How NPOs Can Use Internet Technology to Earn Revenue, Part 1

While the technology slump has been bad for investors and shareholders, it has a significant upside for nonprofits considering a foray into Internet-based commercial ventures and their potential funders. Foundations and philanthropists willing to sift through the ashes of failed commercial Internet businesses will find an unprecedented wealth of lessons to be learned for their own investing. Nonprofits will discover that opportunities abound if they can learn from the mistakes of others, if they can adapt what worked in commercial businesses and discard what didn't, and if they can tweak various business models to balance significant social and financial returns. In addition, nonprofit social enterprises have access to human and social capital that were previously tied up in high-flying technology enterprises. A recent stabilization in venture capital equity markets bodes well for investors in independent sector start-ups too. While much of this funding is going into sectors like wireless network technologies and biotech, it is a good sign that private equity players are getting back into the habit of taking reasoned, long-term risks on technological innovation instead of trying to turn a quick buck on dot-com mergers or initial public offerings. This resurgence will hopefully reset the tone and expectation for foundation and philanthropic investment in technological innovation as well.

The most important part of evaluating Internet technology for its social enterprise potential is to understand the organization's business model. Investors must approach social enterprises with full knowledge of a business model's strengths and weaknesses, with clear social and financial goals, and with a legal structure?nonprofit or for-profit?strategically chosen to maximize the enterprise's chances for success. This section will give funders the background they need to assess different Internet-based social enterprise revenue models by examining the following dominant commercial Internet business models:

1. Consumer Advertising and Sponsorship
2. Paid Membership/Subscriptions for Consumer Content
3. Consumer E-Commerce
4. B2B Commerce and Services
5. Internet Software for the Independent Sector (Application Service Providers)
6. Customer Relationship Management Software for Donors, Activists, and Social Services Clients
7. Online Training and Education

Each model is evaluated from the following six perspectives:

• What It Is: a brief explanation of the model
• Commercial Models and Market Opportunity: what conventional business models exist and what does the market looks like?
• Nonprofit Innovators: who in the nonprofit sector has adapted commercial models?
• The Upside: what are the potential benefits?
• The Risks: what nonprofits should consider before entering the space
• The Bottom Line: a straight-forward assessment of the model's viability for nonprofits

1. Consumer Advertising, Sponsorship and Classifieds

What It Is

Selling ad space or developing commercial sponsorships ("This web site/email brought to you by Widget Worldwide"). Most for-profit business models sell advertising impressions?charging a certain amount each time a consumer views an ad in their web page or in an email. Recently, however, the ad market has been moving towards performance-based advertising where advertisers only pay if a consumer clicks through to their web site or buys a product. The few nonprofits selling ads typically charge flat fees, not per-viewer fees, since they cannot attract large commercial audiences. Classified ads, on the other hand, are a significant part of the advertising market and show great promise for nonprofits.

Commercial Models and Market Opportunity

The Internet advertising market took off in 1994 when Hotwired, the web site of Wired magazine, sold the first banner ad?a small rectangular box on the top of its web page?to Zima and AT&T. Since then, online advertising has evolved to include sponsorships (where publishers sell a company the right be inserted in various parts of the content); interstitials and pop-up ads (ads that show up in little boxes on web pages); and more exotic rich media ads, which include sounds, graphics, and interactivity.

Online advertising is a significant and growing source of revenue for Internet publishers. Most Internet companies rely on advertising and sponsorships as their core source of revenue. In 1999 approximately $180 billion was spent on advertising in all North American media: $38 billion on broadcast television, $8 billion on cable, and only $1.3 billion on the Internet. In 2002, those numbers are expected to be $42 billion for broadcast TV, $8 billion for cable, and anywhere from $5 to $15 billion for the Internet. Even conservative estimates of future online advertising project $24 billion to $25 billion in 2004, although analysts doubt advertising revenues alone are capable of making Internet media companies profitable over the long haul. Online classifieds constitute a significant part of that total, with pure Internet models like Monster.com and Earthweb/Dice emerging as real winners. Classifieds also happen to be the most relevant business model for nonprofits.

Nonprofit Innovators

At first, most nonprofit web sites were little more than online brochures with static information and little interactivity. Now, many nonprofit web sites feature updated content, email newsletters, online action centers, and a place to donate. Nonprofit Express and the Philanthropy News Network are beginning to compete with print publications like the Chronicle of Philanthropy. Sites like Compumentor's TechSoup, which covers the impact of technology on the sector, and Oneworld.net, which aggregates global news, both have limited ad sponsors, but neither has seen significant revenue. Network for Good, the newly launched evolution of the Helping.org site backed by AOL, Cisco, Yahoo!, Amazon.com, and others, may generate enough traffic through advertising and its commercial partners to do better than smaller content providers, but it is still likely to generate only a few hundred thousand dollars a year in revenue despite its partners' marketing savvy and might.

Idealist.org is perhaps the most financially successful nonprofit publishing endeavor. Founded in 1996, Idealist.org provides classified ads for nonprofit volunteer and job opportunities. Idealist.org charges nonprofits $40 to list a job opening and lists volunteer opportunities for free. Idealist.org's revenues are approaching $30,000 a month after grossing nearly $200,000 last year?an extraordinary sum considering Idealist.org's budget will be less than $1 million this year. It is truly one of the great Internet-based social enterprise success stories.

The Upside

The market for online advertising is huge and growing. Nonprofits with a high-quality, high-traffic Internet site should be able to attract limited sponsorship dollars from other nonprofits and from some businesses, especially those with cause related marketing plans. Idealist's focus on a classified market, however, has been much more successful than traditional corporate sponsorships. Their business model is focused on providing an advertising opportunity where a transaction is facilitated, and their prices are lower than traditional classified ads.

The Risks

Considering the difficulties commercial ad driven sites are having these days, it seems silly for nonprofits to start a dot-com or to expect a dot-org to be profitable based on ads. It is unlikely that a nonprofit site could generate enough traffic to compete with commercial sites that were targeting the same market. Soliciting ad dollars requires critical mass and sales sophistication?neither of which are core to most nonprofits' missions. In some cases, advertising may actually hurt a nonprofit's mission: the environmental site Fourworld.org, a project of Environmental Defense decided against selling ads because the site's users said advertising would undermine the site's credibility.

The Bottom Line

Patient nonprofits may be able to build a viable advertising model by focusing on the social benefit of advertising, but they will not be able to compete for measurable consumer impressions, the standard metric for buying advertising. Nonprofits should consider selling web-based sponsorships of their site and in e-mail newsletters in the same way they sell advertising space in newsletters or at events?based on goodwill, not ill-fitting industry metrics. The key is to have reasonable revenue expectations and to emphasize the social and marketing benefits, not the commercial benefits. On the other hand, Idealist.org proves that a targeted site with a loyal audience can develop transactional advertising models that leverage existing strengths. If that can be done, there might be meaningful revenues to be earned.

Continue to Part 2: How NPOs Can Use Internet Technology to Earn Revenue, Part 2