beneficiaries. Because many nonprofit organizations can expand to provide 21 times the number of beneficiaries, that’s a great place to begin. You should start by considering who you will serve as these added beneficiaries and where those benefits will be delivered to make the expansion more practical and affordable.
Who Will You Serve and Where Are They?
Let’s begin considering volume-expanding business models by looking at “who” is served. The lesson is to keep it simple. Change as little as possible while becoming more efficient and effective as an organization for your beneficiaries. The simplest way to do this is to put more volume through an existing organizational structure without adding fixed costs.
Let’s look at an organization that carries donated food by truck to distribution centers serving needy families. Many such distribution centers provide a small portion of a family’s total weekly needs — often as little as one meal a week. The families may be visiting 10 to 30 different distribution centers weekly to fulfill all their needs. The trucks carrying the goods to a given distribution center are often owned and operated by that center, may be in use for only a few hours a week, and could be operated much more often without wearing out the equipment.
Let’s make an evaluation based on assuming that more volunteers can be found to load the food, and drive and unload the truck. Both the nonprofit organization and the needy families will benefit financially if 21 meals weekly are delivered and distributed at one time to a distribution center. Asset costs of having the truck will be spread over much more use, dropping cost per mile. Beneficiaries will make many fewer trips, cutting weekly costs of acquiring the food by a vast amount.
By comparison, if an organization picks people and organizations to serve who are located far away and desire less profitable offerings, this choice of who is served and where to serve them can increase costs to serve each beneficiary versus doing more with the same customers. If the nonprofit organization’s food distribution truck has to serve families located anywhere over a large country and recipients still receive only one meal per week, the cost to deliver the food will increase versus serving local people even though the same number of people are served in both cases. Look at Exhibit 1 to see details of why this cost increase can occur.
Exhibit 1: Adding Truck Trip Volume but Expanding Miles Driven per Trip by a Large Factor and Keeping Food Received per Family Pickup the Same
While driving more miles can reduce capital costs per year for a vehicle, there’s a limit to how far this efficiency goes. In this example, the truck is driven such longer distances that you actually wear out your vehicle and have to buy a new one. In addition, your operating costs of fuel, oil, and maintenance would also be higher from taking longer delivery trips. As a consequence, increasing volume a lot doesn’t drop costs by nearly as much.
Truck Beginning Point One Truck Trip per Week Annual truck capital costs $52,000 (5,200 miles per year)
Capital cost per trip $1,000
20 Times Truck Volume Increase with Tripling of Miles Driven per Trip Annual truck capital costs $327,600 (327,600 miles per year)
Additional truck operating costs $81,900
Capital cost and additional operating costs per trip $400
Automobile Beginning Point for Recipients 21 Pick Ups per Week
Weekly gas, oil, and maintenance $21.00
Cost per pickup for a beneficiary $1.00
Since pickup frequency remains the same, recipients receive no benefit in reduced costs.
What Benefits Are Being Served?
Providing more of what you already offer to beneficiaries can be a big help in creating efficiencies. But sometimes you are serving virtually all of someone’s needs for given items.
When that happens, improved effectiveness occurs in food trucking by the nonprofit organization if you add items dense in nutrients and weight are shipped instead (e.g., old-fashioned oatmeal versus potato chips). See Exhibit 2 for a quantification of this factor.
Exhibit 2: Adding Helpful Nutrient Volume Through an Underutilized Truck and Increasing Food Available to Needy Families for Each Pickup
If we add the factor of what kind of food is delivered, we see that capital costs can be lowered greatly if we carry food that contains more helpful nutrients per cubic meter or foot of space. By shipping foods with 10 times as many nutrients in a given volume, we are able to lower the capital cost per trip/unit of helpful nutrients by another 90 percent.
Truck Beginning Point 1 Truck Trip per Week Annual truck capital costs $52,000 (5,200 miles per year)
Capital cost per trip $1,000
Capital cost/unit of helpful nutrients $0.10
20 Times Truck Volume Increase with Denser Nutrients 21 Truck Trips per Week Annual truck capital costs $109,200 (109,200 miles per year)
Capital cost per trip $100
Capital cost/unit of helpful nutrients 0.001
Note: Annual capital cost is higher because service life in years is reduced by driving the truck more miles a year.
Increasing nutrient density has a similarly helpful effect on the costs of recipients picking up the food. The 96 percent cost-reduction gain from reducing frequency of trips is also improved by making the materials more nutrient dense by a factor of 10.
Automobile Operating Costs Beginning Point for Recipients 21 Pick Ups per Week
Weekly gas, oil and maintenance $21.00
Weekly gas, oil and maintenance/ unit of helpful nutrients $0.21
Automobile Operating Cost 1 Trip per Week for Denser Nutrients Weekly gas, oil and maintenance $1.00
Weekly gas, oil and maintenance/ Unit of helpful nutrients $0.00084
Copyright 2007 Donald W. Mitchell, All Rights Reserved
