Are orchestras really non-profits?

According to the IRS, we are. But according to this article in the Stanford Social Innovation Review, we don’t seem to fit any of the models for how non-profits are funded:

What follows are descriptions of the 10 funding models, along with profiles of representative nonprofits for each model. The models are ordered by the dominant type of funder. The first three models (Heartfelt Connector, Beneficiary Builder, and Member Motivator) are funded largely by many individual donations. The next model (Big Bettor) is funded largely by a single person or by a few individuals or foundations. The next three models (Public Provider, Policy Innovator, and Beneficiary Broker) are funded largely by the government. The next model (Resource Recycler) is supported largely by corporate funding. And the last two models (Market Maker and Local Nationalizer) have a mix of funders.

• 1. HEARTFELT CONNECTOR Some nonprofits, such as the Make-a-Wish Foundation, grow large by focusing on causes that resonate with the existing concerns of large numbers of people at all income levels, and by creating a structured way for these people to connect where none had previously existed. Nonprofits that take this approach use a funding model we call the Heartfelt Connector. Some of the more popular causes are in the environmental, international, and medical research areas.

Not us.

• 2. BENEFICIARY BUILDER Some nonprofits, such as the Cleveland Clinic, are reimbursed for services that they provide to specific individuals, but rely on people who have benefited in the past from these services for additional donations. We call the funding model that these organizations use the Beneficiary Builder. Two of the best examples of Beneficiary Builders are hospitals and universities. Generally, the vast majority of these nonprofits’ funding comes from fees that beneficiaries pay for the services the nonprofits provide. But the total cost of delivering the benefit is not covered by the fees. As a result, the nonprofit tries to build long-term relationships with people who have benefited from the service to provide supplemental support, hence the name Beneficiary Builder. Although these donations are often small relative to fees (averaging approximately 5 percent at hospitals and 30 percent at private universities), these funds are critical sources of income for major projects such as building, research, and endowment funds.

Also not us. Our funders are not generally past beneficiaries (we’d call them “ticket buyers”), for one thing. For another, we’re far more dependent on donations.

• 3. MEMBER MOTIVATOR There are some nonprofits, such as Saddleback Church, that rely on individual donations and use a funding model we call Member Motivator. These individuals (who are members of the nonprofit) donate money because the issue is integral to their everyday life and is something from which they draw a collective benefit. Nonprofits using the Member Motivator funding model do not create the rationale for group activity, but instead connect with members (and donors) by offering or supporting the activities that they already seek. These organizations are often involved in religion, the environment, or arts, culture, and humanities.

Not us either, but closer. But the differences are real. We depend far more on corporate and foundation funding. And we don’t typically have “members.” The people described here as “members” are closer to what we call “ticket buyers.”

• 4. BIG BETTOR There are a few nonprofits, such as the Stanley Medical Research Institute, that rely on major grants from a few individuals or foundations to fund their operations. We call their funding model the Big Bettor. Often, the primary donor is also a founder, who wants to tackle an issue that is deeply personal to him or her.

Not us either. Orchestras generally do have some large individual donors, but that’s not where the bulk of our revenue comes from.

• 5. PUBLIC PROVIDER Many nonprofits, such as the Success for All Foundation, work with government agencies to provide essential social services, such as housing, human services, and education, for which the government has previously defined and allocated funding. Nonprofits that provide these services use a funding model we call Public Provider.

Definitely not us – although, if one substitutes private funding for government funding, this could be a very useful template, if we were willing to do away with trying to sell tickets and simply focused on providing service – ie, concerts.

• 6. POLICY INNOVATOR Some nonprofits, such as Youth Villages, rely on government money and use a funding model we call Policy Innovator. These nonprofits have developed novel methods to address social issues that are not clearly compatible with existing government funding programs.

Nope.

• 7. BENEFICIARY BROKER Some nonprofits, such as the Iowa Student Loan Liquidity Corporation, compete with one another to provide government-funded or backed services to beneficiaries. Nonprofits that do this use what we call a Beneficiary Broker funding model.

Also nope.

• 8. RESOURCE RECYCLER Some nonprofits, such as AmeriCares Foundation, have grown large by collecting in-kind donations from corporations and individuals, and then distributing these donated goods to needy recipients who could not have purchased them on the market. Nonprofits that operate these types of programs use a funding model we call Resource Recycler.

Not even close.

• 9. MARKET MAKER Some nonprofits, such as the Trust for Public Land, provide a service that straddles an altruistic donor and a pay or motivated by market forces. Even though there is money available to pay for the service, it would be unseemly or unlawful for a for-profit to do so. Nonprofits that provide these services use a funding model we call Market Maker. Organ donation is one example where Market Makers operate. There is a demand for human organs, but it is illegal to sell them. These nonprofits generate the majority of their revenues from fees or donations that are directly linked to their activities.

Some interesting similarities here, but the fundamental purpose behind Market Makers is quite dissimilar to ours, I think.

• 10. LOCAL NATIONALIZER There are a number of nonprofits, such as Big Brothers Big Sisters of America, that have grown large by creating a national network of locally based operations. These nonprofits use a funding model we call Local Nationalizers. These organizations focus on issues, such as poor schools or children in need of adult role models, that are important to local communities across the country, where government alone can’t solve the problem.

Also nope.

So WTF are we? I suspect the answer is also the answer to why orchestra finances are so confusing. What we appear to be is an enterprise attempting to make a profit (although we’d call it net earned revenue) by using a large and expensive asset (the orchestra) donated by the community through individual, corporate and individual donations (and past donations in the form of endowment earnings).

Put another way, orchestras wouldn’t need much, if anything, in terms of donated income if the orchestra were to work for free. Donations are to pay for the cost of having the orchestra. In a full-time orchestra, donations buy the services of that orchestra for however many weeks the CBA provide – whether or not those services are used. But actually using the orchestra to put on concerts involves significant additional expenses, which are supposed to be covered by ticket income (and, to a much lesser extent, fees for services).

I’ve spent years trying to find an analogy for this that makes sense. The best I’ve been able to come up with is this:

Imagine that a small community in the back of beyond, frustrated beyond bearing with the lack of public transportation out of the boonies, were to lease 5 new buses, pay the leases through donations, and then re-lease them to a operater for $1 per year. The buses are non-profit; operating them isn’t.

The problem comes in figuring out what the bottom line of the whole operation is. For the operating company, the bottom line is net revenue. If they spend $10,000 per year on the operation, by running one bus once a week to the nearest metropolis, but have one customer on each trip who pays $200 each way, they’ve grossed $20,000 and netted $10,000. That’s a rational strategy, especially if the alternative is to fill all the buses up with people who are paying $1 each way and run the buses every day, which would net them far less than nothing. But they’d be serving a lot more people, which presumably is why the community leased the buses in the first place.

The bottom line for the donors is not the same as the bottom line of the operators. And the kinds of discussions they would have in aligning their interests would be very similar – if far more explicit – to what should go on in finance committee meetings in orchestras.

Unfortunately, such discussions seem to be rare in orchestras, because all those concerned tend to forget that the bottom line is far more about the number of people who hear us than it is about how much they should pay for the privilege.